If getting ready for tax season isn’t a seasonal tradition in your home, maybe it should be. Chris Gandhu, High Net Worth Planner at TD Wealth, joins Kim Parlee to talk about the tax moves you can get a jump on now, and the things you need to do before the clock strikes midnight on December 31.
- They say it is the most wonderful time of the year, but we are going to make it even better for you. We have an end of the year to do list that could make your finances just a bit more festive. Joining us from Calgary is Chris Gandhu. He's a High Net Worth Planner at TD Wealth.
Chris, it is great to see you. You're going to be delivering all this great news for everyone who is listening and watching about things they need to do with their finances at the end of the year. I've got a long list here, so I'm going to start firing them out at you. December 31 is an important date, we know, for a lot of tax filers. Let's start about one of the first things we should look at, which is something called tax loss selling. What do we need to do?
- Right. So tax loss selling, Kim, in is when you intentionally, deliberately sell a security that's in a loss position so that you can offset a capital gain that you've realized earlier in the year. And you'd want to do that, because in Canada, any tax liability is based on net capital gains. So if you have capital gains, and you can offset them by capital losses, you won't have a tax liability at the end of the year.
Now, if you want to consider tax loss selling, you also need to be aware of the superficial loss rules. Because if they apply to your situation, then this deliberate loss that you're trying to claim, well, it'll be treated as superficial. It's not a real loss, and you won't be able to claim that loss to offset your gains.
So what do we have to watch out for there? Well, first of all, there's sort of this window of 30 days. If I sell a security today, as long as I didn't own the identical security, or rather I didn't buy the identical security 30 days before or 30 days after this date of disposition, then the superficial loss rules won't apply to me.
So a few things to watch out for, first, if you are going to buy that security, perhaps for investment purposes, you happen to really like it, wait more than 30 days and then do it. Otherwise, your option is to not buy the identical security. Maybe there is a substitute, something that's like that, but not exactly that, that you could look at purchasing.
And finally, one other tricky thing to watch out for, it's not just you. It's anybody affiliated with you that's also caught, so you can have a corporation controlled by you, a spouse, a common law partner that you could sort of lean on and ask them to purchase that security for you, because that will also be caught by the superficial loss rules.
- All right. Awesome. OK, we've got about three minutes left. We're going to power through some more. December 31, also the deadline for charitable giving.
- Yes, exactly. So if you are philanthropically inclined, and you happen to want to get a tax break, so those charitable tax credits for your 2019 tax year, you've got to make that donation by December 31. Now, what's also quite common in Canada, Kim, is to make a donation in-kind. And by that I mean, you take publicly traded stock, and rather than selling it and cashing out, you take that stock and you donate it in-kind to your favorite charity.
And that works quite well, because not only do you get the donation tax credit, you also don't pay the tax if there's any appreciation on that stock. So equities that have gone up in value considerably are the best ones for this strategy. Now, if you're going to donate in-kind, though, there's a bit more work to do for your brokerage, which means it's going to take more time. So your true deadline might not be December 31. It's probably sooner than December 31st, and you should check with your broker and the recipient charity to make sure this works within that time frame.
And I guess, one other thing that I would add here is that if you happen to have 2019 as a tax year when your income is high, and you would love this donation tax credit to offset your tax, but you aren't quite ready to commit to a charity just yet, well, this is one of those situations, Kim, when you can have your cake and eat it too. You can, in fact, make a donation, perhaps to your own foundation or a donor advised fund, that'll give you the tax credit, but the money then sits in that fund. And in 2020 and beyond, you can actually make disbursements from that donor advised fund to your charities of choice.
- OK. I got about a minute here, Chris. I want to get to this RRSPs and TFSAs. Is December 31 first material for those two vehicles?
- Yeah. I mean, for RRSPs, you actually get 60 days into 2020 to make the contributions. But if you do them as soon as possible, well, then you get that tax deferral today as opposed to waiting for Jan and Feb. So it's better to do it as soon as you can. TFSA is a contribution limit in 2019 with $6,000.
If you have the ability to, you should certainly top up your TFSA, because this is tax-free growth inside this account. If you happened to make withdrawals from a TFSA in 2019, the nice thing with the TFSA is that that withdrawal, sort of, the contribution room is still held for you. The only thing to watch out for is that the room doesn't refresh until Jan 1, 2020, so you can't make that recontribution in 2019. You've got to wait until next year.
- I'm going to squeeze one more in, because I think I've got 30 seconds. And this is not a 30 second topic, but I'm going to try. Prescribed rate loans, end of year is important for that too.
- Yeah, it is. I mean, many, many Canadians use prescribed rate loans, whether it's a loan to a spouse or a family trust, as part of their tax strategy. The end the year is important, because December 31 is when the deadline starts ticking for whoever the borrower is to repay you the interest on their loans. So if you made a prescribed loan in 2019, you have 30 days into 2020 to repay that interest. And for this strategy, it really is important to dot your I's and cross the T's and make sure that gets done in time.
- Anything else we should think about? I mean, a lot of people are getting year end bonuses, all sorts of things happening. So in, again, 30 seconds, what else do we need to keep in mind now near the end of the year?
- Sure. Bonuses are taxed as T4 income, which means they will create RRSP room for you. So if you haven't already maximized your contributions, you should look at that. It's always a perennial topic at this time, are tax rates going to go up in 2020? Are they going to go down? Well, if they're going to go up, and you have the ability to, you should certainly accelerate income into 2019, i.e., take that big bonus today. If you think tax rates are going down for you in 2020, well, then it makes sense to defer income into 2020.
- Sorry. And I keep saying I'm going to squeeze one more thing, in and I do have one more question. RESPs, RDSPs, things that have grants attached them. Like, if you make a contribution, it gets matched by the government. Are December 31 important for that, as well?
- Somewhat. I mean, it's always nice to make that contribution to the RESP or the RDSP and get the government grant. Plus, again, keep in mind, both of these accounts, the money that you have invested inside is growing tax deferred. So there is sort of a time value of money factor to it. It's better to do it today. But if you do miss the December 31 deadline, and you make that contribution next year, you can retroactively go back, in some instances, and still get that grant.