Taking Advantage of Tax Savings
As we approach the end of 2021, many people are looking at optimizing tax savings on their investment portfolios. This is an important part of any investment strategy, and here are a few options for you to consider with your advisor and or your accountant.
EXAMINE YOUR ASSETS AND ALLOCATIONS
Working with your advisor, look at which accounts hold which type of investments. For example, interest-earning assets could be moved to registered plans (RPPs, RRSPs, DPSPs, RESPs, RDSPs, and TFSAs) to defer paying tax on the interest. In contrast, more tax-efficient assets could be moved to non-registered (taxable) accounts.
LOOK AT YOUR CAPITAL GAINS VS CAPITAL LOSSES
Can you defer any capital gains into 2022? For example, if you have an investment you want to sell, can you hold off until January to move that taxable income into the new year? Are you in a position where selling an investment to offset a capital loss would be more advantageous?
As part of your philanthropic efforts, would you consider donating securities that have appreciated in value? You won't pay capital gains on donated securities, AND you get the tax receipt for the donation.
Have any of your investments lost value over the past year? Could you sell off those investments to offset pending capital gains? You may not be aware that you could apply these losses against capital gains taxes paid over the past three years.
Could you transfer assets that have lost value to a child? You get the capital loss advantage and benefit from the investment recovering in value over time.
Another option is to investigate the benefits of a "capital gains reserve." You can establish one of these if the proceeds from your investment will be collected over a period of time. This allows you to spread out the capital gains taxes into years with less income. A capital gains reserve can be in place for a maximum of five years.
DEDUCTING EXPENSES AND INTEREST
Determining which expenses and interest costs are deductible is another way to lower taxes owed. These deductions can include investment counselling fees and interest on loans used to purchase investments. Fees related to registered plans are not deductible.
If your interest costs are nondeductible, consider how you could reduce that debt. It may sound circular, but you can use your investments to pay down the debt and then borrow to replace those assets. The interest on this new loan would be tax-deductible, thereby offsetting the nondeductible interest costs.
How do you know if your interest costs are deductible?
They must meet one of four criteria:
Was the money used to earn income from a business or property?
The costs are being claimed during the year you paid the interest.
You must be legally obligated to pay the interest.
The interest rate being charged must be "reasonable”, following current market rates.
If you have any questions about eligibility, check with your accountant or financial advisor.
TAKE ADVANTAGE OF AVAILABLE CONTRIBUTION ROOM
Make sure that you max out any available contribution room in your TFSA and RRSP.
If you are looking to invest in mutual funds, wait until the new year, especially if the fund is likely to pay out taxable distributions.
This happens when a mutual fund disperses income across the various mutual fund units, becoming taxable income to the unitholders (you). This lowers the overall income tax paid by the mutual fund company on the fund and improves their overall rate of return.
If you want to withdraw against these investments, be aware of the best times to do this.
If you're planning to withdraw from your TFSA, you should do that before the end of the year.
If you're withdrawing from your RRSP to participate in something like the Home Buyer's Plan or looking into investing in bonds, try to delay this until the new year, so you have the maximum amount of time before paying tax or repaying the loan.
Please be aware; this is certainly not an exhaustive list. Consult your tax advisor, accountant, or financial advisor to determine the most advantageous options for your situation.
While we advise making tax-planning decisions at regular intervals during the year, it's certainly not too late to make changes and adjustments to your portfolio to minimize your tax situation for 2021.