Q: I like to plan early for all occasions including filing my income tax return next year. Every year, I contribute to my Registered Retirement Savings Plans (RRSPs) and have always received a handsome tax refund. Should I do anything different before the end of the year to maximize my income tax refund?
A: With the holiday season upon us, many individuals are focused on looking for gifts than tax shelters. Although, this is a gift-giving time of year, give what you can afford and not be pretentious. Holiday revellers spend more than they can ill-afford and get into debt. However, faster than you can payoff those credit card debts, RRSP and tax season are upon us.
Tax planning for businesses or individuals should be done year-round and not only at the calendar year end. Take a close look at your financial situation and take full advantage of the deductions and credits available to minimize your tax liability.
Capital losses – Liquidate stocks with large capital losses and minimize or eliminate capital gains and taxes. If this year (or past three years) of trading in the stock market triggered healthy capital gains, this would be a great time to sell off those stock losers before end of the calendar year. Capital losses can be used to reduce capital gains in the current year, carried back three years to obtain tax refunds or carried forward indefinitely.
Capital gains - Defer sale of assets that yield capital gains until the following year. Deferring sales, would defer the tax to the following year.
Charitable Donations – Taxpayers will receive a tax credit for donations to a registered charitable organization. Taxpayers that sell shares then donate proceeds to charity are taxed on the capital gains. Donate stocks or mutual funds instead of cash to registered charitable organization before the end of the year. Prior tax changes, exempt donation of securities directly to charitable organizations from paying capital gains tax. What more incentive do you need?
Registered Plans – Contributions to RRSPs before end of year can be deducted on 2007 tax return. Contributions between January 1 and February 28, 2008 maybe deducted in 2007 or 2008. Next year, a better strategy is to contribute directly from each paycheque. The sooner you begin compounding tax-free earnings. Contributions to Registered Education Savings Plan (RESP) contributions do not qualify for a tax deductions but does defer tax on earnings in RESP.
Turning 69 – Prior rules, Individuals turning age 69, must mature RRSP into Annuity or Registered Retirement Income Fund (RRIF) by December 31, 2007. However, new rules will defer collapsing RRSP until age 71 years old. Individual that has RRSP room and spouse is under 71 may contribute to spousal RRSP, particularly if taxpayer has income.
Capital assets – Maximize Capital Cost Allowance (CCA) by making Capital asset purchases at end of fiscal year and dispose of old assets at the beginning of next fiscal year. Although, first year CCA is 50% of qualifying amounts, the deduction can substantially reduce taxable income. CCA is an optional deduction, use sufficient to minimize taxes.
Income splitting – Consider paying a spouse or children for services rendered. Amounts must be reasonable for services provided. The basic personal exemption is approximately $9,000. Therefore, business gets a $9,000 deduction and the individual pays virtually no tax.
Bad debts – Clients that have been delinquent or not paid for your services may qualify to have these amounts written off. Determine which accounts are un-collectible and write off.
Defer revenues to following year – Invoices that can be billed in next fiscal year will reduce current income and delay payment of taxes.
Maximize deductions – Expenses that are paid in following month should be accrued in current year. This will decrease taxable income.
Bonuses – Consider accruing or payout bonuses before year-end. This will reduce taxable income and taxes in the current year.
Records and receipts – Maintain good records and keep all business receipts to maximize deductions. Consult your tax advisor before proceeding with some of above.