Tax checklist

It’s hard to believe but in just a few weeks we’ll be saying good-bye to 2009. Before you get caught up with the hustle and bustle of the holiday season, take a little time to review this year-end tax checklist to see if you can save a few dollars when the time comes to file your return.

Tax-loss selling. It’s been an unusual year, to say the least. If you sold a lot of your stocks during the January – March meltdown period, you probably already have booked far more capital losses than you can use right away. On the other hand, if you were a buyer when the market was near its nadir, you may be sitting on significant unrealized capital gains or already have taken some profits.

This means it is more important than usual to review the status of your non-registered portfolio in the next few weeks to determine if you should do any selling prior to year-end. Some people who crystallized losses early in the year may want to take steps to utilize them by taking profits on positions that have increased in value. Conversely, if you have already sold some winners, you may want to dump some losers to offset those gains.

Taxes should never be the primary motivation for buying or selling a security. But if you have some stocks or mutual funds you have been thinking about selling anyway, you should decide whether it is beneficial from a tax perspective to do so before year-end.

Because of the three business day settlement period and the fact that Monday, December 28 will be a holiday (Boxing Day falls on a Saturday this year), the last day for tax-loss selling in Canada will be December 24. However, I would not advise waiting until the last minute. Although the stock exchange will be open, there may be no one around to take your order on Christmas Eve.

For U.S. stocks, the last selling day is December 28, since Boxing Day is not a holiday there. But if you are working through a Canadian broker, he or she won’t be in the office either. My advice is to complete all transactions by December 23 at the latest.

Remember that if you sell a security at a loss, you cannot repurchase it within 30 days or your tax claim will be disallowed.

Any assets in registered accounts such as RRSPs and TFSAs are not eligible for capital loss claims.

Mutual fund purchases. Every year I remind readers about this and every year I receive at least a couple of e-mails from people who didn’t pay attention and have been blindsided by a tax bill. So if you’ve read this tip before, I apologize. If you haven’t, it may save you money.

It’s this: Do not buy any equity or balanced mutual fund in a non-registered account between now and the end of December without checking first to see if the managers expect to pay out a large year-end distribution.

The reason is simple: that distribution will be taxable in your hands and the net effect will be that you’ll end up paying tax on your own principal. Here’s how it works.

Suppose you invest $1,000 in a mutual fund with a net asset value (NAV) of $10 per unit on December 10. You receive 100 units for your money. On December 18, the fund pays out a distribution of $1 per unit, or $100 in your case. You receive the cash but the fund’s NAV drops by the same amount, to $9 per unit. You are left with 100 units now worth $9 each (total $900) and $100 in cash. You have not made one cent in profit but that $100 distribution is taxable in your hands (the same applies if you took the payment in the form of additional units). This may seem unfair but it’s the way the system works. Don’t get caught!

Some mutual fund companies issue press releases in advance outlining the amount of expected distributions. Check their websites. If you can’t find any information and you want to make a purchase immediately, ask your financial advisor to contact the fund company on your behalf.

Funds that make distributions quarterly or monthly are not as great a concern as their payments are spread out. It’s the ones that make annual distributions that you need to worry about.

Charitable donations. It’s been a rough year for charities, based on all the media stories we have heard. So consider making some donations before year-end so that you can take advantage of the charitable tax credit. Your donations qualify for a 29 per cent federal tax credit after the first $200. But your payment must be received before midnight December 31 to qualify for 2009.

I have found that the easiest way to donate is on-line, using a credit card. Your receipt is usually issued within a few minutes and delivered to you by e-mail in a pdf format.

Home renovation tax credit. Time is running out to claim this lucrative tax credit which is worth up to $1,350 off your federal taxes. You have until January 31, 2010 to have a contractor complete work under the program, although eligible expenses for goods acquired before the cut-off date will qualify even if they are installed afterward.

Remember, this is a one-time tax break. Unless the government decides to extend it, renovations done after February 1 will not be eligible for a tax credit. You can find information on how to calculate the value of your tax credit here.

Tax-Free Savings Accounts. The cut-off date for 2009 contributions to a TFSA is December 31. But that’s really a meaningless date. You won’t be penalized if you miss it; your unused contribution room will simply carry forward to 2010. But one word of caution: If you had previously contributed the $5,000 maximum and then made a withdrawal, don’t top up the plan until the New Year. Otherwise, you’ll be hit with a hefty over-contribution penalty.

Registered Education Savings Plans. These also have a December 31 cut-off but in this case it does make a difference. The Canada Education Savings Grant (CESG) is worth 20 per cent of your annual contribution, to a maximum of $500 each year per student. So if you have been considering making a contribution, do it before the end of 2009.

Photo © Ethan Myerson


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