8 Tax Strategies to Implement Before the End of the Year
It will be tax time before you know it but it’s never too early to plan. So take a break from holiday preparations, pour yourself an eggnog and spiced rum and check these year-end tips to reduce your taxes and prepare you for the new year.
Related: Preparing for Tax Season
1. Review your income for the next calendar year
After you track your monthly cash flow for the year, take it one step further and forecast your income and expenses for the coming year. Come up with an approximation of what your taxable income might look like. Estimate where your investment income will come from – taxable account, RRSP/RRIF or TFSA, how you receive it – interest, dividends or capital gains, and how much of each.
Plan where your withdrawals will come from to help you smooth out your income and reduce your tax bill by keeping an eye on your marginal tax rate. It might make sense to take additional income this year if it will be taxed at a lower rate.
2. Apply for CPP sharing
If you and your spouse don’t receive equal Canada Pension Payments, consider sharing your CPPs. When you apply to share pensions, the CRA bases the amount on how long you were with your partner during your working years. It’s not always a 50/50 split.
3. Realize capital losses
To maximize tax advantages, sell the investments that aren’t working for you and use the capital losses to offset the capital gains you made from taking your profits – first this year, then any three preceding years, or carried forward to any future year.
Note that you must make trades no later than December 27 to be considered a transaction for 2019 tax purposes.
4. RRSP contributions
We know that RRSP contributions make a great tax deduction. If you turned 71 this year make your contribution before December 31st as this will be the last year you can make a contribution. (The February 29, 2020 deadline does not apply to you.) There may be some tax savings if you make a $2,000 overcontribution in the year you turn 71.
But remember that you can continue to receive deductions for contributions to your younger spouse’s RRSP until the year in which he or she turns 71.
5. Make charitable contributions
Do you have a favourite charity? December is the busiest month for contributions. If you are planning on making charitable donations, make sure you make them before the end of December so that you can take the tax deduction on your 2019 tax return. Instead of cash, you might want to think about donating appreciated shares from your non-registered portfolio. Not only will you get a receipt for the fair market value, but you pay no capital gains tax on that appreciation.
6. Optimize medical expenses
Consider paying for qualifying medical expenses by the end of the year if possible so you can reach the threshold required to claim a tax credit on your tax return for the year.
7. Organize your medical receipts
One of the more time-consuming tax entries is listing your medical expenses. Rather than assembling dozens of individual receipts, ask for an annual printout that details both the total cost of your prescriptions and your own out-of-pocket expenses. Most pharmacies offer this service. The earlier you ask the better if your pharmacy is a busy one.
Don’t forget other regular health practitioners such as physiotherapists and chiropractors. They can give you a print-out too.
Related: How Retirement Can Affect Your Taxes
8. Apply for the disability tax credit
The disability tax credit is a non-refundable tax credit that helps people with disabilities or their supporting persons reduce the amount of income tax they may have to pay. This is a huge credit, but it must be approved by the CRA. If you think you may be eligible have your doctor complete the form right away. It can take three to four months to receive a reply.
The bottom line
December is a good time to review your finances to see if you could implement some changes before the end of the year that will result in a lower tax bill.
It’s important to stay current on tax rules and review your overall tax situation at least once a year to determine whether any of these strategies are suitable for you. Minimizing the taxes you pay has a significant impact on your net worth over time and keeps more of your money in your pocket.