'Tis season to think about TAXES

Tax season seems a long way away. Most people don't consider getting their papers in order until they have to sit down in late winter or early spring and do the deed with the help of an accountant or tax software.

But if you really want to end up paying as little as possible, you're best advised to do a little tax preparation before the end of the calendar year, taxation experts say.

"It's just every year people forget, and then in April, they go, 'Oh man! I could have done this,'" says Carol Bezaire, vice-president of tax and estate planning at Mackenzie Financial in Toronto.

To save yourself a tax-induced migraine three months from now, here are a few considerations to address before the end of the calendar year that could help reduce Canada Revenue Agency's (CRA) share of the fruits of your toiling.

Tax breaks... get the most from the credits and deductions

Because the RRSP contribution deadline extends until the end of February, many people wrongly think other contributions for tax savings also run into the New Year.

But most deductible expenses that can result in tax savings must be realized in the calendar year, Bezaire says.

"Tax-free savings account (TFSA) contributions end December 31, for instance, but there is accrual," she says. "If you don't make a contribution, then it rolls over to next year as long as you file a tax return."

So if you don't contribute any of the $5,000 contribution room to a TFSA this year, you can roll that amount forward into the following years.

Another consideration is tuition payments. Rather than waiting until January to pay for the next term, she suggests paying this year if you are looking to reduce taxes payable in 2009 more than you will be in 2010.

One tax credit that will run into the New Year is the Home Renovation Tax Credit.

"Up until February 10, the first $1,000 is your cost, but between $1,000 and $10,000 -- on $9,000 -- you get a 15-per-cent non-refundable tax credit, which will reduce any taxes payable. That's up to $1,350."

Give to others and save with the taxman...

It's the season for giving, so why not give now and receive tax savings in the spring? All charitable donations made before Jan. 1 should result in lower taxes when filing for 2009.

And the more you give the more you will receive, Bezaire says. Donations up to $200 receive a 15-per-cent tax credit. That means your taxes payable will be reduced by $30. Donations more than $200 will receive a 29-per-cent tax credit on the dollars above the $200 level (with first $200 getting a 15 per cent credit).

You can also donate securities, but limits on both monetary and investment donations do exist. You can only claim amounts up to 75 per cent of your income. Amounts over that limit may be carried forward for three years.

The CRA does allow exceptions on donations of land or cultural property, on which you can claim up to 100 per cent of your income.

You can't give less and receive more...

Chartered accountant Jeff Edwards says people should steer clear of charitable donation schemes claiming to offer additional tax savings beyond the actual amount donated.

"I was approached by a group that was offering me the opportunity to donate $1,000 for AIDS medication and I would receive a charitable donation receipt for four to five times the donated amount," says the Winnipeg-based accountant. "Of course the seller of the scheme is telling me that the CRA has approved the donation structure and this is a great opportunity."

The bottom line is if it sounds too good to be true, it likely isn't true, he says, adding many people are still getting fooled into making this type of donation. The CRA may process the return and send out the cheque, but that doesn't mean it won't rule a few years later that the charitable donation claims are invalid, he says.

It can be a costly mistake, too. CRA not only charges interest (five per cent a year), but it charges a one-per-cent per month penalty on the amount owing to a maximum of 12 months, Bezaire says.

A capital idea for stock market losses...

The market volatility over the last couple of years has presented an opportunity for investors to use capital losses to offset taxes that would be paid on capital gains, Bezaire says.

Many investors may be in a capital loss position on some investments, but the situation will not last long as the market is expected to recover, she adds.

"People who are carrying accrued capital gains in some of their holdings might find it a good time to trigger some capital losses on others that are down and crystallize some of their gains," she says. "Take your profit, and you will pay less tax because you will offset the gains on some assets with the losses on others."

And, if your losses outweigh your gains, you can carry those losses indefinitely.

(Capital losses, however, can only be applied back three years against past capital gains.)

Many investors also are sitting on investments on which they've lost money, but they're still holding onto them, hoping they will become profitable.

"If you're holding something you like that is still down, but you're confident it will rebound, then you might want to crystallize a loss now," she says.

You can then repurchase the same security, and hope the investment continues to climb in value. "When the repurchased investment does start churning out capital gains again, you can utilize the loss realized today against the capital gain when you sell it again later on," she says, adding the strategy works only on non-registered investments.

Investors do need to be cautious about the superficial loss rule in the Income Tax Act. If the security is repurchased within 30 days, the capital loss becomes ineligible, but the loss can be included as part of the cost to repurchase the stock, which is then subtracted from the capital gain when the stock is sold again in the future.

Your loss is your child's gain...

Another variation of the capital loss/gain strategy is transferring an investment into trust for a child.

"You can realize the loss, but you know the investment is going to grow and the child will be taxed on the capital gain in a much more tax-efficient manner."

As an example, she says a $20,000 capital gain, of which only 50 per cent is taxable, may result in no tax payable for the child, who otherwise has no income and a basic personal tax exemption amount of $10,320 of income.

As you might have realized, capital gains/losses strategies -- like most tax planning -- can be as clear as a glassful of the Red River, so Bezaire recommends investors consult an accountant or investment adviser before making decisions.

Padding your spouse's nest egg...

Attribution rules for contributing to your spouse's RRSP run three calendar years.

But depending on when you make the contribution, you can make the rules work in your favour and reduce the waiting time from three years down to two years and change, Bezaire says.

"If you're going to make a spousal RRSP contribution, do it in November or December instead of January because the attribution rules when it's taxed to the donor's spouse run the current year plus two," she says.

"So a spouse who has a spousal RRSP will be able to access that money about a year earlier if they contribute before December 31."

One last thing... a gift for your accountant...

This present won't cost you anything but a little bit of time. And it likely will save you money.

"Clients should take time to add up all their different types of receipts in different expense categories or, at least, they should organize those invoices in separate envelopes for their accountant to tally up," Edwards says, adding this makes your accountant's life much easier.

Being organized also will help you save money.

"Time is money and the less time it takes your accountant to complete your return, the less it will cost you."

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Capital gains/losses deductions explained

Most capital gains are subject to a 50-per-cent inclusion rate. That means only 50 per cent of the gain is taxable. And that amount is then taxed according to your marginal tax rate. A capital gain is calculated by subtracting the asset's adjusted cost base -- purchase cost, associated fees and maintenance costs -- from the value of the asset when it's sold.

Here's a scenario:

If you bought $1,000 worth of ABC shares and sold them when they were worth $10,000, here's the approximate capital gain and taxes owing:

Purchase: $1,000

Trading commission costs: $100

Total adjusted cost base: $1,100

Total capital gain: $8,900

Total taxable amount (the 50-per-cent inclusion rate): $4,450

When taxed at highest marginal rate (46.4 per cent), taxes owing: $2,064.80

However, if you have a capital loss, you can use the loss to reduce your taxable capital gains. So if you bought $1,100 worth of DFG stock and sold it for $400, you would have a capital loss of $700.

Half of that amount is eligible as a deduction from capital gains income, but it cannot be used against other forms of income like your work salary or interest income. It can only be applied to a realized capital gain.

Using the same scenario mentioned above, the $4,450 in taxable capital gains on the sale of ABC would be $3,750, if you applied your capital losses from the sale of DFG, resulting in a tax bill of $1,740.

Republished from the Winnipeg Free Press print edition December 5, 2009 B14