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Top 10 Tax Planning Tips for Investors

Aug 17, 2007
As the end of the year approaches, it's always a good idea to consider what tax-saving initiatives you might commit to before Dec. 31 in order to ensure you get the most benefit for the 2006 tax year.

To that end, I would recommend 10 key strategies in relation to your investments that you should consider. Keep in mind that these plans should be thought out as soon as possible, since they take some planning and proactive action on your part to set up.

Tip 1. Postpone any asset sales that would result in capital gains until 2007. By doing so, you'll avoid paying income tax on any gains until you file your 2007 return in 2008. Delayed expenses are almost always a good idea.

Tip 2. Record losses on securities and stocks held outside of any registered plans. This is a significant advantage as tax laws permit the current year's losses to offset the current year's capital gains. Additionally, remaining losses can be carried back and put against capital gains in any of the preceding three years or carried forward indefinitely. It's an important point to note that in order to benefit from a tax loss in this way, you are not allowed to purchase the same security again until 31 days after the sales. And that applies to both non-registered and registered accounts.

Tip 3. Research and Invest in a resource tax shelter. Resource tax shelters allow you to deduct the full value of your investment against other income in 2006. Resource tax shelters are fully endorsed by Canada Revenue Agency, whereas many other tax shelters present the risk of being declared invalid, whether or not they have a tax number.

Tip 4. If you are considering a donation to a registered charity, give stock instead of cash. This creates an exclusive tax break. Under normal circumstances, half of a capital gain is taxed as income; under new regulations, any capital gain created by a donation of securities or stocks to a charitable organization is exempt from tax.

Tip 5. Complete an RESP contribution before the end of the year to qualify for the Canada Education Savings Grant. This grant is up to a maximum of $400 or 20 per cent of your contribution up to $2,000 for the 2006 tax year. If you are just establishing an RESP, it's important to keep in mind that you'll require a social insurance number for the child to get the grant. Obtaining a social insurance number can take several weeks to obtain.

Tip 6. If your plan is to make a spousal RRSP contribution, do it before the end of the year, as it will shorten the waiting period for withdrawal. Your spouse will be able to access the funds in 2009 without attribution to you. If you don't make the contribution until 2007, the three-year waiting period won't end until 2010.

Tip 7. If you have an RRSP and you are turning 69 in 2006, you are required to convert your RRSP into a RRIF by the end of the year. When establishing your RRIF, you can set up the withdrawal schedule on your younger spouse's age, which should minimize the mandatory withdrawals and taxable income they create in subsequent years.

Tip 8. If you are required to set up a RRIF in 2006 and you still have income from employment, you are able to make an RRSP contribution and enjoy the benefit of a tax refund the following April. The only caveat is that your contribution must be made before your RRSP ceases to exist at the end of the year. This can by somewhat difficult to do properly, since you are not meant to make contributions to you RRSP on this year's employment income until 2007. In spite of that, the penalty you will pay for over-contribution will be relatively small when measured against the income tax refund you will receive.

Tip 9. If you are past the age of 69 and still have employment income, you can still defer taxes by contributing to a spousal RRSP. This is a valid approach until the end of the year for spouses who turn 69 in the current tax year.

Tip 10. Avoid investment in mutual funds in your non-registered account prior to year-end otherwise you'll be stuck paying taxes on gains you didn't benefited from. This scenario arises because Canadian tax rules require that all capital gains within a mutual fund must be attributed to those holding the mutual fund units at year-end.

While not an exhaustive list, following even a couple of these tax planning tips will ensure you pay the lowest possible taxes possible.
About the Author
Michael Lee-Smith has been investment planning for over a decade. Learn more about strategic investments at http://www.advicebuy.info or visit Michael's personal homepage at http://www.yourwork.info/ to learn more about his experience.
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