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Year-end Tax Planning

April 30 is the Canadian tax filing deadline, but the end of the CALENDAR year is a significant date for many tax strategies.

Austin O’Mally once said that ‘in levying taxes and in shearing sheep, it is well to stop when you get down to the skin!’ So let’s look at four tips to consider as 2021 draws to a close, because December 31 is a significant deadline for many tax strategies.

#1 Offsetting capital gains. It’s been a great year in the market generally. Perhaps you’ve sold some positions and made some taxable gains.  Determine if you can offset robust gains that you’ve triggered with capital losses that are now under water. In late November, early December take a look to consider the sale of any eligible investments that are in an unrealized loss position to offset to the extent possible, the gains you’ve incurred.

TIMING matters! Trades have to close inside the calendar year and plan to sell well in advance of December 29th to settle by Friday December 31 this year.

#2 Make Charitable Donations.  In order to be claimed as a tax credit it will have to be in by December 31. If lack of cash is an issue, consider donating ‘in kind’ by giving the charity investments such as shares in a publicly traded company or ETF units. This way the client avoids having to sell the investment which would trigger capital gains, in order to make a cash donation. An in-kind donation receives a charitable receipt for the value of the asset on the date of the donation, allowing it to be claimed as a donation tax credit.

#3. Consider prescribed rate loans. This is predicated on the couple having excess cash to invest.

Couples in different tax brackets can execute a strategy where the higher income spouse can loan money to their lower income spouse, who would then invest the money. The lower income spouse pays lower taxes (dividends or capital gains) on the investment earnings than would the higher; AND pays deductible interest on the loan to the lending spouse at the prescribed rate. The prescribed interest rate has been low for quite a while, eg. for the 4th quarter of 2021 it is 1%. With interest rates rising, rates may increase but the applicable rate would be the prescribed rate WHEN THE LOAN IS INITIALLY INCURRED, so establishing that loan now while rates are still low would result in ongoing LOWER interest income inclusion that doing so when rates rise.

#4 Take advantage of self-employment deductions. Many people still work from home, and   can evaluate the related tax deductions available to them.  Individuals who earn commissions have a broad range of deductions such as electricity and heating, minor repairs, a portion of cell phone services and certain office supplies, provided the right conditions are met. Independent contractors who are not employees can also claim some home office expenses like insurance, property taxes, mortgage interest.

Connect here to talk to Peter about complimentary year-end tax planning.

*Using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines.