Top 10 tax tips for you to consider before Dec. 31
THE PENSION INCOME CREDIT $2,000
With just a week to go until the end of 2021, here’s my top 10, time-sensitive tax-planning tips you must do by Dec. 31, depending on your individual circumstances.
❚ 1. Contribute to charity: You must make any charitable contributions by Dec. 31 to get the tax credit on your 2021 return. As a reminder, charitable donations to registered charities (or donor-advised funds) attract both federal and provincial non-refundable tax credits.
On the federal side, you get a credit of 15 per cent for the first $200 of annual charitable donations. For cumulative donations above $200, the federal credit rate jumps to 29 per cent (and can be as high as 33 per cent if your taxable income exceeds $216,511 in 2021). Provincial and territorial donation credits work similarly, providing you with a combined donation credit rate of between 20 per cent and 54 per cent depending on the amount you donate, your income level and your province or territory of residence.
As a reminder, if you donate appreciated marketable securities or mutual funds “in kind” to charity, you’ll get a donation receipt for the fair market value and eliminate any capital gains tax. But act quickly, because it may take a few days for the securities to actually get transferred once you’ve put in a request to your brokerage.
❚ 2. Tax-loss selling: If you plan to trigger any capital losses on investments in
2021, either to offset other capital gains realized this year, use against mutual fund capital gains distributions allocated to you, or to perhaps carry back to the 2020, 2019 or 2018 tax years, you need to ensure the trade settles in 2021. For this to occur, the trade date must be no later than Dec. 29 to complete settlement by Dec. 31.
❚ 3. Take TFSA withdrawals: If you withdraw funds from a tax-free savings account (TFSA), an equivalent amount of TFSA contribution room will be reinstated in the following calendar year. If you are planning a TFSA withdrawal in early 2022, consider withdrawing the funds by Dec. 31 so you don’t have to wait until 2023 to re-contribute that amount should you wish to do so.
❚ 4. Transfer your RRSP to a RRIF: If you turned 71 in 2021, you have until Dec. 31 to transfer your registered retirement savings plan (RRSP) to a registered retirement income fund (RRIF). Starting in 2022, you will be required to withdraw a minimum amount each year based on your age (or the age of your younger spouse or partner, if that’s what you initially choose upon setup). If you turned 71 this year, your minimum required withdrawal next year will be 5.28 per cent of the fair market value of your RRIF as of Jan. 1, 2022.
❚ 5. Make a final RRSP contribution: If you have to transfer your RRSP to a RRIF this year because you turned 71 in 2021, be sure to make any final RRSP contribution by Dec. 31 since you don’t have the normal 60 days following yearend to do so this year. If you have a younger spouse or partner, however, this may not be necessary as you could still choose to contribute to a spousal (partner) RRSP by the normal March 1, 2022, RRSP deadline.
❚ 6. Make a deliberate overcontribution to your RRSP: Similarly, if you turned 71 in 2021 and you have earned income, such as (self-) employment income or rental income that will create RRSP contribution room for 2022, consider a one-time deliberate overcontribution to your RRSP this month. You’ll pay a small overcontribution penalty tax of one per cent of the over-contributed amount (above a $2,000 permitted overage) for the month of December, but you’ll be able to deduct that contribution in 2022 (or beyond) and the penalty tax will cease. Note, again, that if you have a younger spouse or partner, this is not necessary, as you could continue to contribute to a spousal (partner) RRSP even beyond age 71, assuming you have the contribution room.
❚ 7. Withdraw at least $2,000 from a RRIF: Once you’re 65, RRIF withdrawals (but not RRSP withdrawals) qualify for the $2,000 pension income credit, both federally and provincially. If you otherwise have no pension income in 2021, consider converting a portion of your RRSP to a RRIF once you turn 65 to take advantage of the annual pension income credit on $2,000 of annual RRIF withdrawals (or $4,000, if you elect to split pension income with your spouse or partner who is also at least 65 years old and has no other pension income).
❚ 8. Pay interest expense: If you borrowed money for the purpose of earning business or investment income, be sure to pay your interest by Dec. 31 to claim a deduction on your 2021 tax return.
❚ 9. Take educational assistance payments: If you have contributed to a registered education savings plan (RESP) for a student who attended a post-secondary educational institution in 2021, you may wish to withdraw some educational assistance payments (EAPS) before Dec. 31. Although the amount of the EAP will be included in the student’s income for 2021, depending on the student’s other income, perhaps from part-time or summer employment, the EAP income will be effectively tax free if the student has sufficient personal tax credits, including the enhanced federal basic personal amount of approximately $13,800, and tuition fees eligible for the tuition tax credit.
❚ 10. Make RESP contributions: Finally, if your (grand)child turned 15 this year and has never been a beneficiary of an RESP, no Canada Education Savings Grants (CESGS) — worth 20 per cent of your annual contributions up to an annual maximum of $500 ($1,000 if CESG carryforward room exists), can be obtained in future years unless at least $2,000 is contributed to an RESP by the end of the year. Consider making an RESP contribution by Dec. 31 to receive the current year’s CESG and potentially create CESG eligibility for 2022 and 2023.
CHARITABLE DONATIONS ... ATTRACT BOTH FEDERAL AND PROVINCIAL NONREFUNDABLE TAX CREDITS.