If you’re an investor who wants to realize tax savings in 2018, there are some things you’ll need to do by December 31. Here are a few ideas to think about before year-end.
If you have securities or fund units with accrued losses, consider selling them before year-end so you can offset your capital gains from the year. You must sell publicly-traded securities by December 27 for settlement by December 31, 2018. If you plan to repurchase the security, be sure to wait at least 30 days or the “superficial loss” rules will keep you from claiming a capital loss until you ultimately sell the investment.
Another way to reduce taxes on capital gains is to donate appreciated securities to your favourite charity. Gifting publicly-traded securities or mutual funds with accrued capital gains directly to a registered charity not only gives you a tax receipt for the fair market value of the security being donated, it eliminates capital gains tax too. It can take some time to arrange an in-kind donation with your charity, so plan well in advance of year-end.
Pay investment expenses
You can deduct investment-related expenses, such as interest on money borrowed for investment purposes, on your 2018 tax return if they’re paid by December 31.
Convert your RRSP to a RRIF if you turned 71
If you turned 71 in 2018, you have until December 31 to make any final contributions to your Registered Retirement Savings Plan (RRSP) before converting it to a Registered Retirement Income Fund (RRIF) or registered annuity.
If you have earned income in 2018, you may want to consider overcontributing to your RRSP in December before conversion. While you’ll pay a penalty tax of 1% on the overcontribution (above $2,000) for December 2018, new RRSP room will open up on January 1, 2019, so the penalty will cease in January 2019, and you can deduct the overcontribution on next year’s tax return.
Withdraw from your TFSA in 2018 instead of next year
If you withdraw funds from a TFSA, an equivalent amount of TFSA contribution room will be reinstated in the following calendar year. If you’re planning a TFSA withdrawal in early 2019, you may want to withdraw the funds by December 31, 2018, so you won’t have to wait until 2020 to re-contribute that amount.
Delay RRSP withdrawals for first home purchase or post-secondary education
If you or your spouse need to pay for your first home or your post-secondary education, you may be thinking about withdrawing funds from your RRSP under the Home Buyers’ Plan (up to $35,000 for first-time home buyers) or the Lifelong Learning Plan (up to $20,000 for post-secondary education). You must start repaying the funds in the year after you withdraw them to avoid paying tax on the funds in the future. If you’re thinking about withdrawing RRSP funds under one of these plans, you can delay repayment by one year (i.e., until 2020) if you withdraw funds in early 2019 rather than in late 2018.
Use RESPs to help fund your kids’ education
The federal government provides a Canada Education Savings Grant (CESG) equal to 20% of the first $2,500 of annual RESP contributions, adding up to $500 annually to an RESP per child. If you haven’t maximized RESP contributions in the past, you may be able to “catch up” and get double the CESGs this year. Making a contribution of $5,000 by December 31, 2018 could add $1,000 of CESGs to the RESP for 2018.
If you already have an RESP for a child who is attending post-secondary school in 2018, consider having Educational Assistance Payments (EAPs) made from the plan before the end of the year. EAPs can only be paid out for up to 6 months after the child has left school and are taxable to the student. If the child has little or no other income this year, there may be no tax at all on the EAPs.