MAKING CENTS: Get your finances in order before year’s end

As another year comes to an end, investors should be reviewing their income for the calendar year and looking at ways that can help reduce their tax bill.

The advisor-client relationship has typically centered on accumulating wealth but it is important to plan for withdrawals, especially as more boomers retire. Advisors need to pay more attention to tax-efficient strategies for helping clients keep as much of their wealth in the family and out of the hands of the government. Three ways to do this includes early income withdrawals, tax loss selling and charitable giving.

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With more Canadians transitioning into retirement, they are beginning to rely less on earning a paycheque and more paying themselves a paycheque from the nest egg they have saved for retirement.

One of the most common questions from clients is, “Where do I withdraw my money from first?” Whether you have recently retired or have been retired for years, it is important to keep an eye on your marginal tax rate. If you have built up a large RRSP account, it could make sense to make “early” RRSP withdrawals even if you don’t need the income for your normal lifestyle expenses.

After age 65 there are benefits of making these early RRIF withdrawals including the ability to income split with your spouse, qualifying for the pension income tax credit, smoothing out your income so that at age 72 you don’t suddenly have a really large minimum annual withdrawal, and reducing substantial potential taxes owing on residual RRIF balances should you and your spouse pass away close together.

It is also important to come up with an estimate of what your taxable income might look like for the tax year. Many retirees have a disproportionate amount of money in their registered retirement savings accounts and don’t realize the tax liabilities related to that. You want to avoid having too much income if possible so you don’t push yourself into a higher tax bracket, forcing an OAS claw back.

In the final months of the year, we review gains and losses in non-registered portfolios to look for ways to reduce any tax liability. Another tax saving strategy that you may want to take advantage of before Dec. 27 is tax-loss selling. When you sell investments for a profit throughout the year, you create taxable income which in turn results in taxes owing. You can reduce this bill by selling some of your losing investment positions which will offset your gains and reduce the taxes owing. This is a strategy we use each year to effectively minimize the amount the government will be owed.

Even if you don’t have substantial gains this year, it might also be wise to speak with your accountant to check if you had big gains previously, as you can carry back the losses up to three years or forward indefinitely. This could allow you to get a refund of taxes previously paid on gains from real estate, selling a business or gains on your portfolio. 

This is always the busiest month for charities, as many Canadians rush to make last minute donations before the Dec. 31 deadline. Many investors make donations to charities without really thinking about the tax benefits, but there are significant tax savings that can come from charitable giving.

The combined federal and provincial tax credits mean the actual out of pocket cost to you for a donation is almost half the amount the charity received. In B.C., you receive 43.7 per cent in tax credit on donations that are more than $200. First time donors get an extra credit too.

Even if you have cash readily available, you should look into donating shares from your non-registered investment portfolio. The benefit of donating stock as opposed to cash is that by donating publicly traded securities in-kind, you can avoid the capital gains and the taxes on that profit.

It is important for you to consult with your financial advisor, accountant or tax specialist, to review your overall tax situation on an annual basis and determine if these strategies are suitable for you based on your circumstance.

These approaches, along with other planning strategies, may have a significant impact on your net worth over time, and allow you to have more control over your future tax liabilities.

Lori Pinkowski is a senior portfolio manager and senior vice president, private client group, at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Lori can answer any questions at 604-915-LORI or pinkowski@raymondjames.ca. You can also listen to her every Wednesday morning on CKNW at 8:40 a.m

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