We can tell by the drop in temperature that the end of year is near; it’s a perfect time to consider ways to improve your tax position for the current year. Of course you will ensure you claim every tax credit available, such as your basic personal, spousal amount, child amount, tuition and textbooks; donations, etc. In addition, there is no better time than now to take the final steps to reduce your taxes even further for 2015 and set yourself up for success in 2016.
Below are 5 additional ways to reduce your tax burden:
Restructure your Portfolio
The incurring of taxes can be a huge negative effect on the performance of your portfolio if you’re investing outside of a registered retirement savings plan (RRSP), registered retirement income fund (RRIF) or tax-free savings account (TFSA). Since interest income is the most highly taxed type of income, consider holding your interest-bearing investments inside a registered plan to the extent possible. Also, consider how much in eligible dividends you’re earning. Eligible dividends provide a dividend tax credit, which can fully offset the tax owing on those dividends – and then some. Specifically, if your income is low enough (generally under or around $40,000), then the tax credit on eligible dividends might offset not only the tax owing on those dividends but might shelter other income from tax as well.
Plan your TFSA before Year-end
Setting up a TFSA should be a no-brainer. Any income earned inside the TFSA will be sheltered from tax, so consider holding your highly taxed fixed income investments there. Make this change before year-end to save tax in 2016. And if you’re thinking of making a withdrawal from your TFSA in the near-term, consider doing this before Dec. 31 since amounts withdrawn are not added to your TFSA contribution room until the calendar year following the withdrawal. So, if you make a withdrawal on or before Dec. 31, you could recontribute those dollars as early as Jan. 1, 2016, but it you wait until Jan. 1 to make the withdrawal, you won’t be able to recontribute until 2017.
Consider a Holding Company for your Portfolio
There are four common situations where investing inside a holding company makes sense:
1) Building large cash reserve inside an operation company makes it a litigation target. This can be solved by transferring out cash in the way of dividends from the operating company to holding company for investment purpose.
2) If you have a high income and want to take advantage of the slightly lower tax rates on investment income inside a corporation than you’d pay personally.
3) Funds transferred to your holding company can be used to purchase investments such as real estate, marketable securities, other business etc. Often assets purchased by the holding company can be leased back to the operation company.
4) Business owners can use a holding company like a private pension plan. The owners can accumulate funds in a holding company during high earning years, and then withdraw these funds when they are required, often in a year when they are in a lower tax bracket.
Deduct Interest on Borrowing
Interest can be deducted if it’s reasonable in amount and was incurred for the purpose of earning income from a business or property (including your portfolio). Consider paying off your high-rate non-deductible interest first, use cash for personal purchases (rather than debt) and borrow for business or investment purposes if you’re going to borrow at all. Also, consider using existing cash or selling securities to raise the cash to pay off non-deductible debt. Then, reborrow to re-invest if you’d like. The interest should be deductible since you’ll be borrowing to earn income. Set this up today for some tax savings this year, and into the future.
Donate Securities to Charity
If you have a desire to donate to charity before year-end, you’ll save more tax by donating securities that have appreciated in value than donating cash or selling the securities to donate cash. The reason? Any capital gain triggered when you directly donate securities is eliminated under tax law, and you’ll receive a donation tax credit to boot. If you don’t have securities with accrued gains, you can donate your losers as well; you’ll be entitled to claim the capital loss and a donation tax credit for the value.
Tax planning should be done periodically throughout the year to maximize your portfolio. Seeking a competent tax and financial professional that will take the time to address any tax saving opportunities is always the best step.