Tax reminders for the end of 2019

With the calendar about to turn over into a new tax year, now’s a good time to make sure that your clients are taking advantage of the tax-planning opportunities available. Here’s a handful of relatively easy tax wins to make sure your clients’ holidays are as happy as they can be:

Timing of TFSA withdrawals

If your clients will soon be withdrawing from their TFSAs to fund a purchase, advise them to do so before Dec. 31. Amounts withdrawn from a TFSA in a given year are added to contribution room for the following year. Thus, if your client withdraws $5,000 from a TFSA in December, $5,000 of contribution room is added to their room in Jan. 2020. Clients who delay withdrawing the funds from the account until January will have to wait until 2021 to regain that contribution room.

Tax-loss selling

Your client might consider selling a losing investment before Dec. 31 in order to use the resulting capital loss to offset capital gains earned in 2019.

Unused net capital loss for the year can be carried back to offset capital gains in any of the previous three years, or carried forward indefinitely.    A transaction needs to take place on or before Dec. 27 in order for the trade to settle in 2019.

RRSP contributions and withdrawals

Clients must contribute to their RRSPs by March 2, 2020 in order to be able to deduct the amount on their 2019 tax returns. Contributions made earlier than the deadline — including on or before Dec. 31 — allow your client to maximize the benefit of tax-deferred growth within the plan.

A client who turned 71 in 2019 has until Dec. 31 to make a final contribution to their RRSP before the plan must be converted into a RRIF or an annuity.

If your client earned income in 2019 that would generate RRSP contribution room in 2020, they could make a one-time overcontribution to their RRSP before the end of the year. While your client will pay a 1% penalty, per month, on the excess contribution above the allowable overcontribution limit of $2,000, the new contribution room in 2020 will absorb the over-contribution amount. Your client can deduct the overcontributed amount on either their 2020 tax return or in a future year’s return, allowing them to shelter more of their money in the RRSP.

Finally, if your client had a low level of income in 2019 and expects to be in a higher tax bracket in their retirement years, they might consider withdrawing from their RRSP before Dec. 31. Some or all of that withdrawal can be contributed into their TFSA if they have contribution room.

RESP contributions

The federal government provides a Canada Education Savings Grant (CESG) of up to 20% of the first $2,500 in contributions, per child, to a Registered Education Savings Plan (RESP) in a year. Unused CESG room may be carried forward until the year in which the child turns 17. The lifetime maximum CESG benefit is $7,200 per child.

If your client hasn’t yet contributed to an RESP for 2019, doing so before Dec. 31 would allow them to take advantage of the tax-deferred growth in the plan.

The government will provide up to $1,000 of CESG in a year when a client makes up unused CESG room. If your client has not been contributing enough to maximize the CESG, and their child is within seven years of turning 17, suggest that your client contribute to the RESP by Dec. 31.

Charitable donations

Dec. 31 is the last day your client can donate to a registered charity in order to claim a donation tax receipt on their 2019 tax return. The federal donation tax credit (DTC) is 15% on the first $200 of donations, and then 29% on donations above $200 (and to 33% to the extent taxable income is above the top bracket threshold of $210,371). There are also provincial donation tax credits available in addition to the federal DTC.