Golombek’s Year-End Tax Tips

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Jamie Golombek

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Jamie Golombek, managing director with CIBC Private Wealth in Toronto.

Once again, we talk every year about year-end tax tips. The question I would ask is what’s different in 2021 that we haven’t already talked about in 2020 and 2019 et cetera. So let me suggest a couple of things and I’ll go over, of course, some of the more traditional planning ideas. The good news is that if you’re invested in equity markets, you’ve done very, very well, not just this year but over the past five or 10 years with really all-time highs in most equity markets. So pretty much you’ve got massive gains in the portfolio, which begs the question is now a time to do some year-end portfolio rebalancing.

And I’m suggesting that primarily because of the uncertainty that we still have on whether or not a government would increase the capital gains inclusion rate. That’s something that we know was promised not in the Liberal government but, of course, in the NDP platform, which of course could have some sway over the minority government. So if you fear an increase in the capital gains inclusion rate, which is currently at 50% and going up perhaps to 75% at some future date. Maybe now is the time to rebalance a portfolio sooner rather than later, taking those gains and then getting back on track with your investment policy statement and what investors really plan to do in their portfolios.

Of course, capital loss planning, year-end tax loss selling is always an opportunity because if you are rebalancing that portfolio in 2021, maybe you also want to realize some potential capital losses and then offset those against those capital gains on the portfolio rebalancing. Of course, the other consideration is, if you do have those massive gains in the portfolio, consider some year-end donation gain planning whereby you donate the biggest winners in your portfolio, or at least some of them, to a registered charity. Or even set up perhaps a donor advised fund, which is really an alternative to setting up a private foundation, which allows you to contribute in kind, pay no capital gains tax on the accrued gain of the stocks or mutual funds in your portfolio, and still get a receipt for the fair market value of the amounts being donated. So I think that’s some considerations that are unique to 2021.

Then of course, we get into the standard stuff that we remind people every single year. So things like making sure in various scenarios that you’re paying certain expenses by the end of the year. So investment-related expenses like interest on money borrowed for investment purposes, investment counseling fees that are deductible for non-registered accounts, you really want to make sure those are paid by December 31st to be able to get that deduction in 2021 tax year. But we’re getting into the more standard stuff like, of course, if you’re turning 71, converting that RRSP to the RRIF by the end of the year, that’s certainly an opportunity.

We still have the prescribed rate loan planning idea where a spouse or partner could loan money to the other spouse or partner using the prescribed rate. That’s been fixed to 1%, at least till the end of the year, RESPs, certainly registered education savings plans. There may be limited opportunities now, depending on the age of the child, if they’re turning perhaps 16 or 17, there are certain limitations. You want to make sure that they have contributed to the RESP by the end of the year they turn 15, otherwise they may lose that on grants for their foreseeable future or forever in that particular regard.

And then just the normal stuff, if you think your tax rate’s going to be higher this year than it will be next year, maybe you want to defer income to the following year and vice versa. If perhaps you’ve been on a maternity leave scenario this year, your income is low, but your income is going to be higher next year, maybe this is the year to realize income, realize capital gains.

And then, finally for business owners, I think it’s a good idea towards the end of the year to look at your total compensation, salary versus dividends. What are you paying yourself? Make sure that you’re paying yourself enough salary to be able to make the maximum RRSP contribution the following year, reminder that there’s an 18% contribution limit on RRSPs so effectively 2021 means you have to pay yourself a salary of at least $162,000 to be able to get the maximum RRSP contribution next year of $29,210. You want to do that by December 31st and, again, the opportunity to leave money in the corporation, enjoy tax deferrals, these are all things that we think about as we come up to December 31st, the end of the year.