As 2019 nears an end, Toronto-based Sightline Wealth Management is sharing some important investment and year-end tax strategies. With each strategy, there are nuances, and every situation is unique so planning for year-end needs to happen now.
7 year-end tax strategies
Here are seven simple year-end tax strategies and investments to help maximize your tax filings this year for any homeowner.
1. Convert your RRSP to an RRIF
If you turn age 71 in 2019, you must convert your RRSP into an RRIF or an annuity before December 31. Not doing this would result in your RRSP accounts being deregistered and the entire value would be classified as income.
2. Update your will and power of attorneys
This topic is very comprehensive and if you do not have a will or power of attorneys in place, we suggest that you do not delay. There are numerous decisions to be made regarding your medical care and to ensure that your assets are managed and distributed according to your wishes.
3. Give charitable contributions
Charitable contributions qualify for a tax credit for up to 75% of your net income. In the year of death and one year prior, the limit is 100% of net income. If you contribute over $200, then it qualifies for a tax credit at the highest tax rate, and under $200, it qualifies at the lowest tax rate.
Another consideration is to donate publicly traded securities (stocks, bonds, mutual funds) that have appreciated in value in your non-registered account. The benefit is that you receive a tax receipt for the market value but do not pay capital gains on the appreciation. To maximize this year-end tax strategy, you must contribute before December 31 and only registered charities can issue official receipts for tax purposes. To confirm whether a Canadian charity is registered, visit the CRA website.
4. Assign beneficiary designations
This does not have a December 31 deadline but it’s a good time to double-check that you have designated beneficiaries on all your accounts. A beneficiary is a person or entity that will receive the proceeds from your account when you pass away. Without a beneficiary named, your estate is the default beneficiary and there could be taxes and delays in accessing the proceeds. Keep in mind that due to life events such as death, separation and divorce, your beneficiaries should reflect the changes in your life and your year-end tax strategies.
5. Save an emergency fund
Depending on where you are in your life, having a minimum of three to six months living expenses can be very helpful when life presents an unexpected challenge.
6. Use interest payments on prescribed rate loans
If you made a prescribed rate loan to your spouse, common-law partner, minor child or family trust, the interest payment on these loans must be made by January 30 of the following year in which the interest accrued. If the payment is not made then, the entire strategy can fall apart and the attribution rules would apply, resulting in the income earned, becoming taxed to the lender.
7. Review the diversification and investment selection in your portfolio
How long has it been since your portfolio has been reviewed? Does it require rebalancing? Are the investment selections appropriate given the market conditions and do they still reflect the recommendations from your financial plan? Is the portfolio diversified into non-correlated asset classes? These are all questions that should be addressed annually and if this conversation hasn’t occurred, then aim to have it before year-end.