Year-end investment and tax tips

You could still save a bundle on 2019 taxes

Year-end is fast approaching, and with the holiday season getting into full swing, you probably won’t want to think about investments and taxes. Still, there are a few tax and investment moves you could make before Dec. 31 that could save you a few bucks in tax come next April. So here’s my annual list of favorite year-end tax and investment tips.

Avoid December mutual fund purchases

If you buy a mutual fund in December in a non-registered account, you could end up paying tax without ever having made a buck in gains. It all has to do with year-end distributions made by mutual funds, which impact net asset value. Why pay for someone else’s distribution? Wait, and invest in January. Keep in mind that this won’t necessarily apply to exchange-traded funds. Check with your financial planner before making any mutual fund transactions around this time of the year.

Tax-loss selling

If you’ve got some losing stocks in your portfolio, consider selling before year-end if you wish to use losses to offset any gains you might have made earlier in the year on other investments. To qualify for a 2019 tax loss, the settlement must take place in 2019.

Because it takes three business days to settle a transaction, the last possible day to sell most securities in Canada to be eligible for a capital loss in 2019 is Dec. 27 for settlement by Dec. 31, 2019. For U.S. exchange-traded stocks, different rules apply, and you may have another day’s leeway. But check with your broker or advisor now, while you still have time, to be absolutely sure you can meet the various transaction deadlines. Better to make transactions slightly earlier than the last possible day, just in case there’s some sort of delay or mix-up with your orders.

For more details, see tax lawyer Samantha Prasad’s recent in-depth series on tax loss selling.

Make registered contributions

Contribute to registered plans like RRSPs, TFSAs, and RESPs if you haven’t already done so. True, most plans let you accumulate and carry forward contribution room into future years, but why wait? The sooner you contribute, the sooner you start earning tax-advantaged compound growth in your plan. Plus, it makes your bookkeeping a whole lot easier!

Defer RRSP/RRIF withdrawals

And if you’re planning a withdrawal from your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF), wait until January if you can. Withdrawals from these plans are included in your taxable income for the year. By deferring a withdrawal if you can until early 2020, you’ll put off the tax hit for another year.

Year-end business tax tips

If you’re a business owner, consider buying computer and other equipment now rather than deferring purchases to January. Your capital cost allowance (CCA) will increase for the year, even though you’re entitled to claim only 50% of the allowable CCA for a particular class (the “half-year rule”). In addition, your CCA claim for next year will be that much larger. Likewise, delay disposition of depreciable assets until January so as to avoid reducing your CCA claim for 2019.

You might also look at areas where you can bring forward deductible business expenses into 2019, for example, advertising or supplies. And on the other side of the coin, consider delaying business income due in December until January (if you have a Dec. 31 year-end), thus reducing your tax bill for the current year.

The strategies I’ve outlined here won’t apply to everyone, and may be subject to other tax rules and restrictions. As always, consult with a qualified advisor when contemplating changes to your investment portfolio or when considering tax-driven business strategies.

Year-end payments

There’s also a number of payments that you can make before year-end to get a tax benefit for 2019. These include such things as charitable donations (you can do it online to ensure your donation is processed for 2019), interest payments on money borrowed for investment purposes, investment counseling fees, even safe-deposit box rental fees. While not investment-related, ensure you make any necessary medical or dental payments for items not covered by provincial health plans. These include such things as glasses, prescription drugs, and hearing aids. Pay before year-end and you can add them to your medical expense deduction for the year.

Dec. 31 is also the last day you can make eligible 2019 payments to a Registered Education Savings Plan and a Tax-Free Savings Account.

And if you’re planning a withdrawal from your RRSP or RRIF, wait until January if you can. That way, you’ll defer the tax hit for another year.

TFSA contribution conundrum

Mostly, people who come to me with TFSA problems have run afoul of the rules related to withdrawals and contributions.

This happens if you start using your TFSA like a piggy bank or a daily interest savings account, dipping into it when you’re short of funds, and then topping up again when you’re flush. If you’re prone to doing this, you could end up in a confusing cycle of contributing, withdrawing, and re-contributing so that you end up with what the Canada Revenue Agency calls “excess amounts” in your TFSA – that is, over and above the $5,500 annual contribution limit for the year.

The CRA levies a tax penalty of 1% per month based on the highest excess TFSA amount in your account for each month in which an excess exists. This means that the 1% tax applies for a particular month even if an excess amount was contributed and withdrawn later during the same month. The excess-amount tax kicks in on the first dollar of excess contributions.

While it can be tricky to locate your TFSA contribution room information, you can start at one of the following Canada Revenue Agency websites: My Account; MyCRA; or Tax Information Phone Service (TIPS).

Rebalance portfolios

Throughout the year, as markets fluctuate, assets in your portfolio will gain or lose value, and by the end of the year may have skewed your asset weightings. Perhaps a 50/50 fixed-income/equity split in your balanced portfolio at the start of the year has become a 40/60 split or even a 30/70 fixed-income/equity split at the end of the year. The net effect is that your overall portfolio risk has grown considerably, because your portfolio is now overweighted to stocks, which are considered riskier than fixed-income. If left unattended, this can have a serious impact on your portfolio performance during the next bout of stock market volatility.

So year-end is a great time to review your asset weightings with your advisor, with a view to normalizing allocations and diversification. Trim or switch where necessary, using capital losses to offset gains in the current year where available. Don’t forget to apply any unused losses carried forward from previous years.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.