With just days to go before Dec. 31, here’s some last-minute tax-planning ideas to contemplate during the final week of the year that could reap significant tax savings when you file your 2018 tax return next spring.
With the recent tumult in financial markets, you may actually have some accrued losses sitting in your non-registered portfolio this year. If so, consider some last-minute tax-loss selling, which involves selling investments with accrued losses at, or close to, year end to offset capital gains realized elsewhere in your portfolio. This Thursday, Dec. 27, is the last trade date in order for your transaction to settle in 2018.
It’s critical that your trade settle in 2018 if you want to use your loss against other capital gains realized this past year, including using it to offset capital gains distributions you may have just received this past week from your non-registered mutual funds.
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As a reminder, any net capital losses that cannot be used in 2018 may either be carried back three years or carried forward indefinitely to offset net capital gains in future years.
Make charitable donations
Both the federal and provincial governments offer donations tax credits that, in combination, can result in tax savings of up to 54 per cent of the value of your gift in 2018. With total cash donations up to $200 in a year, the federal donation credit is 15 per cent of the donation amount. For total donations exceeding $200 in a year, the federal donation credit jumps to 29 per cent (33 per cent where taxable income exceeds $205,842) of the donation amount. Provincial donation credits are also available.
Dec. 31 is the last day to make a donation and get a tax receipt for 2018. Keep in mind that many charities offer online, internet donations where an electronic tax receipt is generated and e-mailed to you instantly. Also, remember that gifting publicly traded securities, as well as mutual funds, with accrued capital gains to a registered charity or a foundation, including a donor-advised fund, not only entitles you to a tax receipt for the fair market value of the security or fund being donated, it eliminates capital gains tax as well.
Pay family medical expenses
A medical expense tax credit (METC) can be claimed when total medical expenses exceed the lower of three per cent of your net income or $2,302 in 2018. You must, however, pay your medical expenses by Dec. 31 to qualify for the 2018 tax credit.
It may be worthwhile to look for unclaimed expenses prior to 2018 as well. The METC may be claimed for eligible medical expenses that were paid during any 12-month period that ended within the calendar year (extended to 24 months when an individual died in the year.)
Make renovations for home accessibility
The relatively new, non-refundable Home Accessibility Tax Credit (HATC) assists seniors and those eligible for the disability tax credit with certain home renovations. The tax credit is equal to 15 per cent of up to $10,000 of expenses per year towards renovations that permit these individuals to gain access to, or to be more mobile or functional within their home, or reduce their risk of harm within their home or from entering their home.
The HATC will apply for payments made by Dec. 31 for work performed or goods acquired in 2018. Note that a single expenditure, such as a wheelchair ramp, may qualify for both the HATC and the medical expense tax credit, and both may be claimed.
Pay interest on student loans
Students with a student loan can claim a non-refundable tax credit in 2018 for the amount of interest paid by Dec. 31 on student loans received under the Canada Student Loans Act, the Canada Student Financial Assistance Act, the Apprentice Loans Act or a similar provincial or territorial government law. Note that while only the student can claim the student loan interest credit, the interest on the loan itself can be paid either by the student or by someone related to the student, such as a parent.
RESP withdrawals for students
If you or your (grand)child is an RESP beneficiary and attended a post-secondary educational institution in 2018, consider having Educational Assistance Payments (EAPs) made from the RESPs before the end of the year. Although the amount of the EAP will be included in the income of the student, if the student has sufficient personal tax credits, including the basic personal amount ($11,809 for 2018) and the non-refundable tuition tax credit, the EAP income will be, effectively, tax-free.
Also, if you or your (grand)child is an RESP beneficiary and stopped attending a post-secondary educational institution in the second half of 2018, keep in mind that EAPs can only be paid out for up to six months after the student has left the school. You may therefore wish to consider having final EAPs made from RESPs of which the student is a beneficiary.
Planning for a change in your marginal tax rate
Finally, if you anticipate that your personal, marginal tax rate will be substantially different in 2019, it may be worthwhile to shift income and expenses between 2018 and 2019, as appropriate, and where possible.
For example, let’s say you expect your marginal tax rate will increase in 2019 because you are planning to return to work after a paternity leave or attending school. If so, you may wish to realize income in 2018 by taking steps such as rebalancing your portfolio this week by selling investments with a capital gain so that the gains are taxed in the 2018 calendar year, rather than in 2019 when your income and marginal tax rate may be significantly higher.
Conversely, if you anticipate a lower marginal tax rate for 2019, perhaps because you plan to retire next year and thus have earnings for only part of next year or you sold an asset with a significant capital gain in 2018, which won’t recur in 2019, you may wish to delay that portfolio rebalancing until the first week of January such that any capital gains triggered will be taxed in 2019, at your lower marginal rate.