While the deadline for filing your taxes is still months away, the 2020 year-end is only weeks away, and most strategies discussed in this post would have to be implemented before December 31st in order to effective for the 2020 tax year.
Let’s take a look at our top 5 tax saving tips and strategies.
- Make your RESP contributions. If you’re planning to contribute to an RESP, you should make the contribution before December 31st in order to maximize the Canada Education Savings Grant (CESG) for 2020. The first $2,500 of annual RESP contribution is eligible for a 20 percent CESG matching contribution, to a maximum of $500 CESG per child, per year. However, although carry-forward is available for unused years, it is limited to one year at a time. That is, in any given year, the maximum possible CESG is $1,000, which is the current year plus one “catch-up” year. It’s wise to contribute each year to ensure you receive the maximum CESG matching contribution.
- Make your RRSP contributions. The deadline for RRSP contributions for the 2020 tax year is March 1, 2021. But why wait? Waiting until the last minute to make an RRSP contribution means you also miss out on a full year of tax-free growth. If you’re not doing so already, you should consider setting up a regular contribution to your RRSP that matches your pay schedule, such as monthly or bi-weekly. This is known as a dollar-cost averaging strategy, and can help ensure you’re not scrambling to meet the deadline to make a last minute contribution. Additionally, if you’re transferring your RRSP assets to a RRIF this year, you may want to make one final tax-deductible contribution before year-end.
- Don’t purchase equity funds before January. Many equity funds, both mutual funds and some exchange traded funds (ETFs) distribute realized gains such capital gains, interest or dividends, only once a year – usually in December. For ETFs in particular, each owner has their own gain or loss experience based on their buy and sell details. Furthermore, the kind of ETFs used by ModernAdvisor typically have very low turnover rates, and therefore are not going to distribute significant capital gains. Of course, this isn’t an issue inside tax-sheltered accounts such as a TFSA or an RRSP, but it most certainly is an issue in a non‑registered account. If you buy a fund just before the fund makes its distribution, you will face taxes on that distribution, yet you have not received the associated gains. In short, you’ll be taxed on gains you never had in the first place. To avoid this, you could consider deferring purchase of such funds until January of 2020. But keep in mind, the decision for buying or selling investments should never be driven solely by taxes. You may incur a significant opportunity cost for delaying an investment purchase my missing out on investment gains that could have been otherwise enjoyed.
- Claim your medical expenses. You should consider paying deductible medical expenses before December 31st so that you can claim those expenses on your 2020 tax return. Note that, you can claim the total medical expenses for both you and your spouse (or common-law partner) on one tax return. Furthermore, it’s generally advisable for the lower income spouse to claim those expenses. Why? Because the lower of $2,397 (2020) and 3% of net income is deducted from your medical expenses to determine the tax credit amount.
- Make your charitable donations. If you plan to make any charitable donations before year-end, consider making your contribution with investments that have appreciated in value. Why? Because there is a tax incentive for donating securities (including stocks, bonds and funds) to charitable organizations. Since 2006, capital gains on publicly traded securities are not taxable when those securities are donated to a registered charity. The charity will receive the full value of the donation, and you will owe nothing in taxes, regardless of the size of the capital gain. Note that capital losses are denied on in-kind contributions, so, donating shares that have decreased in value is generally not advisable. The annual limit on charitable donations is currently 75% of your net income (extended to 100% in the year of death and year prior).
If you have any questions about your investment portfolio or your financial plan, or would like to have a discussion with a Portfolio Manager or Certified Financial Planner, just contact us.