Year-end tax tips

December is a busy month for advisors, but you can help your clients close out 2010 on a positive note with these year-end tax tips.

For starters, year-end is a good time for a review of the investment portfolio. If your clients have capital-loss carryforwards from prior years, they might consider cashing in on some of the winners and applying the losses to avoid paying tax on the capital gains.

Other clients may want to sell loss securities to reduce capital gains realized earlier in 2010 or the preceding three years. Keep in mind that the trade must settle in 2010 to be considered a 2010 disposition.

If your clients are considering buying bonds or long-term GICs this month, remember that even if the investment pays no interest in 2011, tax will be payable on the interest that accrues to the first-year anniversary date (December 2011) with the 2011 tax return. By delaying the purchase to January 2011, that tax can be deferred one year.

With mutual funds that regularly make year-end distributions, the distribution amount is effectively included in the purchase price, and will be taxable in the 2010 return. Waiting until after the distribution to purchase those funds could lower the costs and defer the tax.

If your clients are looking for opportunities to reduce an expected tax liability in 2010, they might consider a flow-through share investment before year-end.

These provide for a significant current tax deduction, and may give rise to federal and provincial tax credits. A capital gain will arise when the investment is sold, but if it’s donated to charity, the gain will be nil. But do remind clients that these investments carry risks and should be assessed on the merits of the operation—not the tax attributes.

Family matters

The prescribed interest rate applicable to the exemption from income attribution on intra-family loans is still 1% for the final quarter of 2010. So income-splitting loans are an excellent tax-saving opportunity.

For those with outstanding income-splitting loans, interest must be paid by January 30, 2010 to avoid income attribution.

Those clients who regularly receive tax refunds because of deductible RRSP contributions, childcare costs or spousal support payments can request CRA authorization to allow their employers to reduce the tax withheld from their salaries (Form T1213). While it won’t affect 2010 taxes, in 2011, they’ll receive the tax benefit all year instead of after the 2011 returns are filed.

You should also remind clients to make RESP contributions before the end of the year. With a contribution of $2,500 per child, the federal government will contribute a grant of $500, and if you have prior non-contributory years, the annual grant can be as much as $1,000 (for a $5,000 contribution).

If your client has a child who’s 15 this year but has never contributed to an RESP on his or her behalf, December 31 is the last chance to make a contribution and earn a grant for that child.

Other deductions

Self-employed people and unincorporated business owners expecting to make capital purchases should consider buying before year-end to get a depreciation deduction for 2010 (but only half of the regular depreciation amount). In the case of eligible computer and software purchases made before February 2011, the full cost can be written off for tax purposes in the year of acquisition.

Finally, remind clients to make their TFSA contributions for 2010 and make 2011 contributions as early as possible next year. They can also fund their spouses’/partners’ contributions without attracting the attribution rules.