As we near the end of 2019 it is always a good idea to reflect on the past. We have rounded up some of our past articles to help make sure you have completed all the financial transactions that you had either planned on making or should consider doing, before year end. We have also put together a financial check list of items to start thinking about before the end of the year.
Have you topped up your Tax Free Savings Account?
As of 2019 the maximum one can contribute to your TFSA is $63,500. Earlier in the year we wrote three articles specifically on the TFSA (TFSA Limit increased to $6,000 for 2019; Strategies help contribute to your TFSA early; Understanding TFSA beneficiary terminology). If you have not already done so, now is a good time to make sure that you have topped up your TFSA for 2019. If you have not, or are not able to, not to worry, you are able to carry forward any unused room and make those contributions when the cash flow allows. As we have mentioned in previous articles, we view the TFSA as a long-term account that would typically hold equities inside it so, the earlier you get those contributions in, the longer you have to protect any potential gains within the TFSA.
2020 TFSA limit announced
We already know that Canada Revenue Agency has announced that the 2020 TFSA limit is $6,000. December is the ideal time to speak with your portfolio manager to determine how you want to fund 2020’s TFSA contribution. Some of our clients will mail a cheque to be deposited in their non-registered account so that we can simply journal these funds over in the first week of January. We have spoken with other clients about transferring securities in-kind from their non-registered account in early January. In many cases we have had these discussions in 2019 to plan what we will be doing in early 2020.
Determine if you should contribute to an RRSP
By now you should have a pretty good idea of what your income is going to be for the year. Although the deadline to contribute to your RRSP is not until March 2, 2020, if you already know how much you would like to contribute and have the available funds then why not do it now? If you are unsure of how much to contribute, or if you even should contribute to your RRSP, then we encourage you to read our Feb. 1 article (The mathematical approach to RRSP contributions) and Feb. 8 article (50 questions to consider before making an RRSP contribution) which discusses various strategies in much more depth.
2020 RRSP maximum contribution
On the Government of Canada website it states that the RRSP dollar limit for 2020 is $27,230. This additional room would be added provided you have $151,278 in earned income without other adjustments (i.e. pension adjustments). Similar to making TFSA contributions early, we encourage clients who want to maximize RRSP contributions to make early contributions. Having the funds earmarked in December will help you make a contribution early next year. The longer you have the funds in your RRSP, the longer you have for potential tax-deferred growth.
Converting your RRSP to a RRIF
In the year you turn 71 you are required to convert your RRSP to a RRIF. This conversion has to be done before December 31st. The reason for this is that the following year is the first year that you actually take the payment from the RRIF which is percentage based on the Dec. 31 value of your RRIF. In some cases even though you are not turning it may make sense to convert earlier than the required date. In our March 1 (When to stop contributing to an RRSP) and Nov. 22 (What to consider when looking at registered accounts withdrawals) articles we outline some strategies on when it makes sense to convert early. If converting all or part of your RRSP to a RRIF suits your particular financial situation, then make sure to do it before Dec. 31 as this is the date used to determine what your minimum payment will be for the following year.
Interest payments on spousal loans
Some of our clients have spousal loans for income splitting strategies. There is no requirement to pay back any of the principal of the loan but you are required to pay the interest on the loan each year at the prescribed rate set when the loan was first taken out. To avoid any attribution rules you are required to repay interest on the loan within 30 days of the end of the year. It should be noted that if you do not pay the interest in the designated time frame, then all the income in the current year as well as all future years will be attributed back to your spouse.
Cash flow needs
The end of the year is a good time to look at what you have spent throughout the year and to consider if you will need to draw the same amount, more, or less from your portfolio for the following year. As we discussed in our April 12 article (Asset mix should be tied to cash-flow needs and market conditions) knowing the amount of funds required allows us to set aside 12 to 24 months of cash, which we refer to as a ‘wedge’. The wedge is earmarked for these cash withdrawals. This is done to ensure that investments do not have to be sold at the wrong time in the equity market cycle.
Tax loss selling
In October (Tax-loss selling might reduce your tax bill), we wrote about strategies to consider. In Canada and the U.S. the settlement for trades is now the trade date plus two days (T+2). This means that if you have any losses that you want to crystallise or gains that you want to realize in 2019 then the last day to enter the trade is on December 27th. Remember that any losses will be denied if you purchase the same security within 30 days of selling it.
Rebalancing your portfolio
In a year where markets have been very good, it might be worthwhile to do some rebalancing in your portfolio. If you hold individual equities then a good year in the market could lead to some of those positions being overweight. It makes sense to have a look at some of those overweight positions and consider trimming some of the gains and using those funds to add to any existing positions that may be underweight that you believe are still a quality long-term holding. We provided some rebalancing tips in the article titled Rebalancing helps manage risk.
Topping up your child or grandchild’s RESP
The maximum you can contribute to an RESP is $50,000. While there is no annual maximum (as long as you are below the $50,000 limit), the maximum you can contribute each year to get the maximum basic CESG grant of 20 per cent ($500) is $2,500 for each child. We discuss this in our March 22 article (A spring break refresher on RESPs). If you want to maximize the grant each year (maximum lifetime grant per beneficiary is $7,200) then make sure to contribute $2,500 to each beneficiary before the end of the year. If you have missed a year in the past then not to worry, you are able to carry forward some of those missed contributions to a maximum contribution of $5,000 which will get you 20 per cent or $1,000 in the basic CESG grant.
Taking advantage of the $2,000 pension credit
Some clients will open a small RRIF account in order to claim the $2,000 pension credit. The pension income amount allows a taxpayer to claim a federal non-refundable tax credit on up to $2,000 of eligible pension income which includes RRIF income. The federal tax credit rate is 15 per cent, so the maximum federal tax savings available is $300 (15 per cent of $2,000). In order to do this you must be 65 years old and withdraw the $2,000 out of a RRIF by the end of the year.
Ensuring instalment account is up to date
If you are required to make any tax instalment payments then you would have received a notice in February for payments due on March 15 and June 15 and/or one in August for payments due on Sept. 15 and Dec. 15. It is important to make these payments as the CRA charges instalment interest on all late or insufficient instalment payments. The CRA may also charge penalties if you make payments that are late or less than the requested amount. To learn more about who is required to make instalments and why, see our article from March 8 (Do you need to make income tax instalment payments?) Don’t forget to make the last instalment of 2019 by Dec. 15.
Making the most of charitable donations
A lot of people like to make their charitable contributions at the end of the year. While there are many ways to make these contributions, one way we would suggest looking at is an in-kind donation of securities. If you have a non-registered account then you have to look at the holdings that you have with the largest percentage gains and consider using those securities as your donation.
When you do this you will get a tax receipt for the market value of the securities donated on the day that you donate and you will not have to pay any capital gain on the security donated. This is one of our favourite strategies. If you do this, and you would like it to apply for 2019, make sure you talk to your portfolio manager well before Dec. 31 to help with processing.
Check out the Greenard Index next week as we prove more comprehensive tips on those considering charitable donations.
Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with the Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138. greenardgroup.com