This article was originally published in the December/January 2014 issue of MoneySense with the headline “Still time to cut 2013 tax liability,” online at MoneySense.ca.
It’s high time to plan to reduce your taxes for 2013. By filing prior years’ returns or adjusting previous errors, you can recover “tax gold” before year end, spend to maximize tax reducers and set up tax-efficient wealth management for 2014.
Recover gold. Missed a big deduction? CRA lets you recover refunds on prior filed returns over a maximum 10 years. Adjustments to 2003 tax returns can still be made until December 31, 2013. Be sure to claim capital losses, safety deposit box charges, disability, medical and other tax credits, and file missed returns to create RRSP contribution room.
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Give generously. The new First-Time Donor’s Super Credit, available between 2013 and 2017, is for cash rather than in-kind donations, as long as you or your spouse have not donated in the prior five years. The regular calculations change from 15% to 40% on the first $200 and from 29% to 54% for those over $200 but not over $1000.
Consider giving $1,000 in cash, perhaps by generating losses in non-registered portfolios. Those can offset the year’s capital gains, or if losses exceed gains in carry-over years, you can go three years back or indefinitely forward. Then give more by transferring securities with accrued gains — the transfer is tax-exempt and you get a regular donation credit. Political party donations are even more lucrative, notably on the first $400, attracting a 75% tax credit.
Move up medical appointments. Medical expenses paid are claimed for any 12-month period ending in the calendar year. So choose the best 12-month period ending in 2013: December 15, 2012 to December 14, 2013, for example. Make appointments to get eyes, teeth and ears checked, buy prescriptions, medical devices, contact lenses, hearing aids and batteries, get prescribed therapeutic massages or other treatments.
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Buy business assets and office supplies. The self-employed can buy a new car or computer or stock up on office supplies by year end. Get new tires, car repairs and fill the tank on December 31. Rookie commissioned employees with no first-year commissions should hold off buying promotional items. Make Happy New Year’s gifts instead so expenses are deductible next year.
Review quarterly instalments. If your income dropped in 2013, estimate taxes before the instalment due date of December 15. You may not need to make the payment. Contribute to RRSPs to reduce net income further if eligible or use the extra cash to make a TFSA investment.
Avoid OAS clawbacks. Seniors, total OAS benefits for 2013 are $6,579.06. Once net income exceeds $70,954, you must repay a portion—all of it if net income reaches $114,815. Worse, a twelfth of the clawback is deducted from OAS starting next July after tax filing. Consider deferring certain taxable income actions to January 2014: for example, an extra RRSP withdrawal, or the disposition of taxable capital assets.
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Defer OAS benefits. If your income is going to be in a clawback range throughout your retirement, you may wish to elect to defer receiving your OAS for up to 60 months until age 70. You will be eligible to receive a larger pension at that time in return for the deferral.
Preserve EI benefits. Unemployed? Employment Insurance benefits are taxable but if regular benefits were received previously over the last 10 years, this year’s benefits may be subject to clawback if net income exceeds $59,250. Avoid this with an RRSP contribution if you have room.
Business owners. Two tips: Create enough earned income to maximize RRSP contributions in 2014; the upper earned-income ceiling is $134,833 in 2013. Then consider paying dividends from the family business in January rather than December to defer taxes. But because of recent changes, tax on small business dividends rises in 2014. Discuss options with your tax pro.
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Planning with investments. Try to offset capital gains with losses as part of a year-end tax loss selling exercise, and plan RRSP contributions, if age-eligible and you have room. If you buy mutual funds in December before distributions are paid, the full distribution for the year will come into your income. You’ll have the benefit of the net distribution but try to avoid increased quarterly instalment tax payments.
Final RRSP contributions. Age 71 in 2013? Convert RRSPs to a RRIF or life annuity before year end. Consider making a final RRSP contribution, if eligible; or, if you worked but have no contribution room carried forward, an over-contribution can be made in December to use the 2013 room. Beware of a 1% penalty tax for December, though. Another option: make a spousal RRSP contribution for an age-eligible spouse.
Read more: Guide to family tax credits and deductions>
Make RESP contributions. Contributions may qualify for the Canada Education Savings Grant: 20% of contributions up to $2,500. A maximum grant of $1,000 is possible if there is unused room from a previous year.
Bottom Line: When you pay the correct amount of tax you are exercising your taxpayer rights. Do so before December 31.