As we are nearing the end of the year, many people are taking the time to review their financial plans to spot any tax-saving opportunities. Below are 6 common strategies that can help reduce your taxes:
1. Capital Gains Deferral: It could be wise to defer any unrealized capital gains until 2022 for any of the following reasons – (a) Your marginal tax rate could be lower in 2022 than in 2021, (b) Triggering any capital gains this year would require tax payment made on May 2, 2022. By delaying into the near year, the tax payable would be paid one year later on May 1, 2023, and (c) Capital gains recognized this year would have to be offset against any existing capital losses for this current year. This will limit one’s ability to carryback the capital losses to recoup taxes paid on gains from prior years.
2. Low-Income Year: You may want to make an early RRSP withdrawal before year-end if the following applies – (a) One expects to be in a low marginal tax bracket for 2021, (b) One expects to be in a higher marginal tax bracket in retirement, (c) One seeks to reduce the size of their RSP while in a lower tax bracket as they approach a mandatory RIF withdrawal age that will push them into a higher tax bracket. After a withdrawal has been made, you may want to consider reinvesting these amounts into a TFSA account for tax free growth on future gains.
3. Charitable Donations: Donating to charity can be a rewarding experience, and it can also help reduce your personal taxes. To get a donation tax receipt, the final day to make a donation is December 31st, 2021. Instead of donating with cash, you can also donate securities in-kind that have unrealized gains. A donation receipt worth the full market value of the security will be provided and no capital gains are incurred. With this method, you will have to ensure it is done before the year-end and the charity is able to accept this gift.
4. Tax Loss Selling: If you recognized any capital gains during the year and you are holding investments with unrealized losses, this may be the time to realize the losses to offset some of the capital gains. This technique is commonly referred as “tax loss selling”. The blog published last week, “Cleaning Up Before the Holidays”, provides more details of this strategy.
5. Year End Bonus Planning: The year-end bonus is not only a nice reward at the end of the year but it also provides an opportunity for tax planning. A year-end bonus creates more RRSP contribution room for next year’s contribution season (if you have not already reached the maximum RRSP limit). On the other hand, if you expect to be in a lower tax bracket next year, you may want to consider deferring the bonus to next year (if permitted by your employer) to smooth out your taxable earned income.
6. RRSP Contributions: This is not required to be done before the end of the year as you have until March 1st, 2022 to make a contribution. However, by contributing earlier, it maximizes the window of tax-deferred growth. If you are turning 71 this year and have earned income, consider making one last RRSP contribution before your RRSP matures. You will lose that contribution room unless you have a spouse who is under 71. However, you will still want to make this contribution as close to the end of the year as possible since this contribution is technically considered an over-contribution until the new year starts in 2022. The excess contribution is subject to a 1% penalty per month for over-contributions above $2,000. By making the contribution closer to the end of the year, you minimize the over-contribution penalty while still reaping the benefits of a tax deduction and tax deferred growth. Please consult your advisor and accountant to see if this strategy is suitable for you.
This is just a summary of some of the more common tax saving strategies. For a more comprehensive list or a custom tax planning approach, please feel free to speak to one of our advisors so we can identify the best opportunities to help reduce your taxes.