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Year-end Planning – For Tax, Investing and Life

My general philosophy is to take a balanced approach to life. While you need to spend some of your money to meet your needs and enjoy life today, we all need to set some aside for tomorrows’ needs and wants. This may be a fun trip, it may be eventual retirement (yes, you too will get old), or it may be a serious illness. Yearend is a good time to spend a few hours looking at your own life situation to be sure you are in an okay place. It may be no fun to do this, but it is less enjoyable to be unable to pay your bills.

Personal Tax Planning

  1. Use the best tax shelter available – give money to charity. Deliver, pay online or mail your donation no later than December 31. In PEI, if you are paying federal and provincial taxes, you will save between 45.7 and 51.4 cents on any amounts over $200.00 in total giving. The charity gets $1.00 to spend on helping others and it only costs you about half to give them that money.
  2. Pay any tax deductible bills that you want to deduct this year before December 31. This include such items as medical bills (not prepayments), child care costs, association dues, moving expenses, adoption costs and employment expenses.
  3. If you have been paying taxes on interest and investment income, and have no Tax Free Savings Account, open one for next year. Tax free income is so much better!
  4. If you have a Home Buyer’s Plan or Lifelong Learning Plan from your RRSP, make your repayments by December 31 to avoid an increase in your taxable income.
  5. Make repayments on any previously borrowed taxable life insurance policy loans, or any other repayments of income that was taxable to you previously (employment insurance, shareholder loans, wage overpayments, etc.)
  6. If your income this year is low and you expect to be higher for many years in the future, look at ways to increase it. For example, if it is less than your available tax credits (your basic personal amount of about $12,000 federally, plus any other credits), increase you income to use these credits. Or, if your income will be less than approximately $46,000, you are in the lowest federal tax bracket. If your income in the future will be higher, maybe you should take advantage of this temporary low bracket. One possibility is a withdrawal from your RRSP (and consider re-depositing it in the New Year). It is better to pay no taxes or lower taxes this year than to pay taxes at a much higher rate in the future.
  7. If you planned to draw money from your TFSA early in the New Year, take it in December so that your limit will be higher next year and you can re-deposit it.
  8. Any real estate transferred this year will need to be reported on your tax return, including transfers to joint name, gifts and sales. This includes your principal residence and other real estate. Start collecting all of the costs and proceeds together and aim to get your tax return prepared early so you can plan for any significant tax payments required.
  9. If you are a US citizen or dual citizen with the US, remember that you must file your US tax return and also special reports for bank accounts and investment holdings in Canada that are of certain types or amounts. Get advice because the penalties are significant for non-compliance, and the due dates differ from Canadian tax deadlines.

Investment Planning

  1. Did you turn 71 this year and do you have an RRSP? If so, the deadline is December 31 to cash it, buy an annuity or convert it to a Registered Retirement Income Fund (RRIF) to avoid paying tax on all of it this year. See your financial institution promptly.
  2. Are you ready for a stock market crash? This is not a yearend tip – it is a year round tip. If you are not prepared to lose money, either temporarily or permanently, and you are in the stock market (either directly or through mutual funds), then meet with your financial planner (or another planner for a second opinion) and review your risks.
  3. Selling investments to claim tax losses is popular at year-end; again, this should be a year-round practice. Review your portfolio regularly and sell the losers which are not likely to recover and sell the winners if they have likely reached the threshold. Of course, doing it at year-end is better than never, and you may be able to use the capital losses to offset capital gains triggered earlier in the year.
  4. If you have not reviewed your investment performance and risk balancing with your advisor in the past year or two, it is time to do so. Schedule an appointment today to meet your advisor in late January to review your performance this year in comparison to market averages (benchmarks) for the year. I recommend determining how much you paid in investment fees and identify which are deductible for tax purposes. The disclosure of these fees recently changed and it can be confusing as to which are deductible. Also, determine if the money you need for the next five years (ten if retired) is safe from stock market declines, and that your risk of loss is comfortable for you.

Business Planning

  1. Meet with your tax advisor prior to December 31 to ensure your planning for year-end is appropriate.
  2. Pay any wages or dividends, or legally declare bonuses and dividends, to place you in the best tax bracket for this year. If you have no cash to pay them within the time limits required (ensure you understand those limits), consider preparing a loan agreement to document that the money is legally owed.
  3. If you have a family trust or relatives being paid by your corporation, meet with your tax advisors before yearend to take the necessary steps to deal with tax law changes made in 2017 affecting 2018 and future years.
  4. Have you thought about who will take over your business someday (called business succession planning)? This is a good topic to discuss while the family is home for the holidays.

Divorce and Separation Planning

  1. Ensure your spousal support payments are made by December 31 to claim your deduction.
  2. Legal and accounting fees to obtain support are deductible when you are billed, so discuss the timing of such bills with your advisors to get the best tax benefit.
  3. Are you a single parent with shared custody of two or more children? Does your support agreement require you to pay a single set-off payment to your ex-spouse? Consider amending the agreement by December 31 to require two payments (one to each other), which may entitle you to an eligible dependent tax credit next year.

Financial Planning for the future

  1. If you have high interest debt, meet with your planner immediately on the best method to reduce it. If you are increasing your credit card balance and line of credit to buy your play toys and keep up with your friends, you should ask them now, rather than later, if you can move in with them when you retire. Put yourself on a budget for next year.
  2. While enjoying today, remember to save for tomorrow – set up a plan now to transfer 5% to 10% of your net pay cheque each pay day to a savings account, even if you have a pension plan at work.
  3. Open a Registered Education Savings Plan (RESP) for your children before yearend, or make your current year deposit by then, to get your current year grants. Think you can’t afford an RESP? The government will give low income families an additional $500 grant (Canada Leaning Bond) for opening an RESP (followed by more grants in the future), even without a deposit by you. An RESP may be better for you than an RRSP.
  4. Open a Registered Disability Savings Plan (RDSP) if you have a permanent disability and are under age 60 or have a child under that age. Designed to assist disabled people in their later years, the government grants that are available up to age 49, in addition to tax deferrals, can be substantial. There is an additional grant of up to $1,000 for low income individuals to open the plan, followed by additional annual grants.
  5. Stop and look at your monthly bills. Where can you save? For example, have you ever checked your telephone or cable bills? Look for mistakes, and look for services you never use. Have you ever obtained quotes on home and automobile insurance, as well as life, health and disability coverage? Look for proper coverage, reasonable deductibles and competitive pricing. Pay for only what you need.
  6. No matter how much money you have, it is no good if you don’t live to use it. Get a health checkup. If you are middle age or older, get your regular mammogram and prostate exams – an ounce of prevention is worth a pound of cure. It worked for me. (How is this financial advice? Certain health costs are paid by government, but many are not, and time off work and need for personal caregivers, for example, can be expensive.)
  7. Do you have a Will and Power of Attorney? Shame on you for the hardship and the expense it will have on your loved ones if you do not. Discuss what you want to happen to your property and the type of funeral you would like to have while your family is home for the holidays. Resist your desire and their urge to procrastinate until it is too late.

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum