Everyone wants to pay less tax, but most of us manage to avoid thinking about the taxman before push comes to shove in March and April. That’s often too late, says Kurt Rosentreter, a senior financial advisor with Toronto-based Berkshire Securities Inc. and author of Wealthbuilding: “Tax planning should be a year-round thing.” But there’s still time to find savings. Make these tax-wise moves before year-end or early in the new year to slash your 2006 tax bill:
1. Use capital losses to offset capital gains. Sell money-losing shares or mutual funds before year-end to count as a loss for the current tax year, says Adrian Mastracci, portfolio manager of KCM Wealth Management Inc. in Vancouver. First, apply the losses against gains for 2006; if you can’t use them all, they can be carried back to offset gains made in any of the previous three years. Have your sell or redemption order in by December 20 to ensure it’s processed in time, advises Mastracci. “Don’t wait until the last trading day.”
2. Pay deductible investment expenses. Advisory fees, safety deposit box charges and accounting fees must be paid by December 31 in order to claim them come April.
3. Defer bonuses or dividends. If your compensation includes a bonus or dividends, you’ll want to declare the payments in 2006 so you can write them off as a business expense. But you have 179 days to pay yourself. Wait until January, recommends Rosentreter: “That allows you to defer taxes on the payments until the following year.” Plus, the taxation rate on dividends is slated to drop from about 31% to as low as 21% in 2007. That reduction, adds Rosentreter, might impact how you pay yourself in the future.
4. Delay any purchases of non-registered mutual fund until the new year. Mutual funds generally distribute their income and net realized capital gains in December, points out Mastracci. You, in turn, have to declare any gains distributed by your funds to Canada Revenue Agency, even if you simply reinvest them. That means if you buy into a fund in December, you pay taxes on income and gains that were accumulating all year, even though you didn’t earn them and you won’t get the cash.
5. Make any charitable donations before year-end to realize the benefits on your 2006 return. Rather than cash, consider donating shares, suggests Mastracci. “With the changes in the last federal budget in May, there is no capital gain reported by the individual who donates securities or bonds to a charity.”
Here’s how it works: Let’s say your marginal tax rate is 46% and your investment in ABC company has done very well. You bought it for $25,000 and it’s worth $50,000 on the day you donate it to the United Way. If you had sold it, you would have to report a capital gain of $25,000, of which only half would be added to your income. The result: additional taxes of about $5,500 (in B.C.). If you donate the stock, that $12,500 capital gain is exempt from tax and yet you get to deduct the entire $50,000 charitable contribution, saving you taxes of about $21,850.
The caveat: Your broker has to transport the stock physically to the charity, so it could take time. Don’t do it at the very last minute.
6. Ensure you pay yourself enough salary and bonus before the end of the year to allow for a maximum RRSP contribution in 2006. Once your income reaches $105,555, you’ll reach the maximum contribution level, which is $19,000 for 2007, shaving almost $9,000 from your tax bill if you’re in the top marginal tax bracket.
Consider, too, contributing to a spousal RRSP. You do have until March 1, 2007, but the earlier you contribute, the more time your money has to grow. Although recent changes by the federal Finance Department allow couples over the age of 65 to split pension income, spousal RRSPs still make a lot of sense for those aiming to retire before they turn 65. “Since each member of a couple is taxed individually,” says Mastracci, “the goal is to have a similar income when you retire.”
7. Avoid December maturities. If you have bonds or GICs maturing late in 2006, most banks will automatically roll them over for a 12-month term. By opting to roll them over for, say, 13 months instead, you can push the maturity date to the following year and defer taxes until the year after that.