The end of 2011 is near! If you have not considered your tax options, now is the time to consider the year end tax planning strategies that must take place before the end of 2011.
Be mindful of the timing of investment transactions. Many stock and mutual fund transactions must happen before the end of the tax to take effect in 2011!
1. Take Advantage of Any Losses – Take the opportunity to review your investment portfolio. If you have some stocks or other investments that have decreased in value, you may consider selling them to realize any losses for income tax purposes. If you intend to re-purchase the investment again in the near term, be aware of the superficial loss rules.
Remember that timing is important and the trades should be entered by December 23rd to settle by December 30th.
2. Consider The Timing of New Mutual Fund Purchases – Many mutual funds distribute their income and capital gains annually in December. If you purchase a mutual fund prior to the allocation, you will be allocated a full share of the income for the entire year. By delaying your purchase until after the distribution ensures you will not be allocated this income for 2011.
3. Consider The Timing of GIC Or Other Debt Purchases – If you are considering purchasing a GIC, or rolling a maturing GIC over, you may want to delay the purchase until January 3rd.
Interest on investments purchased after 1990 must be accrued annually on the anniversary date of the purchase (unless you receive the interest more frequently). If you purchase a 3-year GIC on November 1, 2010, you must include the interest accrued from November 1, 2010 to October 31, 2011 on your 2011 income tax return. By delaying the purchase until January 2012, you can defer the tax until the 2013 tax year.
4. Review Debt To Ensure Its Deductible – Generally speaking, interest paid on your mortgage, car, or other consumer debt is not deductible. Review your available cash and consider paying off non-deductible debt and then use borrowed funds to invest and make the interest deductible.
5. Take Advantage of The TFSA – Every Canadian resident over age 18 received $5,000 of contribution room annually. While the contributions are not tax deductible, the income earned in the account is tax-free.
You may want to consider lending or gifting funds to your spouse to contribute to their TFSA. Since the TFSA is exempt from income, there is no attribution.
Take Advantage of Tax Credits And Deductions
May tax credits and deductions are only available if paid during the calendar year.
1. If you Turned 71 in 2011, Convert Your RRSP Before December 31st – You must convert your RRSP to a RRIF or purchase a registered annuity before December 31st. Before you make the conversion, consider making a final contribution. You may make a one-time over contribution $2,000 to your RRSP without attracting the 1% penalty tax.
If you have earned income in 2011, you may also consider making an additional over-contribution in 2011. While this will attract the 1% penalty tax, the penalty will only be applied for one month and does not carryover to the RRIF or registered annuity.
2. If you are over age 65 Create Pension Income – If you are over the age of 65, you are entitled to a tax credit for your first $2,000 of pension income. If you are not receiving a pension, and do not intend to mature your RRSP, you should consider transferring $2,000 from your RRSP to a RRIF and immediately withdraw it. The application of the tax credit makes the withdrawal effectively tax-free.
4. Make Donations of Publically Traded Stocks To Charities Before December 31st – Gifts of publically traded securities to a registered charity are not subject to the tax on capital gains. In addition, you will receive a tax credit for the market value of the stocks. If you wish to make a gift, ensure the gift is completed before the end of the year to apply to 2011.
Other Tax Planning Strategies
1. Make Spouse Contributions before December 31 To Shorten The Attribution Period – Any withdrawals from a spousal RRSP in the year or preceding two years will be subject to attribution. By making your spousal RRSP contributions before December 31st, you will shorten the attribution period by a full year.
2. Sell Any Non-Qualified Investments In Your RRSP Before December 31st – If you have non-qualified investments in your RRSP, the purchase price of the investments will be added to your income for the year. If the non-qualified investments are sold in the same year, you can deduct the amount of the proceeds which may reduce or eliminate the income inclusion.
3. Consider Delaying Home Buyers Plan Withdrawals Until After December 31st – If you are considering a home purchase near the end of the year and can delay the withdrawal until the new year, you will extend the time period to purchase the home and the repayment date by a full year.