As the festive holiday season approaches, income tax planning may begin to slide down our priority list. However, by taking some time to consider these personal tax-planning tips, you may be toasting an even happier and more prosperous New Year!
Registered Retirement Savings Plan (RRSP) Contributions
Although you have until March 2, 2020 to contribute to an RRSP and claim a deduction for the 2019 taxation year, a few details may require your attention before the end of the year.
Your RRSP contribution limit is based on your prior year’s “earned income” (i.e.: salary, self-employment income) up to a maximum indexed amount, set annually by the CRA. For 2019, the maximum RRSP limit is the lesser of 18% of your 2018 earned income and $26,500.
For 2020, the maximum RRSP limit will be $27,230, based on earned income of $151,278 in 2019. Owner-managers wishing to maximize their 2020 RRSP contribution limit should consider topping up their salary by December 31, 2019 to ensure the maximum contribution room will be available. (Note that dividend income does not qualify as “earned income” and as such, does not generate RRSP contribution room.)
If you turned 71 during 2019, your deadline for making your final RRSP contribution is December 31, 2019.
At this point, you must choose one of the following options for your RRSPs:
- Withdraw the funds and pay tax on the fair market value of the plan assets;
- Transfer the funds to a Registered Retirement Income Fund (RRIF); or
- Use the funds to purchase an annuity.
If you have a spouse that has not yet reached the age of 71, you may be able to use your available contribution room in subsequent years to make payments to a spousal RRSP account, up until the end of the calendar year that your spouse turns 71.
Home Buyers’ Plan/Lifelong Learning Plan Repayment
If you have withdrawn funds from your RRSP under the Home Buyers’ Plan (HBP) or Lifelong Learning Plan (LLP) prior to 2018, you may have to make a repayment to your RRSP in 2019. Your annual Notice of Assessment provides details of the remaining HBP/LLP balance and amount that must be repaid in the current year.
If you do not make the required HBP/LLP repayment, this amount will be included as RRSP income on your 2019 personal tax return.
To make a repayment under the HBP/LLP, you must contribute to your RRSP and designate all or part of the contribution as a repayment. Accordingly, the deadline for the annual repayment is the same as that for an RRSP contribution (i.e.: March 2, 2020 for a 2019 contribution).
If the recent increase in the HBP withdrawal limit from $25,000 to $35,000 (effective March 19, 2019) has persuaded you to buy your first home, you may wish to consider delaying your HBP withdrawal until the New Year. This will provide you with an extra year before your first required repayment, which will be due in 2022.
Tax-Free Savings Account (TFSA) Contributions
There is no deadline for contributing to your TFSA as the contributions are not deductible for income tax purposes. However, income generated within your TFSA, as well as the contributions, can be withdrawn on a tax-free basis.
The TFSA contribution limit for 2019 is $6,000. In addition, your limit also includes any unused TFSA contribution room from previous years as well as the amount of any prior year withdrawals from your TFSA.
A common issue that may result in costly CRA penalties is withdrawing funds from your TFSA and then re-contributing in the same year, without having sufficient available contribution room.
Accordingly, making any planned withdrawals before year-end will ensure that this room is available in 2020 to re-contribute to your TFSA if desired and avoid penalties.
Sale of Investments
If you realized capital gains in the current or prior three years, you may wish to take another look at your portfolio before year-end. If you own any investments that are “underwater”, you may consider selling these assets to trigger capital losses before the end of the year.
Capital losses may be used to offset income from capital gains realized on the sale of investments during the year or in the past three years. Therefore, if you will be reporting capital gains in the current year or have reported net capital gains in the past three years, you may be able to reduce your 2019 tax bill, or even recover some prior year taxes.
Any late 2019 trades will need to be settled before the end of the year in order for the capital loss to be reported in 2019. Please confirm the trade date to complete the settlement by December 31st with your investment advisor.
If you do sell investments to trigger capital losses, it is important to note that CRA will deny the loss if the investment is re-purchased within 30 days and is still held on the 30th day by you or an “affiliated person” (i.e.: spouse/partner or an entity controlled by you or your spouse/partner).
Conversely, if you are planning to divest from certain securities that have unrealized capital gains, consider selling these investments after 2019 such that the capital gain income will be taxed in 2020 and taxes payable may be deferred until early 2021.
As always, please keep in mind that tax should not be the only consideration driving investment decisions.
Charitable Donations
Donations to registered charities, whether cash or “gifts in-kind”, must be made by December 31, 2019 in order to obtain a tax credit on your 2019 personal tax return. Tax savings from cash donations vary depending on the total amount donated as well as your taxable income and province of residence. The first $200 of annual donations results in a 15% federal tax credit. This federal tax credit increases to 29% for donations above this level (and 33% if taxable income exceeds approximately $206,000). Provincial tax credit rates should also be considered. For example, in Ontario, charitable donations may result in a cumulative tax savings of up to 50.4% for higher income individuals.
Donations of certain property other than cash, or “gifts in kind”, may generate even higher tax savings. For example, when donating publicly traded securities, you will receive a charitable donation receipt equal to the fair market value of the donated securities. In addition, you will not be required to recognize the capital gain on the disposition (other than on flow-through shares).
Accordingly, if you are planning to make a charitable donation, it will be more tax efficient to donate an eligible security with an accrued gain rather than sell the security and donate the after-tax proceeds. Please be sure, however, to make appropriate arrangements with the charity well before the end of the year as the administrative procedures for donating securities often require some additional lead-time.
Medical Expenses
The federal medical expense tax credit is a non-refundable tax credit calculated as 15% (plus an additional 5.05% provincial component in Ontario) of qualified medical expenses in excess of the lesser of 3% of net income or a specified annual minimum threshold ($2,352 in 2019).
Medical expenses may be claimed if they were paid within any 12-month period ending in 2019. Accordingly, it may be possible to include 2018 expenses that were not claimed in the prior year if an appropriate 12-month period ending in 2019 can be determined. In addition, it may be beneficial to pay for certain medical expenses in advance or consolidate expenses in one year in order to increase your 2019 credit (i.e.: orthodontics/eye glasses).
Personal Tax Instalments
If you are required to make personal tax instalments, the deadline for the final quarterly payment to avoid potential interest and penalties is December 15, 2019.
In addition, if you think you are behind on your 2019 instalments, interest and penalties may be reduced by making a “catch-up” payment before the end of the year.
For 2019, the CRA interest rate on overdue income taxes is 6%.
Other Payments Due by December 31, 2019
There are several other payments that should be made by December 31st to ensure that the benefit of the tax deduction or credit may be realized on your 2019 personal income tax return. Some of these payments include the following:
- Investment expenses (i.e.: interest and management fees for non-registered accounts)
- Child care expenses
- Professional dues
- Interest on student loans
- Political contributions
If you have any questions regarding the above tax planning tips, please do not hesitate to contact your Shimmerman Penn advisor.
