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9 year-end tax planning tips

12/19/2011 05:17 EST | Updated 02/18/2012 05:12 EST

Year-end to-do lists are filled with reminders to get shopping done, do some baking and plan get-togethers with family or friends. There are, however, less festive but perhaps more financially lucrative actions people can take before New Year's Eve.

Accountants have long lists of ways Canadians can boost their personal tax situation and claim tax breaks — but many of them require attention by Dec. 31.

"When it comes time to do your tax return in March or April, there's not a lot you can do to saves taxes," says Jamie Golombek, CIBC's managing director of tax and estate planning. "December is the time to get your things in order for the 2011 tax year."

Here's a look at ways to find savings for your 2011 income tax return and improve your financial situation for the next year.

Tax-Free Savings Accounts

"If you have set up a TFSA and you're planning a withdrawal, consider doing so before the end of 2011 rather than early 2012, as amounts withdrawn are not added to your contribution room until the beginning of the following year after the withdrawal," KPMG says on its website.

Deb MacPherson, a tax partner with KPMG Enterprise in Calgary, also suggests thinking about how much you might want to contribute in the new year. If you haven't contributed before, you can put in $20,000 in January.

Tax loss selling

Year-end is a good time to consider selling investments that have accrued losses this year because you can do that and offset any capital gains in your portfolio in 2011.

But this is one bit of advice that needs to be followed before Christmas.

"You've got to actually do your trade and have settled by the end of December," says Golombek. "The last trading date to do so this year is Dec. 23."

When considering this, make sure to think about your experience over the past three years.

"The more capital gains tax you paid in the last three years, the more you should consider the tax advantages of tax loss selling before the end of the year, so you can carry back the losses and get a refund of the capital gains tax you paid in prior years," KPMG says.

Retirement preparations

The first wave of baby boomers are turning 65, and there are several tax and financial considerations for retirees.

"If you're 71, you've got to convert an RSP to a RIF or an annuity by the end of the year," says Golombek.

Because of changes to the Canada Pension Plan, he also advises those who are between 60 and 64, and who had been thinking of taking CPP prior to turning 65, to apply this month. Under the new rules, you will receive slightly less if you apply next year.

Make payments and donations by Dec. 31

Most people know about the Dec. 31 deadline for charitable donations, but other payments also need to be made by the end of the year to get a tax deduction or credit for 2011.

"If you do have some mutual funds or shares that have appreciated in value, those are ideal candidates to donate to charity, because there's no capital gains tax on that donation difference," says Golombek.

Payments due by Dec. 31:

- Charitable contributions

- Political donations

- Union and professional dues

- Investment counsel fees, interest and other investment expenses

- Safety deposit box charges

- Medical expenses

- Alimony and child-care expenses

Contribute to a Registered Education Savings Plan

RESPs allow for saving for post-secondary education, and there are a couple of instances where the Dec. 31 date is crucial.

"If you have less than seven years before your child turns 17 and haven’t maximized RESP contributions, consider making a contribution by Dec. 31," says Golombek.

"Also, if your child or grandchild turned 15 in 2011 and has never been a beneficiary of an RESP, Dec. 31 is your last chance to contribute at least $2,000 to an RESP in order to collect the 20 per cent [Canada Education Savings Grant] for 2011 and create CESG eligibility for 2012 and 2013."

Contribute to a Registered Disability Savings Plan

This vehicle allows people to put a lifetime limit of up to $200,000 into a tax-sheltered plan.

"New for 2011, RDSP holders with shortened life expectancy can withdraw up to $10,000 annually from their RDSPs without repaying grants and bonds," says Golombek. "A special election must be filed with [the Canada Revenue Agency] by Dec. 31 to make a withdrawal in 2011."

Think about your RSP contributions

There's no particular Dec. 31 deadline around your RSP, but thinking ahead could boost your fiscal outlook.

"If you really want to get out ahead of this, you should be making your 2012 contributions in January, not your 2011 contributions by the end of February like everybody else. You've got a whole 14-month head start," says MacPherson.

It's a move that MacPherson acknowledges would require some fiscal discipline, but it could pay off.

Review how your assets are allocated

A change in rules for holding private company shares in RRSPs or RRIFs may not affect that many Canadians, but it is one Golombek and MacPherson both draw attention to.

"Prior to the change, it was possible to own private company shares in your RRSP/ RRIF, even if you held more than 10 per cent of the outstanding shares, provided you and related persons didn’t control the company and the cost of shares was below $25,000," says Golombek.

"With the new rules, many individuals who continue to own private company shares in their RRSPs or RRIFs are scrambling to get onside to avoid harsh new penalty taxes that could now apply."

MacPherson says the new penalties are very onerous.

"If your RSP doesn't hold any private company shares, you can cross that off your list, but if it does, you need to pause and think about these rules."

Review trusts

KPMG advises paying year-end attention to a variety of issues around family trusts.

MacPherson says it's a good time to review and ensure trusts based in other provinces or countries really are set up to be run out of that jurisdiction.

"Recent court cases have dictated or have held that just putting your trust in these different jurisdictions and placing almost a figurehead trustee there does not make sure you've entirely switched residence to that other location," she says. "You have to have central mind and management in that location."

If you have a discretionary family trust — something a business owner might have done, for example, to allow income splitting with family members — "you want to make sure that income in your discretionary trust is either paid out or it's declared payable" before Dec. 31, says MacPherson. "If you don't take those steps, it will be taxed in the trust at the top tax rate."

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