6 Unique Year End Tax Strategies + More, Taylor Swift Capital Gains
I know it is only the first weekend of November. But proper year end tax and financial planning needs to be thought about a month or two before the end of December. You don’t want to wait until the last week of December because you will either 1) run out of time or 2) make a quick decision that was not thought out fully. If you google “year end” tax planning strategies you will usually get the same ones. In this post I thought I’d give you 6 strategies I don’t see people mention often followed by a bunch more.
Superficial Loss Strategy
There is a way to transfer your capital losses to shield your spouse’ investment gains. If you sell a stock to realize the loss, the superficial loss rules prevent you or anyone you are affiliated with (spouse/yourself) from buying the same investment or a similar investment 30 days prior and 30 days after the sale. If an affiliated person buys within this time period, the loss is denied and added to the new ACB of the purchase. These are called the superficial loss rules.
Sometimes clients and their spouse will have different investment gains or losses during the year. For instance, say Husband bought a stock for $100K which is now worth $50K. If Husband wants to give this loss to Wife for her to shield capital gains, he sells the stock. Wife should immediately buy the stock in the open market for $50K. Because of the superficial loss rules, Husband’s 50K loss is denied. BUT, the $50K loss is added to Wife’s ACB of $50K she purchased the stock for. Meaning she now has a cost base of the shares of $100K and they are currently worth $50K. If Wife holds onto these for 30 days and then sells, she will have created a loss of $50K to be used against any capital gains for the year she has.
Using Prescribed Rate Loans
If you give your spouse or minor child money to invest, most of the income is attributed back to you (for wife all the income + capital gains. For kids, only property income not capital gains). A way around this is if you loan money to a minor child or spouse and charge the CRA prescribed rate in effect at the time that the loan was made, your spouse or children can invest that amount without any income (capital gains, dividends or interest) being attributed back to you. The interest on the loan must be paid back within 30 days after the end of each year. As of today, the interest rate would be 5%.
The interest paid will be taxable to the person who loaned it. But the goal is for the loanee to make more than the 5% prescribed rate on the investments, thereby allowing the loanee to include the income in their return which is hopefully taxed at a lower rate.
Wage payment directly into RRSP
If you have a corporation and have RRSP contribution room, consider having your corporation contributing directly into your RRSP. If you are above the pensionable earnings and EI thresholds, your corporation won’t have to take any source deductions off. If it is a 30K contribution, the 30K will go directly onto your T4 with a corresponding RRSP contribution slip for 30K. This also works quite well if you have a couple hundred thousand in RRSP room that you haven’t used over the years and spare cash in your corporation as a way of getting money out of your company. A nice problem to have.
You can even do this if you are expecting a bonus and your employer will allow paying directly into your RRSP.
Pension credit
If you are still employed, over 65 and have not converted your RRSP to RRIF yet, consider transferring 2K a year over into your RRIF and withdrawing it in order to take advantage of the pension income tax credit. Most people don’t do this and let the 2K pension credit expire each year. By taking advantage of this, you will pay little to no tax on it depending on your marginal rate.
If your spouse needs pension income to qualify for this credit, you can allocate some of your pension income to them as well.
Employer RRSP Matching
Determine your RRSP contribution room remaining in the year. If your employer offers a matching program based on the amount you contribute, take advantage of it. There is no additional cost to you and is essentially free money. The employer portion is added onto your T4 but you also receive an RRSP deduction that should net out for tax purposes.
Investment transfer to minor child
If you are sitting on a potential loss, consider transferring the investment to your child if they are under the age of 18. Based on the rules of attribution, you are deemed to dispose of the investment at FMV which would lock in the loss. Any future gain realized by that investment would be taxed in the child’s hands. Any dividend or interest income from that investment would still be taxed in your hands. This is why it would make sense to transfer an investment that you know or believe won’t pay a dividend.
Rapid Fire Strategies
Have the higher income spouse pay all household expenses to allow the lower income spouse to invest their money and increase the growth of their capital and be taxed at their lower marginal rate
Maximize TFSA, RRSP & FHSA room
Ensure that by taking capital gains into your income won’t offset your Old Age Security threshold for the following year
Contribute to spousal RRSP and receive the tax deduction.
Open FHSA to gain access to the contribution room even if you aren’t going to contribute
Donate publicly traded securities – get full FMV as charitable donation tax credit and no tax owing
If income is low for this particular year and you expect it to be more next year, realize capital gains
If income is higher than usual, defer realizing the capital gain
If you have to convert your RRSP to RRIF because you turned 71 and you have a younger spouse, consider using spouse’ age as the withdrawal amount. This reduces the percentage amount you are mandated to take out.
Pay all tax installments to avoid further interest.
Review your portfolio allocations to ensure they line up with your risk profile.
Trigger capital losses. Allows you to shield against gains taken during the year and to recover any tax paid on capital gains in the prior 3 years.
If you have a Home Buyers Plan and are in a low income tax bracket, consider not repaying and having the amount included in your income.
Make over contribution in December to RRSP if you turned 71 this year. Once the clock hits 2025, you will create 2025 contribution room provided you had earned income in 2024. There will be a 1% penalty for over contributing over the 2K limit. You should compare it to the potential tax savings this strategy might give you. A couple hundred dollar penalty could let you have a large tax deduction.
Pension share – While you can’t pension split CPP on your tax return, you can call CRA and have them split it between you and your spouse.
If you have corporation with accrued investment losses, consider paying out a capital dividend in order for the account not to be reduced when investment losses are taken.
Paying Capital Gains on Taylor Swift
Taylor Swift tickets in Toronto are a hot commodity. I know people who have paid a couple hundred dollars to a few hundred dollars for tickets. On the resale market, places like StubHub have them going for roughly $5K.
Now, not to be the boring unexciting accountant, but if anyone were to resell them for that large of a profit, you would technically have to report it on your tax return as a capital gain. The tickets would be classified as personal-use property. The rules are if you purchased a ticket for less than 1K, your cost base would be considered 1K. Any sale with proceeds over 1K would then be taxable, to be reported on Schedule 3 of your T1.
Most people who bought the tickets, I imagine, intend on going and won’t have to worry about this. But I can also imagine that it can be quite enticing to cash out for multiples of what you paid for on a Taylor Swift concert ticket. I suppose not everyone who bought a ticket will think about the IRR from reselling that ticket in under a year of purchase. To each their own.
DISCLAIMER: The articles posted on TaxCrunch should not be considered specific advice to anyone readying. Please reach out to a professional advisor to seek guidance on any issues mentioned in this post before acting upon anything written here. All posts are time sensitive to what is law at the time written and are subject to changes in legislation.