Year-End Tax Planning
There are a few things to optimize taxes for 2015. RRSPs, charitable donations, and tax-loss selling will be discussed here.
Registered Retirement Savings Programs (RRSPs) can be contributed to in 2015, and in the first sixty days of 2016 for the 2015 tax year. RRSPs are used to save for retirement. Contributions to your RRSP are tax-deductible (meaning it lowers your taxable income). It is limited to 18% of income, net of pension. More on RRSPs in a later blog.
Charitable donations are also good for year-end tax planning. There is a 15% tax credit on the first $200. So, if you donate, $200, your taxes will be reduced by $200 x 15% = $30. Above $200 there is a 29% credit. So, if you donate $300, your taxes are reduced by $30 on the first $200, then for the extra $100 your taxes are reduced an extra $29, for a total of $59. On top of that, if you or your spouse haven’t donated since 2007, there is a First-Time Super-Donor tax credit that offers an additional 25% credit on the first $1,000.
As for tax-loss selling, while one makes money in the stock market for example, one can lose money as well. It has been a tough year for stocks, particularly in the Toronto Stock Exchange. If one bought stock for $5,000 in the past, then sold for $4,000 this year, there is a loss. That loss can be used to lower taxable income, so it is called ‘tax-loss selling’. It is generally used only against capital gains. So, if you make a capital gain (sell company X stock for $1,000 profit) and a capital loss (sell company Y stock for $1,000 loss) you can use the loss to offset the gain. In other words, you would normally pay tax on the capital gain, but the capital loss brings the net to $0. The benefit is that you sell a good company at a profit, get rid of a company that is in trouble, and pay zero tax.
These are the basics, but it can be more complicated. Pension adjustments can affect RRSPs. Superficial tax losses can be denied. Complicated situations may require some professional help.