2011 Year-End Tax Planning Tips

As we approach the end of 2011, it’s a good time to review your financial picture and explore any year-end tax-saving opportunities. Bear in mind that after December 31 precious little could be done to reduce your taxes and save money. So here is a short list of year-end tax-planning ideas that can be implemented before we say good bye to the year 2011.

1. Realize capital losses.

Hopefully all your stocks were big winners in 2011, but unfortunately for most investors this is not the case. We just want to remind you that when you sell your portfolio dogs you create a capital loss. This loss must be applied against taxable gains realized during the year, but it can also be carried back three years or carried forward indefinitely to apply against future capital gains. Therefore it would be a good idea to check your 2008-2010 tax returns and see if you paid taxes on capital gains for any of those years.
Tax-loss selling must take place by the end of the year; just make sure you do that by December 24, 2011 as it takes three business days to settle a trade. Also keep in mind that selling a security should always be done in the context of your overall investment plan.
If you received no other income this year, you may want to consider increasing the adjusted-cost base of your holdings by selling securities in which you have capital gains. Remember, tax considerations alone should not drive your investment decision. Consult with your Investment Advisor.

2. Contribute to your RRSP.

RRSP is one of the best remaining tax avoidance strategies, and it is perfectly legal. Still, every year thousands of Canadians miss making an RRSP contribution. Up to 90% of Canadians fail to top up their RRSP contribution room. And far too many people wait until the last minute to contribute. This “last minute” normally falls on March 1st the following year. Considering this huge market drop you might want to put your money to work sooner, as there are lots of bargains around us.
Borrowing to make an RRSP contribution usually makes financial sense, and it sure does this year. If you do your home work and choose your investments carefully, your rate of return will definitely exceed the interest you pay to the bank. But be aware that this interest is not tax deductible. Instead you will deduct your RRSP contributions from your total income for the year.
On the other hand you might want to withdraw some money from your RRSP or RRIF before the end of the year if your 2011 income is low. You may pay little or no tax on the withdrawal. Remember the financial institution must withhold tax when you take money from your RRSP, but you may be eligible for most or all of the tax as a refund when you complete your 2011 tax return.

3. Adjust prior errors and omissions.

If you find that you missed a tax deduction or credit, you can adjust most federal provisions under CRA’s Fairness Package all the way back to 2001. Taxpayers often under-report eligible deductions, including moving expenses, childcare expenses, employment deductions, and carrying charges. People also tend to forget about such non-refundable tax credits as tuition and education, caregiver, transit passes and children’s fitness amounts.

4. Make your charitable donations by December 31, 2011.

One of the most tax-effective ways to give to a registered charity is to donate publicly listed securities that have appreciated in value. That’s because you do not have to include any part of the capital gain as taxable income on your tax return, yet you are entitled to a donation tax receipt for the full value of these shares or securities.

5. Consider investing in a tax shelter.

There are many different tax-shelter plans out there. Certain tax shelters are sanctioned by the Canada Revenue Agency and may be eligible for credits while many others are pure scams. In short, taxpayers should be wary of any arrangement that promises a donation receipt in excess of the cash payment. The tax shelters being promoted by many professionals are very complicated “designs”, so we advise you to speak to a tax practitioner before putting your money into any such shelter.

6. Minimize taxes on self-employed earnings.

If you run a non-incorporated business the following tips will allow you to maximize your tax savings. First of all, consider writing off obsolete or damaged inventory as it makes no sense from the tax point of view to include them into your year-end inventory. Secondly, if you plan to acquire new assets do this before December 31 – in this case you will be able to start amortizing them in 2011. Also think about buying office supplies, rewarding special clients or prospects with gifts or paying year-end bonuses to staff.
In case you have been charged a penalty and/or interest, consider requesting to have them reversed. Canada Revenue Agency will sometimes reverse those charges if you provide the CRA with an exceptional reason why you could not comply with the law. You can find the details on their web site. Another situation where it may be possible to waive penalties and interest is in “severe hardship” case. In other words, you should be able to proof that you have severe difficulties in paying your outstanding taxes.

Last but not least, consider the new Tax-Free Savings Account (TFSA), which started in January 2009. The TFSA is unique because while contributions are not tax-deductible the income earned can be received tax-free. Contributions to a TFSA can be made by Canadian residents aged 18 or over. Up to $5,000 per year can be contributed to a TFSA, with unused contribution room being carried forward.