Use these ideas to reduce what you must pay next year
Ray Turchansky
Province
EDMONTON –Tax breaks may be well be on the way, but getting your financial house in order through year-end tax and financial planning is more important than usual this year, since deferring any income into a year when you might have a lower marginal tax rate will save you money.
Here are some ways to reduce your 2005 personal taxes, according to the tax and financial advisory offices of Deloitte:
1. Contribute to your registered retirement savings. Although the deadline for contributing to your RRSP for 2005 won’t be until March 1 of next year, the earlier you contribute the better, because tax is deferred on growth from the moment you invest.
If you have turned or will turn 69 during 2005, you must collapse your RRSP accounts, or their full market value will be added to your 2005 taxable income. Options include transferring your RRSP to a registered retirement income fund, taking out an annuity or receiving a lump sum.
2. Stagger taxes on certain capital gains. If you realize capital gains on the sale of property, you can spread out the taxes by receiving the proceeds from the sale over a five-year period. The term is 10 years for the transfer of farm property, shares from a family farm corporation or a small business corporation if the transfer is to a child, grandchild or great-grandchild living in Canada.
3. Defer taxes on certain stock-option benefits. If you exercised stock options in 2005 on publicly traded shares and plan to keep them until at least the end of this year, you can defer the benefit on exercising $100,000 of options because the amount is based on the fair market value of the shares when the options were granted. But to defer the benefit, you need to notify your employer by Jan. 16, 2006.
4. Use your capital losses. Early December is a favourite time of year for tax-loss selling, namely selling stocks or mutual funds outside your RRSP that have fallen in value, in order to crystallize capital losses that may be used to offset capital gains.
However, if you, your spouse or a company you control repurchases an identical asset within 30 days, the loss will be deemed superficial and disallowed for tax purposes.
5. Donate. Donations to registered charities made before the end of 2005 may be used to claim charitable donation tax credits for that year. The federal credits are 16 per cent on the first $200 and 29 per cent on the rest. Spouses are advised to combine donations and thus face the lower credit on the first $200 only once.
6. Check whether interest on your loans is deductible. Interest paid on home mortgage loans, RRSP contribution loans and life-insurance policy loans is not deductible. However, interest paid on loans for investments that produce income (such as rental income), interest or dividends is generally deductible.
7. Make certain disbursements before year-end. You can only claim some deductions and credits if the disbursements were made before year-end. Examples are charitable donations, child support (if deductible), child-care expenses, interest on investment loans, tuition fees, plus professional and union dues.
8. Plan to receive certain income or pay certain expenses. People with business income can decide which year is best to acquire depreciable assets or make maintenance repairs, depending on what income levels will be in various years.
9. Reduce your December tax instalment. If you pay your income taxes in installments and think your 2005 income will be significantly less than in 2004, consider decreasing the amount of your Dec. 15, 2005, instalment.
