If tax planning happens to be on your list of things to do, what follows are some tax tips that may help.
Contributions to your registered retirement savings plan (RRSP)
The earlier you contribute, the more your savings can grow sheltered from taxes. If you haven’t contributed to your RRSP for the current tax year, don’t wait until the end of February.
You’ll still get the tax write-off but its better to contribute now. To find out how much contribution room you have, refer to last year’s Notice of Assessment.
Also, contributing to a spousal RRSP in December, rather than in January, means that amounts can be withdrawn without attribution back to the contributor one year earlier than would otherwise be the case.
Use your RRSP contribution room
While unused contribution room carries forward, lost investment returns are simply gone. If you make timely maximum contributions, even modest investment returns will compound over the years to make a significant difference in the amount of capital available when you retire. If you don’t have enough cash to make you full contribution – or to catch up from previous years – consider an RRSP loan.
Are you turning 71 this year?
If you will be 71 by the end of this year, you must terminate your RRSP no later than Dec. 31. There are many options available: transferring your RRSP to a Registered Retirement Income Fund (RRIF), purchasing an annuity, receiving a lump sum or choosing a combination of these options.
The last date that you can make an RRSP contribution is Dec. 31 of the year in which you turn 71 – unless you have a younger spouse.
If you have not maximized RRSP contributions in previous years and have unused contribution room, you can make a lump sum contribution before closing your RRSP.
Once your final contribution is made, the deductions can be used in any future year, whenever they are most beneficial for you in reducing taxable earnings.
For example, if you deposit $50,000 into an RRSP in your 71st year, you could spread the deduction over ten years by claiming $5,000 per year. This strategy could result in tax savings at your highest marginal tax rate each year for the next ten years.
If however you have no carry-forward RRSP contribution room but have earned income in the year you turn 71, you’ll have RRSP contribution room next year but no RRSP. You may want to consider making next year’s contribution in December of this year, just before your required conversion date. The penalty for the over-contribution will only be one per cent for the month.
However, on Jan. 1, your overcontribution disappears and you’ll get a tax deduction on next year’s tax return or whenever you choose to claim it.
Are you over age 71?
Regardless of your age, if you have qualifying earned income or unused RRSP contribution room, you can contribute to a spousal RRSP prior to Dec. 31 of the year your spouse turns 71 and claim the deduction on your tax return whenever it is most advantageous to you.
This strategy is particularly attractive if you anticipate your spouse’s retirement income will be lower than yours.
First-time homebuyers
If you are thinking about buying your first home and are planning to take advantage of the Home Buyers’ Plan (HBP), you may wish to delay your RRSP withdrawal under the HBP until January.
Under the plan, you may take up to $25,000 from your RRSP without penalty provided you repay the funds over a 15-year period. These repayments must begin two years after the initial withdrawal.
Since the repayment schedule is calculated according to the calendar year, if you wait and make your withdrawal in January instead of December, you can delay your first repayment for one more year.
Don’t forget about registered education savings plans (RESP)
If you have children or grandchildren consider opening up an RESP. If you have already opened an RESP, try to make your contributions as early as possible to maximize the benefits.
While contributions themselves are not tax deductible, RESPs are still a tax deferred investment vehicle that benefits from time and compound investment returns.
In addition, your annual contributions are enhanced by the Canadian Education Savings Grant (CESG), which matches 20 per cent of your contribution providing up to $500 annually, up to a maximum of $7,200 for each child in the plan.
Contribute to your tax free savings plan (TFSA)
TFSAs also offer tax-free investment growth and tax-free withdrawals.
In addition, the amount you withdraw will be added back to your available room the following year so you are able to save for short term needs, such as home renovations, as well as long term goals, such as saving for retirement.
Pension income tax credit
If you are 65 years of age or older you are entitled to deduct, from taxes payable, a federal tax credit equal to 15 per cent of the lesser of: pension income received and $2,000.
If you don’t have pension or RRIF income eligible for this tax credit there may still be options available to you. On $2,000 of eligible pension income the federal tax credit is worth $300.
This tax saving is enhanced by provincial tax credits which vary by province.
If you have a spouse in a lower tax bracket, you may also want to consider splitting up to 50 per cent of the income that qualifies for the pension income credit by completing an election on your tax return to reduce the overall family tax payable.
Other tax tips to consider are:
– Medical expenses and charitable donations;
– check whether interest on your loans is deductible;
– use your capital losses; and
– reducing the tax withheld by your employer.
Submitted by Ecclestone Financial Group Inc., Fergus
