The following year-end tax planning guide is geared towards investors and outlines various programs and tax tips that should be considered in order to save tax.
Trigger capital loss
You might trigger capital loss when selling investments with accrued losses at year-end to offset capital gains realized in your investment portfolio. Any net capital losses that cannot be used currently may either be carried back three years or carried forward indefinitely to offset net capital gains in other years. In order for your capital loss to be immediately available for 2020, the settlement must take place in 2020. The trade date must be no later than December 29, 2020, to complete settlement by December 31st, 2020.
Gifts to family members
If the assets you own have declined in value and you wish to gift them to family members, you might consider gifting those assets when their values are lower as it may result in a reduced capital gain. When gifting property, the tax treatment is the same as if you sold the property at its fair market value (FMV). The difference between the FMV and your adjusted cost base (ACB) will be a capital gain (or loss). The family members receiving the property from you will have an ACB equal to the FMV at the time of the transfer, but any future change in value will be taxed in family members’ hands.
When you sell and repurchase non-registered security, beware of the “Superficial loss” rule. When you sell your investment at a loss and reacquire the identical property, in some cases, the loss may be a superficial loss. When you realize a superficial loss, you cannot claim the loss and therefore, you cannot use it to offset capital gains. Under the current rules, your capital loss will be denied and added to the adjusted cost base of the repurchased security.
Make RRSP contributions
Although you have until March 1, 2021, to make RRSP contributions for the 2020 tax year, contributions made as early as possible will maximize tax-deferred growth. Your 2020 RRSP deduction is limited to 18% of income earned in 2019, to a maximum of $27,230, less any pension adjustment plus any previous unused RRSP contribution room and any pension adjustment reversal.
Make TFSA contributions
The TFSA dollar limit for 2020 is $6,000 but there is no deadline for making a TFSA contribution. If you have been at least 18 years old and resident in Canada since 2009, you can contribute up to $69,500 in 2020 if you haven’t previously contributed to a TFSA.
Use a prescribed rate loan to split investment income
If you are in a high tax bracket, you may wish to have some investment income taxed in the hands of family members who are in a lower tax bracket; however, if you simply give funds to family members for investment, the “attribution rule” applies. The income from the invested funds may be attributed back to you and taxed in your hands, at your high marginal tax rate. To avoid the attribution rule, you can lend funds to family members, provided the rate of interest on the loan is at least equal to the government’s “prescribed rate,” which is 1% until at least December 31, 2020. If you implement a loan before that date, the 1% interest rate will be locked in and will remain in effect for the duration of the loan, regardless of whether the prescribed rate increases in the future.
If you would like more information on this topic, please contact a member of the EPR tax team by completing the contact form below. Our tax experts can advise on the best structure to reduce or minimize the impact of the taxes.
Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. EPR Maple Ridge Langley, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.