Last week was a busy week with Black Friday, Cyber Monday, Giving Tuesday and the onset of Boxing “month.” All the retailers want us to think about Christmas shopping and planning for the Holiday Season. You know, the old saying, ‘Tis the season to… review your financial life year end planning. No wait… that doesn’t seem right. Yes, I know, the first thing people will say when they start to read this post is that they are too pre-occupied at this time of year getting ready for the Holidays. But time marches on and doesn’t consider our favourite festivities.
My prudent self tells me to remind you that, with the arrival of December, it is a good time to start thinking about year end financial life planning. While December is usually a busy month for most people, a little advanced planning can save you come tax time. Sure, a little procrastination settles in here, but there is still time. Here are important things to consider that will impact your financial life:
TFSA contributions and withdrawals
Introduced in 2009, Tax-Free Saving Accounts (TFSAs) give every Canadian resident age 18 and older the opportunity to invest $5,500 (currently) per year. For 2016, a couple could save $46,500 and not pay any tax on the investment earnings. To maximize your return on investment, try topping up TFSAs now and then make your 2017 contribution of $5,500 on January 1st. Students, who are 18 or older, can withdraw $5,000 from their RESP each year and contribute the money to a TFSA. The funds grow tax-free and can be used for any purpose in the future.
Not the other hand, if you were plan on making a TFSA withdrawal, consider making the withdrawal before the end of December. If you make the withdrawal in December, you could recontribute that amount as early as January 1, 2017. But if you waited until January 2017 to make the withdrawal, you won’t get the contribution room back until January 1, 2018.
Charitable donations
If you’re thinking of making a charitable gift soon, be sure to do it before the end of the year so that you’ll get a donation credit right away to reduce your 2016 taxes. If you wait until even January 1st, you’re going to wait for a year if not longer before you’ll see the benefit of the donation credit. Both the federal and provincial governments offer donation tax credits that, in combination, can result in tax savings of up to 50 per cent of the value of your gift in 2016. If you give online, you can usually donate right up to December 31st and get a tax receipt for the 2016 tax year. When donating by mail, be sure to do it earlier.
If you have shares with unrealized capital gains, eliminate the tax liability by donating the shares in kind to your favourite cause. There’s no federal tax on capital gains associated with shares given to charity and the maximum donation is up to 100% of your net income. Provincial tax does vary.
Postpone purchasing investment funds
If you have a taxable investment account (not an RRSP or TFSA), consider putting off buying investments such as exchange traded funds (ETF), mutual funds or segregated funds that make year-end taxable income distributions. Why own an investment for one month and be saddles with a full years’ worth of taxable income?
Tax loss selling
If you have a taxable investment account and have already sold investments with a gain, consider selling investments with accrued losses before year end to offset capital gains from this year. If you declared capital gains in any of the previous 3 years you can apply the capital loss to those gains by filing an adjustment with CRA. For the losses to be usable on your 2016 tax return, you would need to sell the investment on or before December 24 to ensure the trade settles in 2016. If you want to repurchase that investment, make sure you wait 30 days to do so.
Crystallize capital losses
Do you have some shares that would produce a capital loss if they were sold before the end of the year? Even if you want to hold onto these shares, consider selling them to crystallize the loss for tax purposes (you can repurchase the shares after 30 days). Capital losses can be applied against gains reported in the previous three years or carried forward indefinitely. You will need at least three business days to settle the trade, so don’t wait until the last minute.
Delay HBP withdrawals
Consider delaying Home Buyers Plan (HBP) withdrawals from your RRSP until after December 31st. Repayments to your RRSP under the HBP begin 2 years after the year in which the withdrawal was made. So if you make the withdrawal in December 2016, you have to start making HBP repayments in 2018. But if you wait until January 2017 to make the withdrawal, you don’t have to make your first HBP repayment until 2019.
Maximize medical expenses
While medical expenses must be paid by December 31st to a claim a tax credit for 2016, the related good or service doesn’t have always need to be acquired in the same year. This provides an opportunity to prepay certain items for 2017 and claim them for 2016 if it enables you to exceed the minimum threshold required to qualify for a tax benefit. For example, if a child needs braces or orthodontist work, you might be able to get a medical expense credit right away for the amount paid this year, even if this is something that may be ongoing for the next number of months into the new year. A tax credit can be claimed when total medical expenses exceed the lower of three per cent of your net income or $2,237 in 2016.
Pre-pay children’s arts and fitness activities
The Federal Government is phasing out both of the children’s arts and fitness tax credits this year. You only have until December 31st to take save up to $250 of expenses on artistic or cultural activities and up to $500 of expenses on physical activity programs. So, if someone is not spending enough money in 2016 to maximize those credits, maybe they could prepay some of those expenses for 2017.
Let’s say your kids are taking swimming lessons in January. Consider registering your child now for the January semester, get that credit and use that if you’re not already maxed out.
Renovate for home accessibility
Introduced this year is the home accessibility tax credit to help seniors and people with disabilities with the cost of home renovations designed to make life simpler and safer. The tax credit is equal to 15% of expenses for those spending up to $10,000 per year on things like wheelchair ramps and walk-in bathtubs. For the 2016 tax filing year, it applies to payments made before the end of year for work performed and/or goods acquired.
Maximize RESP effectiveness
If you are investing in a Registered Education Savings Plan (RESP) to save for a child’s education, make sure you take full advantage of government grants and tax-deferred growth by earning the maximum grants each year. An annual contribution of $2,500 per eligible child will result in $500 in grants from the federal government, possibly more depending on family income and province of residence. If your child turned 17 this year, and you have been making RESP contributions for them all along, this is the final year for earning government grants.
RRSP to RRIF conversion
Your Registered Retirement Savings Plan (RRSP) must be converted into an income option, such as a Registered Retirement Income Fund (RRIF) or annuity, by December 31st in the year you celebrate you turn 71. When setting up a RRIF, consider electing to base the payments on the age of your spouse, if younger, to maximize tax deferral. If you are still working, make a final contribution to your RRSP before you convert.
A few other housekeeping items…
While these don’t have be done before the end of the year, you should start thinking about them or plan to do them in January.
Did you get married or divorced in 2016? Make a point of reviewing the beneficiaries on RRSPs, TFSAs, life insurance and other accounts if you have forgotten who the beneficiaries are. Make changes to the beneficiaries if needed.
Review your will. A will should be reviewed at least once per year or whenever there is someone who should be added or removed from the will. If you have children under the age of 18, make sure your will specifies who will take care of them in the event that you are unable to care for them. If your will was written is older, make sure those designated to care for your children are still able to do so.
Review life insurance policies. If you had a child in 2016, make sure you have sufficient life insurance coverage to take care of them in the event that you were no longer able to.
In truth, a lot of these items will be addressed in your Financial Life Plan and planned and arranged before the end of the year. But this is also a good time to do a review to ensure you are not missing some things that can save you some money. The one constant in life is that there will always be changes in your life and this process allows you to reflect on whether any of those changes that occurred in 2016 affects your financial life planning. Its just another planning tool used in Keeping Life Current. It’s a great time to talk to us about how you can save on your 2016 taxes. Just ask. Contact Northern River Financial at 1.855.5NRIVER or info@NorthernRiverFinancial.ca.
