December's tax deadlines
Year-end financial moves
Last Updated December 18, 2007
The end of the year means many things to Canadians — New Year's celebrations, school holidays, office parties, family visits, Christmas shopping, eggnog, turkey, Boxing Day sales and good cheer all round.
Key dates for 2007 tax year
Payments due by Dec. 31, 2007:
- Dec. 17: Final income tax instalment due.
- Dec. 24: Last day for tax-loss selling for 2007 for Canadian-listed stocks.
- Dec. 26: Last day for tax-loss selling for 2007 for U.S.-listed stocks.
- Dec. 31: Last day to contribute to RRSP (and to wind it up) for those turning 71 in 2007.
- Dec. 31: Last day to make charitable and political donations and pay medical expenses (full list below).
- Feb. 29, 2008: Last day to make RRSP contributions for 2007 tax return.
- April 30, 2008: Last day to file 2007 personal income tax return.
- Charitable gifts.
- Medical expenses.
- Union and professional dues.
- Investment counsel fees.
- Certain child and spousal support payments.
- Political contributions.
- Deductible legal fees.
- Interest on student loans.
And then there are those other seasonal responsibilities that are a lot less fun. You know, things like financial deadlines that can affect the amount of tax you end up paying this year. With that in mind, here are some tax-planning strategies and must dos that have year-end deadlines:
If you're an investor:
In the world of stocks, December is prime tax-loss selling territory. And while 2007 was a good year for some stocks, there were plenty of clunkers. For tax purposes, Dec. 24 is the last day to sell a security on a Canadian exchange and have it count as a year 2007 sale. That's because it takes three business days for most stock transactions to "settle." For U.S.-listed securities, the deadline is Dec. 26.
But before you dump your dogs, experts agree that you shouldn't sell an investment at a loss just for tax reasons.
"You really need to look at the investment itself," says Patricia Lovett-Reid of TD Asset Management. "If it's been under water for a long period of time and you don't see any hope of recovery, there's an opportunity cost by holding on to something for too long.
"We tend to hold on to our losers far longer than we should," she adds. "So if you really want to look hard at your portfolio, now's a good time to sell and have an opportunity for a capital loss in the 2007 taxation year."
Capital losses can only be written off against capital gains. Long gone are the days when you could deduct capital losses from regular income. But capital losses can be carried back three years and applied against earlier capital gains, or they can be carried forward indefinitely.
Paul Woolford, a tax partner in the enterprise group at KPMG, says a number of his clients are taking a hard look at their U.S.-dollar denominated investments this year. "There could be an inherent foreign exchange loss," he points out. That's because many U.S. investments bought earlier may now be worth a lot less once they're converted into strong Canadian dollars.
"You use the exchange rate on the date of purchase and the exchange rate on the date you sell to determine capital gain or loss for Canadian tax purposes," he says.
"If your investment is under water and you have reported a capital gain in 2007, or any of the three prior years, you may want to sell the investment before the end of the year to realize the benefit of the loss."
Tax advisors also warn people to beware of the Income Tax Act's "superficial loss" rule. If you sell a security for a loss and rebuy the same security within 30 days, the loss will not be recognized for tax purposes.
Prospective investors in some equity mutual funds (bought outside a tax-sheltered vehicle like an RRSP) may want to hold off on buying until the new year (as long as you think the fund won't soar in value in the meantime). That's because many equity funds pass along any realized capital gains or dividend income to their investors only once a year, often in mid- to late December. Buy just before that distribution and you'll pay tax on gains you didn't make (after all, you just bought the fund). Deferring the purchase until January will result in no allocated taxable income for 2007.
If you're a parent:
This year's federal budget brought in a number of enhancements to the Registered Education Savings Plan (RESP) program. For one thing, the annual $4,000 contribution limit has been eliminated. The total maximum lifetime contribution has also been raised from $42,000 to $50,000.
Improvements have also been made to the Canada Education Savings Grant (CESG). This is a tax-free grant that goes directly into your child's RESP, depending on how much you contribute to the plan. The maximum grant rises this year from $400 to $500, based on a $2,500 contribution. Also, if your family's net income is less than $74,357, the first $500 in contribution attracts higher grants. But you must make the contribution by Dec. 31 to qualify for a CESG for 2007.
To claim that grant, the child must have a social insurance number. It used to take weeks for Ottawa to issue a SIN. Not anymore. Now, any Service Canada Centre can issue a SIN for your child while you wait.
Also, be sure to pay all your child-care expenses by year's end and get receipts. Generally, you can claim up to $7,000 of your child-care costs for each child under age seven as of Dec. 31.
For children seven to 16, the maximum deduction is $4,000. Generally, the parent with the lower income claims the deductions. And don't forget that babysitters and costs for overnight summer camp qualify (although camp cost deductions can be deducted only up to $175 per week for the under-seven crowd and $100 per week for older kids). The key test is that child-care costs can be claimed only if they're incurred to earn income.
If you donate to charities:
Due to changes made in the 2006 federal budget, donating securities to a charity makes more tax sense than ever. But Lovett-Reid warns there's a strict procedure to follow to get the full tax benefit. "What you don't want to do is cash in the individual security and then give cash to the charity," she says. "What you want to do is give the security itself."
That's because any capital gains realized on securities donated after May 1, 2006, are not taxed at all. You also get a charitable receipt for the full value of the securities.
As always, you must make charitable donations prior to Dec. 31 in order to claim them on your 2007 tax return. A donation entitles donors to a two-tier tax credit. The first $200 in donations provides a 15 per cent federal tax credit (worth about 23 per cent when provincial tax reductions are factored in). Anything above $200 has a 29 per cent federal tax credit (worth about 45 per cent with provincial reductions, depending on the province). So it makes sense for a couple to pool their donations and have the higher-income spouse claim them all.
If you donate to a political party or candidate:
Federal and provincial governments offer lucrative tax credits for political donations. The federal tax credit is 75 per cent of the first $400 in donations. To have the credit applied to the 2007 tax year, the donation must be made by Dec. 31.
If you're retired (or about to retire):
This year's budget boosted the age at which you must wind up your RRSP. It used to be that the conversion had to take place by Dec. 31 of the year in which you turned 69. Now, it's 71.
That's a "good move" on the government's part, according to KPMG's Woolford. "Those turning 69 this year can now get the growth from two additional years of tax-deferred investment returns in their RRSPs," he says.
If you turned 71 this year, you have some work to do. First, make your final RRSP contribution by the end of the year, rather than the usual RRSP deadline in early March. You must also wind up your RRSP by Dec. 31. Generally, you have three choices on windup. Since a straight cash withdrawal is usually unwise (you'll pay tax on the full amount withdrawn), one option is to convert your RRSP into a Registered Retirement Income Fund (RRIF). For those looking for a steady monthly income, purchasing an annuity is also an option.
A combination of strategies is also possible to ensure a tailored retirement financial plan to meet specific needs. It's best to consult with a financial planner or accountant to determine the best option.
If you pay your taxes by quarterly instalment (as many seniors do), remember that the last instalment for the 2007 tax year is due by Dec. 17. Pay your instalments on time and you'll avoid interest charges.
And for those Canadians who spend a portion of the winter in the U.S., Woolford says they'd be well-advised to prepay their medical insurance premiums now, rather than in January or February, as some plans allow. "The deduction applies to when the expense is paid," he says.
If you're moving:
If you're planning to move to another province around the end of the year, find out if the provincial income tax rates are higher or lower than those in the province where you now live. The tax you pay for all of 2007 is based on where you live on Dec. 31. So if you're moving to Alberta, try to move there by New Year's Eve. If you're moving to a higher tax province, see if you can put off your move until January.
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