Having trouble prioritizing your to-do list? I've got a simple solution: Procrastinate. Eventually, one of the tasks on your list will become a dire emergency -- like the implementation of year-end tax strategies. Consider these ideas to save tax for 2002:
Review the makeup of your portfolio. Consider the type of income, if any, you earned on your portfolio outside of your registered retirement savings plan or registered retirement income fund this year. If you earned interest income which is highly taxed, consider restructuring your portfolio so that it is more tax efficient in 2003.
Review your outstanding debt. Is the interest on your debt deductible for tax purposes? If not, consider liquidating some non-registered investments you may have (count the tax cost first) and using the proceeds to pay down the debt, then re-borrow to replace the investments. This will set you up for a deduction for 2003 since your interest costs on the new debt will be deductible.
Time the purchase of certain investments. If you're planning to invest in an interest-bearing security, like a guaranteed investment certificate (GIC), that has a maturity of one year or longer, consider waiting until the new year before making the investment. By waiting, you won't have to pay tax on any accrued interest until 2004 -- the year of the first anniversary of the investment. Also, consider waiting until early in the new year to purchase any mutual funds that are expected to make taxable distributions before the end of 2002. You'd hate to pay tax sooner than necessary.
Trigger accrued losses before year-end. If you have realized capital gains this year, or in one of the three prior years (1999, 2000 or 2001), consider selling any investments that have dropped in value in order to apply the capital loss against those capital gains.
Capital losses must be used to offset gains in the current year first, but excess losses can then be carried back up to three years or forward indefinitely. You'll save more tax by carrying the loss back to 1999 (the last full year when the inclusion rate was 75 per cent) where possible than by carrying it forward to the future.
Trigger capital gains where appropriate. It can make sense to trigger a capital gain before year-end if the capital gain won't result in a tax bill. If, for example, you have capital losses to use up, or where the capital gain will be taxed in the hands of someone with little or no other income (in-trust accounts for kids come to mind), then triggering the gain and reinvesting the proceeds will allow you to bump up your adjusted cost base without a significant tax cost, if any.
Defer capital gains where appropriate. If you're thinking of selling an asset for a profit and the transaction is going to give rise to a taxable capital gain, consider delaying that transaction until the new year to defer the tax until 2003.
Set up loans to your spouse. You can split income with a lower-income spouse by lending money to your spouse. When you charge the taxman's prescribed rate of interest on the loan (currently 3 per cent), your spouse will pay the tax at his or her lower tax rate on any income earned on the assets loaned. Set this up today to save tax for 2003. See my article from Oct. 27, 2001, at http://www.timcestnick.com for more on this strategy.
Contribute to an RESP. You're allowed to contribute up to $4,000 each year to a registered education savings plan for a future college or university student. If you miss that $4,000 contribution in any year, you're not able to carry that contribution room forward to a future year -- so make a contribution by year-end.
Give investments to a child. Consider transferring investments to a child where that investment has dropped in value. This will trigger a capital loss that you can use, and will pass the tax liability on any future growth in the investment to your child. You'll also avoid probate fees on those assets at the time of death with this idea.
Defer your bonus. Discuss with your employer the idea of delaying payment of this year's bonus until January of the new year. In fact, the bonus can be deferred for as long as three years from the end of this year. This will push the tax on the bonus to a future year.
Pay interest on loans. Ensure that any interest that you pay on an employee loan is paid by January 30, 2003, for this year's interest charge. This will reduce any taxable interest benefit you may otherwise face for 2002.
Reduce taxable auto benefits. Reduce the taxable standby-charge and operating cost benefit on a company car by reducing the number of days between now and year-end that the car is available to you. Also, consider purchasing the car from your employer at its depreciated value in order to avoid the taxable benefit next year.
Negotiate a home office. Before year-end, negotiate with your employer the requirement to work from home more than half the time so that you'll be able to deduct certain home office costs next year. Your employer will have to sign Form T2200 as evidence of this requirement.
Defer tax on stock options. Consider deferring the tax on up to $100,000 of stock options you exercised this year. You'll have to notify your employer of this intention by Jan. 16, 2003, so this deferral can be properly reflected on your T4 slip (releve 1 in Quebec).
Pay salaries to your family. You can split income with family members by paying them salary or wages in 2002 for services they've provided to your business. Review what services were provided by family members in 2002 and determine whether you might be able to justify paying deductible (to your business) compensation to them before year-end.
Time asset purchases and sales. If you are going to be purchasing assets for use in your business soon, consider making the purchase, and making those assets available for use, before year-end to entitle a claim for capital cost allowance (CCA) in 2002. If you're thinking of selling assets soon, consider waiting until the new year to permit a greater claim for CCA in 2002.
Maintain calendar year reserve. If you claimed a reserve back in 1995 when you started to report your business income on a calendar-year basis, that reserve becomes taxable a little each year until 2005 when the full reserve will have been taxed. If you're thinking of winding up your business this year, consider waiting until early next year in order to avoid having to take the remaining reserve into income in full. This will defer tax for a full year.
Tune in next week for Part 2 on year-end tax strategies where I'll address plans related to retirement, students and general planning.
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