November 08, 2020
Year End Planning
The year 2020 has left a lot of us with many things on our minds and we realize that year-end tax planning may not be one of them. This is a friendly reminder that there are some strategies that could yield significant savings if we do some simple planning before the end of December. This list isn’t exhaustive, but it touches on some of the major highlights that we may want to keep in mind.
Tax Loss Selling
As much as many of the equity markets have largely recovered from the drop in early spring brought on by COVID-19, there may still be opportunities to do some tax loss selling. In other words, we can lock in the loss on positions that are down by selling them and use those losses to offset capital gains on other investments. CRA will also allow us to carry those losses back for up to 3 years, so as much as this strategy is available at any time during the year, executing near year end ensures we can take advantage of the carry back all the way to 2017.
If the sold position or something similar to it, still has a place in the portfolio, we can discuss how to get the exposure back into the account once the required window of non-exposure has elapsed. If we aren’t mindful of the rules around Tax Loss Selling, we could trigger what is deemed by the CRA to be a “Superficial Loss” which would negate this whole procedure.
Any Capital Loss will need to be used to offset gains in 2020 before it can be carried back further to 2019, 2018 or 2017. The loss can also be carried forward indefinitely to offset gains in future years. When carrying the loss back, you will lower your earned income from that year and could result in a refund of previously paid tax. Fortunately, it will not impact the net income used to calculate certain credits and benefits such as your Old Age Security.
If you make quarterly tax instalments, ensure that you make your last payment on or before December 16 to avoid any late interest fees.
If you haven’t maxed out your TFSA contribution for 2020 ($6,000), you might consider doing so and if you have the funds, you can also play catch for any unused contribution room over the past 10 years. Since the TFSA was first launched in 2009, your total contribution room could total up to $75,500.
An RRSP must mature by December 31 in the year you turn 71. So, if you do have earned income in 2020 and you will be 71 before the end of the year, you have one last chance to contribute to the RRSP.
If you intend to deduct any expenses such as accounting/legal fees, childcare expenses, alimony, medical expenses, business expenses etc. from your personal income tax, then you need to remember to make the payments before December 31.
For private business owners, there are strategies that you may want to investigate with an accountant that could lead to tax savings if executed before December 31.
Over the past couple of years some restrictions have been put in place to curb the tax advantages associated with income splitting with the introduction of the tax on split income TOSI rules. However, for those with family members that actually work for the business, income splitting possibilities still exist. If the adult family members are shareholders, paying out dividends while being mindful of the TOSI rules, it may provide the family members with an opportunity to receive some income without triggering income tax if they meet the criteria. These rules are complex, so we suggest consulting with a tax professional before attempting to execute any of these income splitting strategies.
The TOSI rules do not apply to dividends or bonuses paid for actual work performed that is remunerated at a reasonable level in line with the fair market value that would have been paid to a third party for the same work. Keep in mind that remuneration in the form of salary or bonus must be paid within 179 days of the business’s year end.
Purchases or Sales of Capital Assets
If you’re planning to purchase and put into use capital assets for use in the business in the near future, pull the trigger before the end of the year and you may be able to claim the enhanced first-year capital cost allowance, and tax depreciation on eligible property thus reducing the current year’s fiscal income.
If you’re planning to sell assets, you may choose to delay the sale until after the new year to claim capital cost allowance for one more year.
At CIBC Wood Gundy Allan Bush Investment Team, we have an integrated team of tax, legal and accounting professionals that can help with your overall investment strategy. We encourage you to discuss some of these topics with our trusted advisors and look forward to helping you work through your investment needs.
This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2020.
Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.