Twelve days of tax tips: Ernst & Young’s year-end guide to savings
(Toronto, 15 December 2011) The holidays are all about spreading joy. While December is a hectic month for many, Ernst & Young suggests taking a little time out of busy scheduled to review these year-end tax tips. Remember: addressing these now could put a little extra jingle back into Canadian pockets in the months ahead.
- On the first day, pay tax-deductible or tax-creditable expenses for 2011. A variety of expenses can only be claimed as deductions in a tax return if the amounts are paid by the end of the calendar year. If some amounts would otherwise be paid early in 2012, consider paying them by the end of this year, to get the benefit of the tax deduction or credit in 2011 returns. Children’s arts programs are a newly eligible expenditure for 2011.
- On the second day, review investment portfolio. You may want to sell loss securities to reduce capital gains realized earlier in the year. If the losses realized exceed gains realized earlier in the year, they can be claimed against net gains in the preceding three years and you will receive the related refund. If you have capital loss carryforwards, you may want to trigger some capital gains without attracting any additional tax. For all security sales, keep in mind that the trade must settle in 2011 to be considered a 2011 disposition. For Canadian exchanges, the final trade date for 2011 settlement is December 23, and for US exchanges it’s December 27.
- On the third day, hold off on certain mutual fund purchases. In the case of mutual funds that regularly make distributions near year end, the distribution amount is effectively included in the purchase price and will be taxable in the 2011 return. It might be better to wait until after the distribution to purchase those funds; the cost may be lower and tax will be deferred.
- On the fourth day, consider income-splitting loans. The prescribed interest rate applicable to the exemption from income attribution on intra-family loans is still 1% for the final quarter of 2011. That means income-splitting loans are still an excellent tax-saving opportunity for those who have liquid or certain other assets, and are interested in income splitting with spouses/partners and/or children or grandchildren. And for those with outstanding income-splitting loans, keep in mind that interest must be paid by January 30, 2012, to avoid income attribution.
- On the fifth day, make capital acquisitions for business. Self-employed individuals and unincorporated business owners expecting to make capital purchases (such as furniture or equipment) in the near future should consider buying before year end to get a depreciation deduction for 2011.
- On the sixth day, pay yourself dividends. Capital dividends are completely tax free. Taxable dividends may generate a dividend refund in the corporation (1/3 of the dividend paid), larger than tax you pay on eligible dividends. And eligible dividend tax rates will be increasing in 2012, so you can achieve tax savings to the extent that you can pay dividends before the end of 2011.
- On the seventh day, employees request reduced source deductions. If you regularly receive tax refunds because of deductible RRSP contributions, child-care costs or spousal support payments, consider requesting the Canada Revenue Agency (CRA) authorization to allow your employer to reduce the tax withheld from your salary (Form T1213). Although it won’t help for 2011 taxes, in 2012 you’ll receive the tax benefit of those deductions all year instead of waiting until after your 2012 tax return is filed.
- On the eighth day, update your travel log for the year. If you’re an employee who uses an employer-provided car primarily for business, you may be eligible for a reduced standby charge (in respect of the availability of the car) and a lower alternate operating benefit.
- On the ninth day, if you are 71 in 2011, remember that your final RRSP contribution must be made no later than December 31 (not 60 days after the end of the year), and an RRSP maturity option must be selected by the end of the year.
- On the tenth day, contribute to education. Remember to make RESP contributions before the end of the year. With a contribution of $2,500 per child, the federal government will contribute a Canada Education Savings Grant of $500, and if you have prior non-contributory years, the annual grant can be as much as $1,000 (in respect of a $5,000 contribution).
- On the eleventh day, contribute to a TFSA. Make your $5,000 tax-free savings account contributions (TFSA) for 2011. And if you haven’t contributed before, you can contribute up to $15,000 before the end of the year
- On the twelfth day, check this list twice and remember to keep receipts. Although none are required for electronic filing and only some for paper returns, the CRA randomly requests receipts as part of its post-assessment review.
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