It’s not too late to help your client plan tax-effectively for 2019.
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If you ask Jamie Golombek, managing director of tax and estate planning at CIBC Financial Planning and Advice, you’ll find plenty of tax tips you can share with your clients before the end of the year so they can take advantage of the tax savings.
Tax-loss sales are on his list.
“If you have investments that have declined and are showing accrued losses by the end of the year, now might be a good time to consider selling,” Golombek said in a Nov. 7 interview. Net capital losses can be deducted from net capital gains in the current tax year, carried forward for up to three calendar years, or carried forward indefinitely to offset net capital gains in other years.
For a client’s loss to be available for 2019 or one of the three preceding years, settlement must occur in 2019. Therefore, any trades must be met by the December 27 deadline to ensure settlement by December 31.
Another issue related to tax-loss sales is currency exchange.
For example, if a client has dollar stocks, “make sure that what looks like a loss is not actually a gain due to positive changes in the currency market,” Golombek says.
Any potential US dollar proceeds from the sale of shares should be converted to Canadian dollars and compared to the original purchase amount (in Canadian dollars on the date of purchase) to assess whether your client will experience a gain or loss.
Customers also need to be mindful of superficial loss rules if they plan to repurchase a security sold at a loss.
“If you redeem a security within 30 days (before or after the sale date), the loss will be disallowed and added to the ACB, the cost basis of the stock,” Golombek says.
These rules also apply if the security is redeemed by the client’s spouse/partner, a company controlled by the client or the client’s spouse/partner, or a trust in which the client or the client’s spouse/partner is the majority beneficiary (e.g., an RRSP or TFSA).
Another year-end tax tip that investors should consider is making a charitable gift in 2019 by donating securities, including mutual funds and segregated funds, along with accrued capital gains.
“Not only will (the investor) receive a tax receipt equal to the fair market value of that gift, but (he or she will) pay no capital gains tax on the value of the shares donated in-kind to the registered charity,” Golombek says.
Other timely tax reminders for investors
For a client planning to withdraw RRSPs as part of their home purchase or lifelong learning plans, a January withdrawal may be a better option than a December withdrawal.
“This will give you an extra year before you have to start making withdrawals under these particular plans,” Golombek says. The Home Buyer Plan allows RRSP withdrawals of up to $35,000 for first-time buyers; lifelong learning plan, up to $20,000 for post-secondary education. The funds must be repaid in annual installments.
However, the planned withdrawal from the TFSA could be a better solution in December than in January.
“By taking money out of your TFSA in December, you have all of 2020 to re-contribute the TFSA amount that was just withdrawn if you have the cash to do so,” Golombek says.
It also reminds investors that to be eligible to claim the tax credit or credit in 2019, certain expenses must be paid by the end of the year, including interest on borrowed money and investment advisory fees for unregistered accounts.
Additionally, if a client turned 71 in 2019, they must make final contributions to their RRSP by the end of the year before converting it to an RRIF or Registered Annuity. “December 31 is the last day you can do this,” Golombek says. “You must make any RRSP contributions by then; you don’t have time to do this until the regular deadline of March 1st.
Tips for students and renovation workers
For clients whose training costs are not covered by their employer, the new year brings a new refundable Canadian training loan.
For people aged 25 to 65 with earned income between $10,000 and $147,667 in 2019, $250 will be added to their hypothetical Canadian training loan account in 2019. In 2020, customers can claim 50% of eligible tuition and fees up to an account balance of $250 to offset personal tax otherwise due. Therefore, clients should consider postponing training costs until the new year.
“To the extent you can defer payment of these costs until January 2020, you can be ahead of the game,” Golombek says.
He also recalled RESP programs and the Canada Education Savings Grants (CESG). Scholarships are provided by the government and are equal to 20% of the first $2,500 of annual RESP contributions or $500 per year per child. CESG room rolls over to the year the beneficiary turns 17, but in some situations it may be advantageous to make an RESP contribution by December 31st.
For example, if a client’s child or grandchild turned 15 in 2019 and has never been a beneficiary of an RESP, they will not be eligible for any funding in future years unless $2,000 is contributed to the RESP by the end of the year. The payment enables the customer to receive this year’s grant and also entitles them to participate in the CESG program for 2020 and 2021, Golombek says.
IN November reportdescribes another situation in which it is advantageous to contribute to an RESP by December 31st. If your client’s child or grandchild is less than seven years away from turning 17 and the client has not maximized RESP contributions, he or she should consider making a contribution by December 17. 31 – explains Golombek.
This is because each beneficiary with unused CESG carryover room can receive up to $1,000 CESG per year (instead of up to $500), with a lifetime limit of $7,200 up to and including the year the beneficiary turns 17.
“If increased catch-up contributions of $5,000 (i.e. $2,500 x 2) are made for just over seven years, the maximum aggregate CESG amount will be $7,200,” Golombek said in the report.
Seniors and people eligible for Disability Tax Credit can get help paying for some renovations through Home Accessibility Tax Credit.
Specifically, these customers can apply for a 15% non-refundable credit to spend up to $10,000 per year on renovations that will allow them to be more mobile and functional in their homes or that will reduce the risk of injury in their homes or when entering them.
“You may want to pay a portion of your expenses by December 31 for any work or goods you acquired in 2019,” Golombek says, adding that the amount may also qualify for the Medical Expenses Tax Credit.
One final tip: tax rate changes
Finally, customers can assess any changes in income tax rates.
“You can compare your 2019 tax rate with your 2020 tax rate to determine whether you can plan to (…) tax your income in a lower tax year,” Golombek says.
For example, a client’s tax rate may increase in 2020 if he or she plans to return to work or receives deferred compensation or exercises stock options.
Therefore, your client “may wish to realize income in 2019 by taking steps such as selling investments for a capital gain, exercising stock options, or taking bonuses in 2019 rather than 2020, if possible.” , Golombek states in the report. “It may also make sense to defer deductible expenses until 2020 if possible.”
For more details, including ideas for business owners, see Golombek’s report on tax advice at the end of 2019.
This article is part of AdvisorToGo powered by CIBC. It was written without the involvement of a sponsor.
