In Part 3 of this series, our Canadian tax lawyers provide their top year-end tax-reduction strategies concerning investments.
1. Strategize Your TFSA Withdrawals
A Tax-Free Savings Account (TFSA) allows you to earn tax-free income—i.e., dividends, interest, and capital gains—from investments that you hold in your TFSA. You can only contribute up to a specified amount to your TFSA each year. For instance, for 2017, you may contribute up to a maximum of $5,500. This contribution limit does not include income earned from the investments already sitting in your Tax-Free Savings Account.
You can also make a tax-free withdrawal from your TFSA whenever you wish. Any amount that you withdrawal from your TFSA is added to your contribution limit on January 1st of the following year.
So, if you plan on withdrawing funds from your TFSA in the near future, you benefit by doing so on or before December 31, 2017. This allows you to replace the funds on January 1, 2018 instead of waiting until 2019.
2. Maximize Tax-Deferred RRSP Contributions
If you wish to deduct your RRSP contributions on your 2017 tax return, your contribution deadline is March 1, 2018.
But, given that you have contribution room, an early contribution—that is, a contribution before the year end—will go a long way in maximizing your RRSP's tax-deferred growth through compounding of returns.
3. Defer Capital Gains
You may want to hold off until 2018 before selling any investments with accrued capital gains. If you sell and realize those gains this year, the resulting tax payable must be sent to the Canada Revenue Agency (CRA) by April 30, 2018. On the other hand, if you sell and realize the gains on or after January 1, 2018, your tax bill isn't due until April of 2019.
You also reduce the amount of any 2017 net capital losses that you can apply to prior tax years if you realize capital gains in 2017. Before you can apply a net capital loss against a prior year's capital gains, you must apply that loss against the current year's gains.
4. Realize & Carry Back Capital Losses
If you own any investments with accrued losses, consider selling those assets and realizing the losses before the end of 2017. This will allow you to offset your 2017 capital gains. Of course, you should always consider whether your loss-position assets still meet your investment objectives.
You cannot, however, claim a capital loss that is a superficial loss. A superficial loss occurs when you incur a loss upon selling a capital property and, within 30 days of your selling that property, you or a related party acquired and owned the same or an identical property. The superficial-loss rule prevents taxpayers from creating artificial capital losses. Check with one of our Canadian tax lawyers to ensure that you don't run afoul of these rules.
As mentioned, you may apply your losses against capital gains from previous tax years. In particular, once you apply a net capital loss against the current year's gains, you may apply the loss against gains from the past three years or any future year. So, 2017's capital losses are the last that you can apply against capital gains from 2014.
5. Delay Your Mutual- and Equity-Fund Purchases
Any Canadian looking to purchase mutual or equity funds should wait until the start of 2018. Commonly, the net asset value of a fund unit includes income or capital gains that the fund has earned but not yet distributed to investors. If you buy units in a fund right before it makes a distribution—such as near the year end—you become entitled to receive that distribution, and you will be taxed on the distribution payment. Depending on the number of units you purchased, this may significantly increase your 2017 income even though you only held the units for a few days that year.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.