Hourly Based Fee
Only Advice
Call today to arrange a meeting.
1 (902) 393-1248
P.O. Box 1201     Charlottetown, PE     C1A 7M8
T: (902) 393-1248 (direct)     CorkumFinancial@pei.sympatico.ca     www.CorkumFinancial.ca

Tax Planning Tips for Investors

The following article deals with a number of issues applicable to taxes. Although this list is not exhaustive, it is a good checklist for everyone to consider. If you are looking for more information on any of the following points, please contact us. Also, please see the selection of handouts which we have made available in our reception area and on our website for more information on various topics. This list is an overview only – please seek professional advice before taking action.

  1. Remember to claim all investment related deductions:
    • Interest on loans for investment purposes
    • Tax preparation fees where applicable
    • Investment counselling fees (non-RRSP)
  2. If you are age 65 or over and do not qualify for the $2,000 pension credit, buy a qualifying interest bearing term investment with an insurance company which will then make the pension credit applicable, or transfer a portion of your RRSP to a RRIF and commence withdrawals. Pension splitting will also be available to you.
  3. Invest Canada Child Benefits in a separate account in your child’s name. The government considers future earnings on this money as belonging to your child.
  4. If you give money to a minor child and it is invested, future capital gains will be taxable to the child; you must still report interest and dividend income on that money yourself.
  5. Capital gains and Canadian dividends are taxed at lower rates than interest income, although the related investments carry more risk.  Do not buy investments just for the tax benefits – always consider the quality of the security.
  6. Remember to report all capital gains and losses for assets held outside of RRSPs /RRIFs, which could include exchanges of mutual funds within a “family” of funds.
  7. Understand the tax reporting differences between a mutual fund and a segregated fund (much like a mutual fund but issued by an insurance company).  A T3 tax reporting slip from a mutual fund does not include the gain or loss on the sale of that fund, whereas a T3 slip for a segregated fund includes all of your tax information, including the capital gain or loss on final sale.  Ensure your tax preparer also knows this difference!
  8. Deduct a capital gains “reserve” if you do not receive all of your proceeds from sale of a capital property in the year of sale.
  9. Capital losses can be carried forward indefinitely, and may only be applied to reduce capital gains, except that they may be fully used against regular income in the year of death or the prior year.
  10. Special capital gains exemptions are still available for certain private corporations and farming/fishing businesses. Ensure your businesses remain qualified for these by knowing the rules. For example, farm property is eligible but rental of land to a farmer does not qualify as farm property.  On the other hand, farm property transferred to you from your parents or grandparents may qualify even if not farmed by you.  (Note that PEI has a special property tax reduction for farm property, even if it is rental property as long as you meet certain conditions.)
  11. Assuming you wish to invest in both interest-bearing fixed income and stock market equity investments, place the interest bearing investments in your RRSP/RRIF first because of the higher tax rate on interest versus capital gains and dividends. Of course, do this only for long-term holdings, not if you will need the cash for personal needs in less than 7-10 years. If you have equities in your RRSP/RRIF, you can do a tax-free swap to remove them and replace them with fixed income securities.  Speak to a financial planner about which way to go for TFSA’s because it may depend on your level of income expected.
  12. Invest to increase wealth, not just for tax savings – understand the risks and rewards of all your investments.
  13. It is usually preferable to spend other sources of money first and your RRSP/RRIF money last to postpone taxes and earn tax-deferred interest as long as possible. However, plan your withdrawals to minimize taxes; if your tax bracket changes, this may effect when you should draw from your RRSP.
  14. Methods promoted to withdraw money from RRSP’s and RRIF’s with minimum taxes usually involve higher risk alternatives, some of which involve borrowing. Ensure you understand these risks and always get a second opinion if someone recommends a loan for investing purposes. It is impossible to draw down your RRSP or RRIF without including it in taxable income.
  15. Use spousal RRSP’s so you can split income in retirement to reduce your taxes.
  16. Consider designating a beneficiary for your RRSP/RRIF – your spouse or dependant minor children may benefit from a tax-deferred rollover, as well as from a reduction of probate fees.  Make your spouse your “successor owner” of your TFSA (which is similar to a beneficiary designation of an RRSP/RRIF)
  17. Re-invested dividends increase your cost base through the purchase of more units; return of capital decreases your cost base and your units held. Ensure you do your calculations correctly.
  18. Many mutual funds declare dividends paying out their annual income in December, which are allocated to the owners at that time. If you buy them in December, you will be taxed on the whole year’s income allocation even though you only owned them for a month. Plan your purchases accordingly.
  19. Consider the benefits of Registered Education Savings Plans to earn tax deferred income (subsidized with government grants) for future education requirements for your children, grandchildren or
    anyone you favour.
  20. A taxpayer’s spouse may report the taxpayer’s dividends if it will restore the spousal credit. Total combined taxes may be lower in this case.
  21. Use the pension splitting rules to allocate eligible pension income between spouses where it will reduce combined taxes.
  22. Donate your shares with inherent capital gains to charity instead of donating cash to eliminate taxes on the capital gains while still receiving a charitable receipt for the full value of the shares. Donations in excess of $200.00 (cumulative) in a year currently reduces taxes at a rate of 46-51%.
  23. Repay personal debts before business or investment loans to protect interest deductibility. Borrow separately for tax deductible purposes rather than combining deductible and non-deductible loans. This allows better tax planning when repaying loans.
  24. When leveraging (borrowing to invest), you are entitled to claim the interest expenses for investment loans. However, also recognize the risk of leveraging because your returns will be magnified, whether they are a gain or a loss. If you are investing in capital gains products, your break-even rate of return will be lower than your loan interest rate because 100% of your loan interest is deductible, but only 50% of your gain is taxable.
  25. Canada Pension Plan entitlements can be split between spouses upon retirement, which may reduce taxes on a combined basis.  Both spouses must have applied for the CPP retirement pension.
  26. Always charge interest and prepare agreements for all loans made by you to friends or family.  This will provide for possible tax deductibility as a capital loss in case you are not repaid (after taking reasonable collection action). For the same reason, always charge guarantee fees when you co-sign for a loan.
  27. If you lose your investment in, or loan to, a private business, you may be eligible to claim an allowable business investment loss, which may be better than a normal capital loss.
  28. Prepare your Will and include a clause advising your executor to seek tax planning assistance upon your death.
  29. Be aware of special rollover rules and planning possibilities on death. See our articles on estate planning and preparation of a Will.
  30. If you spend a significant amount of time in the US or own substantial amounts of US property or investments, seek professional advice about US reporting and estate taxes.
  31. When evaluating returns on foreign investments, remember that foreign dividends are not entitled to the dividend tax credit, which are available for Canadian dividends. Foreign exchange fluctuations
    must also be considered.
  32. If you receive a “spin-off” of shares from an American company, file an election under Income Tax Act section 86.1 to have any gains from this “spin-off” deferred until the shares are sold.  See the CRA site for a list of qualifying companies for these spin-offs approved by CRA.
  33. If you have realized capital gains during the year, and you also own bonds with unrealized capital losses because of increases in interest rates, do a bond swap. Sell your bond and buy another for the same amount, creating a capital loss upon sale to offset your capital gains.
  34. Understand the difference between “dividends” and “return of capital” distributions from investments. Return of capital (ROC) is tax-free. However, do not confuse ROC with a return on your investment, as ROC may only be a return of your original cost.
  35. Deposit the maximum amount to a Tax Free Savings Account and assist family members age 18 or over to do the same.  Ensure you assign your spouse, if applicable, as a “successor holder” so they may continue to benefit from the tax-free income by continuing to hold your account after your death.
  36. Consider use of a Registered Disability Savings Plan if you or a dependant are eligible for the disability tax credit and meet the age requirements. In addition to tax deferrals, significant  government grants may apply.
  37. Remember to report capital gains or losses on investments that are transferred by gift, sale, death or upon your move from Canada.
  38. Investment income within a corporation is normally taxed at a higher rate than when earned personally. Plan accordingly to minimize taxes if your investments are already in a corporation.
  39. Do not fall victim to investment sale representatives who promise tax-free bargains of one type or another.  Get a second opinion from an hourly based fee only financial planner to ensure the plan makes sense for you.  These arrangements often include loans, high risk investments or urgent action so be wary.  See my investment article on investment advisor sales tricks and tactics for some common concerns.
  40. When a broker changes investment firms and transfers your portfolio, check the costs (book values) reported on your new statement.  The security costs are often recorded at the fair value on the date of transfer as if they were bought on that date, instead of the original cost.   These are often reported incorrectly, which will likely result in tax preparation errors in the future.  If no cost is reported, ask for a manual adjustment so that you do not lose track of your original cost.

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