It's that time of the year again, when you need to dust off your tax planning skills to help your clients cope with one of the few certainties in life. Fortunately, tax changes are slow in coming and there is little new in store for 2015. But your clients must act promptly to meet certain deadlines.
Here are six tax tips to help to ensure your clients are well prepared:
- Take advantage of tax losses
Frank Di Pietro, director of tax and estate planning with Mackenzie Financial Corp. in Toronto, says it's time to for clients to "look at their portfolios and dump some of those losing investments." The important thing to remember about tax-loss selling is that the investments must clear and settle before the end of the year to qualify as an investment loss in that taxation year.
Di Pietro points out that the 2015 Christmas holidays fall near the end of the week, so you should sell your clients' losers by Dec. 24 to avoid settlement problems.
Under the tax rules, investment losses can be used to offset any current capital gains earned in 2015. They also can be carried back three years and applied to previous capital gains for the 2012-14 tax years. Di Pietro says it's important to apply losses to the oldest tax year to avoid losing the deduction in subsequent years.
He also cautions against buying back investments sold to realize a loss: doing so can result in the application of the "superficial loss" rules, through which tax authorities can reject a loss if an investor buys back the investment too quickly. The general rule of thumb, Di Pietro says, is that if clients sell, they need to wait at least 30 days before repurchasing the stock or mutual fund units.
- Strategies for seniors
The biggest change for seniors, says John Natale, assistant vice president of tax and retirement services with Manulife Financial Corp. in Toronto, is that the government reduced the minimum registered retirement income fund (RRIF) withdrawal rates. (See stories on pages B3 and B4). Natale recommends that clients who do not need the RRIF income should use the new, lower numbers to leave more money in their RRIF.
Clients who are turning 71 years old this year need to close their RRSPs. That means cashing them out in a lump sum and paying the taxes, buying an annuity or transferring the money into a RRIF. If your clients still are earning or have unused RRSP contribution room, Natale says, they can maximize their RRSP contributions by making a lump-sum payment into the plan before closing it. The deduction for the contribution can be used in future years to reduce taxable earnings.
Also, if clients turning 71 have income in 2015, that would create RRSP room for the following year - but they still must close their RRSP. Clients in this position could, however, still make an RRSP contribution in December. They would have to pay a one-month penalty for overcontributing, but it's worth it in the end, says Natale.
- Manage TFSA withdrawals
Starting in 2015, the annual limit rises to $10,000 from $5,500. (See story on page B8.) Natale says that if a client is planning a large withdrawal from his or her TFSA in the first few months of 2016, advise that client to do it sooner. TFSA withdrawals are added back to the available contribution room, but not until the following calendar year. If a client takes money out in 2016, they will have to wait until 2017 before he or she regains that contribution room. Making the withdrawal in December means the client will get the contribution room back sooner.
- Homebuyers' plan
Clients who are thinking about tapping their RRSP to buy their first home should wait until January 2016 before making the withdrawal. Homebuyers must start making repayments to their RRSP two years after the initial withdrawal. By waiting until 2016, your clients buy a year.
- Spousal RRSP contributions
Have clients make spousal RRSP contributions before the end of the year, Di Pietro says. If the money is withdrawn within the first three years of such a contribution, the payment is attributed back to the contributing spouse and taxed at his or her marginal rate. Making a contribution before yearend shortens that period.
- Interspousal loans
Now is the time for your clients to lend low-income spouses the money to make investments. At 1%, the minimum prescribed interest rate for such loans, Natale says, "is at an all-time low."
That 1% rate gets locked in for the life of the loan, and the earnings on that loan are taxed in the hands of the lower-income spouse, assuming he or she pays the loan interest annually and follows the rules. Even when interest rates eventually rise, the loan remains locked in at 1%.
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