Counting Losses Counts For Cash

Disciplined investors sell at the top of a cycle and buy at the bottom.  Smart ones also pause and plan at this time of the year,  crystallizing losses deliberately before year end to get the desired tax results. How do capital losses impact your tax return?  Lucratively.

Capital losses incurred when capital assets are disposed of,  first reduce or cancel out this year’s capital gains.  After this, unabsorbed losses can be used to reach back to recover taxes paid on capital gains incurred in any of the previous three years.

But what happens if you had no capital gains this year or in any of the prior three years?  Capital losses are still valuable, even though many investors fail to report them, and this omission can be very expensive over the long run.  That’s because unused capital losses can be carried forward-indefinitely-to offset capital gains in the future.

There’s more good news:  if you don’t have another capital gain as long as you live, there is a tax saving bonus at death that will benefit your heirs:  those capital losses can be used to offset all other income in the year of death and in the immediately preceding tax year.

If you have missed reporting your capital losses in the past, part of your year end planning should include making an adjustment to prior filed returns to include those losses.  You can go back 10 years, so be vigilant; unreported losses incurred in tax year 2004 will not be recoverable unless reported before December 31, 2014.

It’s Your Money.  Your Life. Prudent tax loss selling includes scheduling an appointment with both your tax and financial advisors.  It would be good to have them both present at the same meeting, in fact.  The financial advisor can report on accrued gains or losses in your non-registered accounts; the tax accountant will report on opportunities to offset current year and prior year gains with your current-year un-crystallized losses to maximize your tax refund.

Kick Start 2015 Financial Plans

First the bad news. The rules behind the very least you could possibly pay as a household are very complicated. Despite all hype around the $5Billion the new Family Tax Cuts and additional provisions promise to eligible households, it’s going to be up to the taxpayer to navigate the new tax return, file accurately and to the family’s optimal benefit.

Now the good news, in case you missed it: there’s $5 Billion of tax goodies up for grabs and there is lots of help available for Canadian families to tap into it. What’s needed is a focus on three key tax strategies:

1. Plan to keep more of the first dollars you earn before year end. In the context of the Family Tax Provisions, the new Tax Cuts begin in 2014, which means you probably have overpaid taxes through income tax withholdings at source with your employer, or through overpaid quarterly instalments. It’s time to do a reality check to see if you can reduce those withholdings or instalments in December. That’s really important because you may be able to create new money for TFSA, RESP, RRSP or other investment purposes. Or, you might be able to pre-pay your credit cards before Christmas to be sure you are on a sound financial footing before 2015 comes around. For help, check out Knowledge Bureau’s recently released Income Tax Estimator or visit with a DFA-Tax Services Specialist for year end tax planning help.

2. Hold onto to your new found money the longest. With the new tax breaks come opportunities to make great investment decisions. What should be done first: contribute to a TFSA or the RESP? Max out the RRSP or get extra tax breaks through tax-efficient charitable giving before year end? The correct answer is “it depends.” That’s why you need to review criteria for investing in each to determine whether family members are age-eligible, have required investment room and most important, what the best deployment of scarce funds will be in the short term and the long term. This is where sound advice from a qualified financial advisor with a strong tax background can really pay off. Look for an MFA (Master Financial Advisor) designate in your area.

3. Make sure your money has purchasing power in the future. One way to do this is to pay down your expensive, non-deductible debt as soon as possible. Another way is to identify the new dollars to be received and then make plans for their purposeful use, before the electronic deposits co-mingle with other priorities. For example, plan to save the new enhanced Universal Child Care Benefits, arriving in a lump sum next July, in separate accounts for each child so that resulting investment earnings are taxed in their hands, not the hands of parents. This is a great way to preserve purchase power of the gift. In another example, recall that the $1000 increases to maximum dollar amounts available for child care expenses must usually be claimed by the lower income earner. This will form part of the 2015 tax refund, so making sure that money is invested in the lower earners’ hands gets great results: purchasing power is enhanced in the future, because the tax bite on earnings resulting from investments will be lower. Bear in mind, however, that there is no tax bite at all when those bigger tax refunds are invested in the lower earner’s TFSA.

The Family Tax Cuts, Universal Child Care Benefits and increased child care expenses, when taken together, can amount to significant sums of money for some families. What’s required, however, is a revisit of “old” tax knowledge and a renewed focus on tax efficient investing before year end.

It’s Your Money, Your Life. The more you know about the latest new tax filing provisions, the bigger the potential for taxes riches. Advisors and clients who take the time to plan now position the family for new wealth building opportunities.

Maximum CPP Premiums for Self-Employed Close to $5000

The CRA has announced the maximum CPP pensionable earnings for 2015: $53,600 up from $52,500 in 2014. The premium rate of 9.9% (employer and employee) and basic exemption ($3500) remain the same as last year.

What this all means in real dollar terms is that the maximum premium is going up again; this time to $2,479.95 for each the employer and employee. If you are self employed, you pay both portions, so for you, the maximum contribution to the CPP will now be that much closer to $5000 for the year: $4,959.90.

This is a significant contribution towards your future retirement, but is it enough? One of the challenges of year end planning is to be sure that RRSP and TFSA contributions are maximized for the 2014 tax year. Yet, as premiums for CPP rise, where to find the new money to fund these investments is a common complaint. Fortunately there are many places to look for new money. Some immediate opportunities include:

  1. Adjust prior filed returns for any errors or omissions. Be sure to adjust the 2004 tax year as it’s no longer open for these purposes after December 31, 2014. All other returns can be adjusted as well – problem areas are missed deductions, credits and capital losses.
  2. Adjust instalment payments and withholding taxes to pay only the correct amount of taxes, especially with the introduction of the Family Tax Cut for 2014. Do an income tax estimation to find out if you have overpaid your taxes or instalments and adjust your December remittances.
  3. Diversify income sources. If you own a small business corporation, pay salary to maximize your CPP contributions and your RRSP contribution room, but then consider sprinkling dividend income out to family members who are shareholders to reduce household taxation levels. An MFA-Business Services Specialist is trained to help with these decisions.  
  4. Contribute to Tax Efficient Investment Plans in the right order. If you are age-eligible, or have a younger spouse, use your unused RRSP contribution room to minimize your taxes. If you have children, you may want to tap into the Canada Education Grants and Bonds available by investing in an RESP. If you are concerned about funding a better pension for a disabled loved one, check out the significant matching grants and bonds available from government under the RDSP. Or, if your goal is a tax free retirement nest egg, consider maximizing your household TFSAs.

It’s Your Money. Your Life. It’s not inexpensive to fund retirement income options – both public and private sources. But proper planning along the way can help you manage all of your opportunities in an orderly fashion, particularly at year end.