Tax Tips: Delaying investment income

When buying or selling investments, timing is of the essence, especially towards the tail end of the year when getting the timing wrong can result in an undesirable tax position.

A financial advisor with tax expertise can save investors a lot of their hard earned money. With year-end looming, now is the time to employ some end-of-year tax planning strategies that can help minimize the overall tax burden.

Gary Dent, national tax leader at Grant Thornton has this time-sensitive tip: Defer reporting interest income on investments.

“Watch the timing when buying or selling investments; you have to report the interest you earned on an annual basis, even if you haven’t received income, so consider buying investments that pay out annually,” he says. “If you will soon acquire or rollover a short-term investment like a GIC, consider arranging for a maturity date early in 2012 so you can defer the reporting of interest income to your next return.”

Taxpayers need to report interest income on an annual basis. Dent says investors need to have a strategy around it. “If you are looking at putting money out now you may want to defer putting that money out until early 2012 and get a one-year GIC that’s not due until 2013 as opposed to putting out today and having that interest due in December 2012 that will accelerate the reporting of that interest income in 2012 taxation year as instead of 2013.”

Additionally, if a client is selling non-registered mutual funds, they should cash out before the distribution date so they don’t have to report an income allocation from the fund—just a capital gain or loss.

“If you are selling mutual funds, sell it before a distribution date because the value of the distribution will likely be reflected in the proceeds you receive which will be then taxed as a capital gain as opposed to if you wait to get the distribution and then sell [in which case] the value will be reduced [and] the distribution will be taxed as your income,” he says. “We know only one half of capital gains is taxable.”

The timing of selling before or after a mutual fund distribution doesn’t apply where you’re buying equities directly. A shareholder is unlikely to buy shares late in the year and sell them in the same year. Buying stocks just after a dividend payment, therefore, gets a better tax result than buying just before it.