Year-end tax and investment planning tips

They could save you a bundle

Even though most of us are preoccupied with other things at this time of year, there is a handful of year-end investment and tax tips that make a lot of sense to look at now. That’s because they could save you money now and next April, when it’s time to pay your taxes.

Mutual fund purchases

For example, you should not buy a mutual fund in December in a non-registered account. If you do, 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.

Then, if you’re an investor, and you’ve got some losing stocks in your portfolio, you might want to consider selling before year-end.

Tax-loss selling

If you’ve lost money on investment assets 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 2018 tax loss, the settlement of the transaction must take place in 2018.

Because it now takes two business days to settle a transaction, the last possible day to sell Canadian exchange-listed securities to be eligible for a capital loss for the 2018 tax year is Dec. 27 for settlement by Dec. 31, 2018. But check with your broker or advisor now, while you still have time, to be absolutely sure you can meet the various transaction deadlines, especially for securities traded on U.S. exchanges.

Year-end payments

There’s also a number of payments that you can make before year-end to get a tax benefit for 2018. These include such things as charitable donations (you can do it online to ensure your donation is processed for 2018), 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 2018 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 over-weighted 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 where available. Don’t forget to apply any unused losses carried forward from previous years. 

© 2018 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.

Year-end tax and investment planning tips was last modified: December 13th, 2018 by robyn