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Moncton Times & Transcript ~ Tax Help Plus ~ Year End Tax Planning 1 ~ December 12, 2006 - 06 Jan 2007 by TaxHelp
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Ho, ho, hold the payments apply to more than just furniture savings at this time of year.
By doing a little planning now, you just might be able to lower your tax bill next April.
And if you're wondering how to reduce the tab without potentially becoming a guest of the federal government, then there are two main areas to consider: items that increase your taxable income, and claims that you can make to lower it. This week we're going to look at the income side of the equation.
Sometimes people receive year-end bonuses in addition to their normal wages. Income paid out by December 31 will ultimately be calculated into the tax bill you see next spring. Delaying it until January means that you'll only have to deal with it in April 2008.
Investment income is comprised of interest, dividends and capital gains. Of the three general categories, interest is the most thoroughly taxed. If you can tolerate some risk, consult a financial planner or investment counselor and consider broad based mutual funds or high-grade stocks held outside a Registered Retirement Savings Plan (RRSP) in order to increase your dividends and capital gains earnings.
However, hold up on any mutual fund purchases in December, as many funds make year-end distributions and issue T-slips that you will have to declare. Instead, buy just after the distribution, when the unit cost will be lower. (On the other hand, next week we'll look at what appears to be a contrary position in the deductions section).
The markets have been onerous for many investors over the past few years, as more than a few of us have bought dogs. In the event you didn't know, you are allowed to deduct capital losses against other capital gains, so this might be a time to consider selling some of those under-performing stocks and funds. You will then be able to take those losses and apply them against any gains that you might have earned this year. Any leftover capital losses can then be used to adjust returns in preceding years (if you had declared capital gains), and pick up some additional refunds, or be carried forward to some future year.
What if you really like those investments, and believe that they are going to come back to life in the future? Through a concept known as tax loss selling or 'crystallizing,' you may sell the security, and as long as you didn't acquire it 30 days before the sale, or reacquire it 30 days after the sale, the loss will be valid from Canada Revenue Agency's perspective.
In effect, you can sell today, trigger a capital loss and repurchase early in the new year. You can then apply this loss against other capital gains. Just remember to consider all the intangibles such as exit fees or the new cost to acquire if the price goes up. This is a concept that a number of New Brunswickers are going to need to take advantage of if they wish to avoid capital gains as a result of the Aliant income trust conversion. One of our clients called and asked if we thought it was a good time to sell her Nortel shares to offset the gain. Then she wanted to know if we thought she should re-purchase it. Who knows?
Next week we'll take a look at strategies to adopt in order to lower your taxable income.
On a separate note it's that time of year again when we offer a service to various garden clubs, lunch-and-learn employee sessions, business meetings and association functions where we discuss the newest tax changes. These events usually run somewhere around an hour once a question-and-answer is completed and are offered both during the day and evening. Most important, there is no charge for this service. If you or someone you know has responsibility for meeting planning at your work or social club, and would like us to come out and have a chat early in the new year, please call the office to arrange a time and give us some details so we can tailor it to your specific organization.
Roger Haineault is with Help 4 Taxes. His column "Tax Help Plus ..." appears each Tuesday. For questions, comments or column suggestions he can be reached by calling 855-HELP (4357) or by emailing roger@help4taxes.ca
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