Tax Guide for Investors in Canada
Decide the ideal mix of investments in your portfolio to get the best after-tax returns because different types of investments are taxed differently. Consider the treatment, whether it is more beneficial to hold an investment for dividends or to get capital gains by selling it.
Investment counseling fees for registered plans (e.g., RRSP, RRIF, TFSA, RESP, etc.) are not tax-deductible. Make sure that interest on investment loans and investment counseling fees for non-registered accounts is paid by December 31, 2020, to claim a deduction for 2020.
Capital Gains and Losses:
Individuals should generally delay selling investments with unrealized capital gains until 2021 unless they have capital losses to use. Capital losses may be carried back 3 years or carried forward for an indefinite period to offset capital gains in other years. Investments with unrealized losses should be sold before year-end to offset any capital gains realized in the year (or in the three previous years). In order for the loss to be available for 2020 (or one of the previous 3 years), the trade date must be no later than December 29, 2020, for both Canadian and U.S. securities. Due to the “superficial loss” rule, individuals must wait 30 days after selling a share with a loss to repurchase the share.
Allowable Business Investment Losses:
Allowable business investment loss (ABIL) could be claimed by selling the shares or debt of a small business corporation (SBC) that is in a loss position, to an unrelated person before year-end. This loss (ABIL) can be deducted against any source of income.
Tax-Free Savings Accounts (TFSA):
TFSA contributions are not tax-deductible, but withdrawals and income earned in a TFSA are tax-free. Withdrawals from TFSA should be made before the end of 2020 instead of early 2021 because withdrawn amounts are not added to the TFSA contribution room until the beginning of the year following the withdrawal. Contribute for 2020 (up to $6,000) and catch up on any unused TFSA contribution room from 2009 to 2019. Also consider loaning or gifting funds to a spouse, common-law partner, or adult child to contribute to a TFSA.
Lifetime Capital Gains Exemption:
Individuals who have held shares of a qualified small business corporation (QSBC) for at least 24 months should consider selling the shares at fair market value to a spouse or common-law partner, a third party, or a corporation controlled by the individual in order to claim the $ 800,000-lifetime capital gains exemption on the sale (indexed for years after 2014).
Many mutual funds distribute income and capital gains in December, consider deferring the purchase of mutual funds to early 2021 or selling them before year-end to minimize the allocation of taxable income for 2020.
Prescribed Rate Loans:
Give a prescribed-rate (1%) loan to a low-income family member before December 31, 2020. The investment income earned on the loaned funds will be taxed in the family member’s hands if the accrued interest for each calendar year is paid annually by January 30 of the following year.
Investors owning publicly traded shares with accrued capital gains should consider donating the shares to a registered charity or foundation. Capital gains realized on gifts of publicly traded shares are not subject to tax and the donor will receive a tax credit for the donation.
Consider using a Donor Advised Fund (DFA) account at a public foundation to realize your charitable giving objectives. A DAF is a charitable giving vehicle that allows donors to have an advisory role on charitable granting after the donation is made to a public foundation.
Home Buyers’ Plan:
If you are planning to use the HBP towards year-end, better to consider deferring the withdrawal until after December 31. This will extend the time for purchasing a home and repaying the withdrawn amounts by a year. Withdrawn amounts must be repaid to RRSPs in 15 equal instalments, starting with the second taxation year following the year of withdrawal. HBP withdrawal limit has been increased to $35,000 from March 19, 2020.
If you joined the HBP before 2018, you should make at least the minimum required repayment by contributing to their RRSP on or before March 1, 2021, and designating the contribution as an HBP repayment.
Consider purchasing a tax shelter like LP units or flow-through shares before year-end, by comparing the investment potential of the tax shelter and the tax savings.