Five Ways to Save Tax Before Year End

I saw snow for the first time this season. That usually marks the start of Christmas music at the mall. Pumpkin spiced everything. Sweaters and mittens. Year end tax planning.

Wait…

Year-end tax planning?

What’s that?

It’s always a good idea to review your financial plan near the end of the year. Why? Because there are lots of tax strategies that can cut your 2021 tax bill. But some strategies have a year-end deadline. So you need to act now.

Remember: It’s not what you make that’s important. It’s what you keep. So a year-end tax review is worth the effort.

A Financial Advisor Can Help

Don’t know where to start? A financial advisor can help. Many financial advisors today do more than invest money. Many also help with things like cash flow management, debt reduction, estate planning, life insurance and more.

Tax planning is a big area where a financial advisor can add value. In fact, a recent study showed that tax planning alone can provide 1.20% worth of value. (Source: 2021 Value of an Advisor Study. Russell Investments). That’s higher than the fee most advisors charge. So it’s a good investment to work with an advisor who does tax planning.

What is tax planning, and how’s it different from tax filing?

Think of it this way: When you file your taxes each spring, the previous year is already done. Your goal then is to minimize your tax bill from the previous year. That makes tax filing a backwards looking task. It focuses on the past.

By contrast, tax planning looks at the future. A good tax plan will help you understand your tax situation several years into the future. That helps you plan better. Looking forward will open the door to more opportunities, because many strategies cross over multiple years.

For example, will you be in a higher tax bracket next year? It might make sense to defer your RRSP deduction until next year, when you need it more. A forward looking tax plan will highlight opportunities like these.

Most accountants are swamped during tax season. So they might not have time to do much planning. A financial advisor can fill this gap. Many financial advisors connect with clients throughout the year, so they can highlight any tax strategies and deadlines.

What should you focus on before the end of the year? Here are five year-end tax planning strategies for individuals and families:

 

1) Non registered investments

Unlike RRSPs or TFSAs, any income received from a non-registered account is taxable. If you have a non-registered investment account, you need to be aware of year-end income distributions.

Many investments like mutual funds and exchange traded funds (ETFs) distribute taxable income in December. So make sure you’re aware of any upcoming distributions before making a big purchase near the end of the year.

Taxable distributions usually come in the form of interest, dividends or capital gains. Each type has a different tax treatment. Interest income has the highest tax rate, while dividends and capital gains have preferred tax rates. Some investments also have return of capital distributions, which are not taxable.

The different tax rates on distributions create an opportunity to save tax. It may be possible to rebalance your non-registered portfolio to make it more tax efficient.

Tip #1: Review non-registered investments. Rebalance if possible to make your portfolio more tax efficient.

 

2) RRSPs

Do you contribute to a spousal RRSP? Make a contribution near the end of the year. Why? Because it will reduce the attribution period.

Basically, a spousal RRSP moves future income from a high tax spouse to a low tax spouse. But spousal RRSPs have an attribution period. Withdrawals from a spousal RRSP during this attribution period will revert back the high tax spouse. So you want to minimize this penalty time.

You can reduce the attribution period if you time things right. Here’s an example: A spousal RRSP contribution made in December 2021 will be attribution free in 2024. A spousal RRSP contribution made in January 2022 will be attribution free in 2025. Making the deposit a month earlier will reduce the attribution time by an entire year.

Tip #2: Make Spousal RRSP contributions before year-end.

 

3) TFSAs

Need cash? Consider a TFSA withdrawal near the end of the year. That will minimize the impact to your future TFSA contribution room. (You can read my article on TFSAs to see why you should guard your precious TFSA room.)

Remember, you can re-contribute any TFSA withdrawals. Withdrawals in a given year are added back to your contribution room the following year. You also get new TFSA room the following year. Again, good timing is key.

Here’s an example: Lindsay needs cash for an emergency, and is considering withdrawing $10,000 from her TFSA. If she makes the withdrawal in December 2021, her TFSA contribution room in 2022 will be $16,000 (withdrawal plus new room). If she makes the withdrawal in January 2022, her TFSA room in 2022 will be $6,000 (new room only). If she delays one month, Lindsay will lose access to $10,000 TFSA contribution room for an entire year.

Tip#3: Make any TFSA withdrawals before the end of the year

4) Children Education Savings

Want to save for a child or grandchild’s education? A registered education savings plan (RESP) is an excellent option. RESPs help you save tax. They also give you access to government grants and bonds (also known as “free money”).

But there is a deadline. Is your child turning 15 this year? To be eligible to receive RESP grants and bonds in years 16 and 17, you need to do one of the following: Contribute $2,000 in the current year. Have contributed $100 in each of any four years prior.

RESPs are great savings accounts. But you need to plan ahead to maximize available grants and bonds.

Tip#4: Contribute to an RESP. Be aware of the deadline for RESP grants and bonds.

 

5) Registered Disability Savings Plan

If you or a family member qualifies for the disability tax credit (DTC), you may be able to set up a registered disability savings plan (RDSP). A RDSP has several advantages, like access to government grants and bonds.

RDSP carry forward rules allow you to carry forward unused grants and bonds for 10 years. The annual maximum you can receive is $10,500 for grants and $11,000 for bonds. This is particularly important if you turn 49 this year, as this will be the last year to access any unclaimed grants and bonds.

Tip #5: Contribute to an RDSP to take advantage of generous grants and bonds.

 

Bottom Line

Like I said, tax planning is a forward looking exercise. A few simple changes before year-end can make a difference. Then you can look forward to a bigger tax refund in the spring.