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TAXFlash News from IncomeTaxCanada.net
:: After Christmas rush, take a moment or two for year-end tax planning
::If you’re still in shopping mode, surviving on a daily dose of anxiety pills, you may want to set this article on your ever-expanding pile of things to do after the Christmas rush. On the other hand, if you’re the hyper-organized type sitting in your jammies by the fire with hot apple cider in hand, take a moment or two and give some thought to the following year-end tax planning ideas. Do you remember heady days of 1999? Those were the days my friend, we thought they’d never end – stock prices skyrocketing on nothing more than hype – capital gains left, right and centre, money being made hand over fist. This being 2002, the rose-coloured glasses have long since been put away and the reality of a loser stock portfolio has become entrenched. If this all has a familiar ring to it, now’s the time to get off your duff and do some tax-loss selling. Tax-loss selling is when you sell an asset at a loss with the objective of creating a loss that can be used to achieve a tax saving of some sort. Where capital losses are concerned, provisions exist that allow such losses to be carried back up to three years to offset against capital gains previously reported. So, for example, if you had a capital gain on your 1999 tax return, triggering a loss this year will enable you to carry the amount back to offset against your 1999 gain and recover some tax that you paid three years ago. Miss the chance this year to carryback a capital loss to apply against 1999 capital gains and the opportunity is forever lost – you snooze, you lose. If you’re considering dumping stocks, remember that December 24, 2002 (that’s this Tuesday) is the stock-trading deadline to have the transaction treated as a year 2002 deal. Remember too, that any capital losses realized in 2002 must first be applied against 2002 capital gains – only the net resulting loss will be eligible for carryback to a prior year. Before submitting your sell order you should also be aware there are special rules known as the “superficial loss rules” that can work to deny a capital loss if you trigger a capital loss and you or certain related parties acquire the identical property within 30 days before or after the loss-triggering sale. Size matters – at least where “earned income” is concerned. It’s the size of your “earned income” this year that will be used as a base to determine the size of your 2003 RRSP contribution limit. Recall that your RRSP contribution limit is equal to the lesser of 18 per cent of your “earned income” for the previous year and $13,500. This means you’ll reach the maximum RRSP limit when your “earned income” reaches $75,000. So if you’re in a position to control the size of your “earned income” (generally income from employment, business and rental activities) and you want to earn the maximum RRSP contribution room for 2003 make sure that your “earned income” for this year is at least $75,000. RRSP contributions must be made no later than 60 days following the end of the calendar year. Except in cases where weekends get in the way, this usually means a contribution deadline of March 1 of the following year. Because March 1 falls on a Saturday in 2003, it looks like the 2002 RRSP contribution deadline will be March 3, 2003. Clearly there’s no need to panic just yet but if you’re planning on making a spousal RRSP contribution, consider contributing before the end of this year. A withdrawal of funds by your spouse after December 31, 2004 will be taxed a your spouse’s marginal tax rate rather than yours. If you make a spousal contribution in the first 60 days of 2003, you’ll have to wait an extra year if you want the income taxed to your spouse and not in your hands. As a word of caution, this contribution and withdrawal income-shift only works if you do not make any spousal RRSP contributions in the intervening period up to the year of withdrawal. Still on the subject of RRSPs, if you turned 69 in 2002, make your RRSP contribution before the end of this year. Your RRSP maturity options should also be considered – lump-sum withdrawal, purchase of an annuity or, most likely, a RRIF. If you fail to take appropriate action before this year is out your RRSP will be collapsed and you’ll be paying tax on the whole shooting match – not particularly brilliant way to start your retirement. We’re all getting older – our children are too! If you have a child who turned 15 this year consider setting up an RESP by contributing up to $2,000 before the end of the year. This will ensure that the child is eligible for the 20 per cent Canada Education Savings Grant. With a $2,000 contribution, you will be eligible for the maximum grant of $400 – that’s “free” money from the government. In fact, do the same for any children under the age of 15 and multiply your access to this generous program. Even Scrooge became a kind and generous soul in the end. If the “giving season”, better known as Christmas, has gotten the better of you, consider making charitable donations today rather than waiting until next year so that you can claim the tax credit on your 2002 tax return rather than waiting until 2003. When considering this idea, remember that effectively twice the credit is given for donations in excess of $200 in any given year. So if you’re hovering around the $200 mark, keep in mind that you’ll be saving roughly 44 cents for every hard-earned loonie you donate leaving you with a net cost of 56 cents.
I know, I know, who needs advice on how to spend more money at this time of year? Nobody I’m sure, but if you’re self-employed and you’re in the market for a new computer or some other business asset, completing the purchase before the end of the calendar year may enable you to claim a deduction for tax depreciation (CCA in tax talk). Usually, CCA can only be claimed at one-half the normal rate (known as the “half-year rule”) so this is a great way to get the half-year rule out of the way in a rather painless manner. It’s also a pretty good deal when you consider you get a half-year’s worth of depreciation for something you only owned for a few days.
Have a merry Christmas and “god bless us everyone”.
Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney Official details about this and other topics on income taxes can be found in English & Francais at www.ccra-adrc.gc.ca Income tax information offered by www.IncomeTaxCanada.net is done so without endorsement by Canada Revenue Agency (CRA) - l'Agence du Revenu du Canada (ARC) (formerly Canada Customs and Revenue Agency - l'Agence des Douanes et du Revenu du Canada CCRA-ADRC and formerly Revenue Canada – Revenu du Canada) or any Canadian government agency. The free advice is of a general nature for Canadian taxpayers seeking legal ways to reduce their personal and small business income taxes payable to the federal and provincial (or territorial) governments in Alberta, British Columbia, Manitoba, New Brunswick Newfoundland-Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Quebec, Saskatchewan or Yukon. Specific taxation situations vary from taxpayer to taxpayer, province to province, territory to territory. The free tax advice here is only a general guide. Canadians should always seek individual guidance on accounting rules and tax laws from knowledgeable accountants and lawyers. To prepare your income tax return online and NetFile your Canadian income taxes electronically in English or Francais, please visit www.ufile.ca or www.impotexpert.ca websites. Additional information on financial products and services for Canadians can be found at www.CanadianCreditCenter.com. |
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Jim Maroney