Oct 31, 201801:01 PMBlog

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2018 year-end tax planning

2018 year-end tax planning

As year-end approaches, taking some time to review your financial affairs may yield significant tax savings. To ensure that you leave no stone unturned, we have summarized some common year-end tax planning strategies in this abbreviated article.

 

1.   Tax loss selling

If you have realized capital gains during the year, and you are holding securities with unrealized losses, consider selling those securities to realize the losses. This strategy of selling securities at a loss to offset capital gains realized during the year is a year-end tax planning technique commonly known as tax loss selling. Review your portfolio with your RBC advisor to determine if any investments are in a loss position and no longer meet your investment objectives. If the investment still has strong fundamentals and meets your investment needs, consider all costs, including transaction costs before selling investments solely for the purpose of triggering the tax loss.

When disposing of a security, the sale for Canadian tax purposes will be deemed to have taken place on the settlement date. Assuming a two-day settlement period, in order to utilize the tax loss selling strategy for the 2018 tax year, transactions must be initiated by December 27, 2018 for both Canadian and U.S. securities in order to settle during 2018. Canadian and U.S. option transactions have a one-day settlement, therefore, option transactions must be initiated by December 28, 2018 to ensure a 2018 settlement. Check with your advisor for mutual fund settlement dates.

Superficial loss rules - In order to ensure that your capital loss can be claimed, you must be aware of the superficial loss rules. A superficial loss will occur when a security is sold at a loss and both of the following occur:

i) During the period that begins 30 days before and ends 30 days after the settlement date of the disposition, you or a person affiliated with you (i.e., your spouse, a company controlled by you and/or your spouse, or a trust in which you and/or your spouse are a majority interest beneficiary) acquires the identical property that was sold at a loss and;

ii) At the end of that period (i.e., on the 30th day after the settlement date of the disposition), you or a person affiliated with you owns or has a right to acquire the identical property.

You need to look at your holdings across all accounts when determining if the superficial loss rules apply. For example, if you purchase mutual funds on a pre-authorized contribution plan, be sure to check all of your accounts to make sure you are not buying the same mutual fund you are selling (in a different account perhaps) for tax loss purposes within the 60 days that may trigger a superficial loss.

Carry forward and carry back of capital losses - A capital loss must first be applied against any capital gains (including capital gain distributions from mutual funds) you realize in the current year. Once the capital gains of the current year have been offset, the balance of the loss can be either carried back three years (to capital gains realized in 2015, 2016, or 2017) or carried forward indefinitely to offset future years’ capital gains. When you carry back a net capital loss to a previous year’s taxable capital gain, it will reduce your taxable income for that previous year. However, your net income, which is used to calculate certain credits and benefits, will not change. Note that this is the last year in which you can carry back your losses to 2015 and offset them against your 2015 capital gains.

If you plan on triggering a capital loss in a corporation, you should speak to your qualified tax advisor as it may be advantageous to pay out a capital dividend if your capital dividend account is positive, prior to triggering the loss.

2.      Capital gains deferral

As we approach the end of 2018, if you currently have unrealized capital gains you may want to consider deferring the realization of capital gains until 2019 for the following reasons:

a)     Your marginal tax rate may be lower in 2019 than in 2018;

b)     Realizing capital gains at the end of this year means that any tax payable associated with the gains would have to be remitted to the Canada Revenue Agency (CRA) by April 30, 2019. Realizing capital gains at the beginning of 2019 means that any tax payable would not have to be paid until April 30, 2020 (unless you are required to make tax instalments); and,

c)     If you have net capital losses in 2018, you can carry back those losses against previously realized capital gains in 2015, 2016 and/ or 2017. However, before losses can be carried back, they must first be used to offset capital gains in the current year. Therefore, realizing capital gains at the end of 2018 would reduce the amount of capital losses you could carry back.

As always, the investment merits of deferring the sale of a security to the following year must first be considered, before looking at the tax benefit.

3.      Year-end bonus planning

Receiving a bonus prior to year-end creates additional Registered Retirement Savings Plan (RRSP) contribution room for 2019 if you have not yet reached the maximum 2019 RRSP limit. Furthermore, receiving a bonus prior to year-end may also allow greater employee/ employer pension contributions and/or employee profit sharing plan contributions for 2019, if these contributions are based on the prior year’s total compensation.

On the other hand, if you expect to be in a lower tax bracket next year, consider deferring the receipt of your bonus (if your employer permits) to early 2019.

If the bonus is paid directly to you, there will be withholding taxes at source on the bonus payment. However, if your employer permits, some or all of the withholding taxes on the bonus may not have to be withheld if the bonus or a portion of the bonus is transferred directly to your RRSP. You must have adequate unused RRSP deduction room in the year of transfer.

 

This article may contain several strategies, not all of which will apply to your particular financial circumstances. The information in this article is not intended to provide legal, tax, or insurance advice. To ensure that your own circumstances have been properly considered and that action is taken based on the latest information available, you should obtain professional advice from a qualified tax, legal, and/or insurance advisor before acting on any of the information in this article.

 

Susan Gottlieb is Vice President and Wealth Advisor with RBC Dominion Securities Inc. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article.  susan.gottlieb@rbc.com

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