Dec. 31 is fast approaching. For investors, that means topping up RESP plans, considering charitable giving, reviewing investment portfolios for tax loss-selling opportunities and TFSA planning.
Registered Education Savings Plans (RESP’s) enable you to make contributions now towards the future cost of a child’s education. Unlike RRSP’s, contributions to an RESP are not tax deductible. However, investments made within the plans grow tax free until withdrawn. The federal government provides a Canada Education Savings Grant (CESG) of 20 per cent on the first $2,500 of annual RESP contributions per child, which can add up to $7,200 to an RESP during the child’s lifetime. A $2,500 contribution to an RESP by Dec. 31 will generate a $500 CESG to the RESP, usually by the following month.
Dec. 31 is the last day to make a charitable donation and obtain a tax receipt for 2012. Investors should consider donating securities in kind. Normally, when a security is sold, half of the realized capital gain is included in the investor’s income in that year. By making a charitable donation of these securities in kind, you are not responsible for paying tax on the capital gains generated on the security and you will receive a tax credit for the fair market value of the securities donated.
Tax loss selling involves selling a security, which is down in value, in order to capture the loss for tax purposes. Once a capital loss is triggered, you must first apply it against capital gains realized in the current year. Any remaining losses may be applied against gains realized in the previous three years or against gains realized indefinitely in the future. You may purchase the sold security back after 30 days without losing the capital loss eligibility. This year’s tax loss selling deadline is Dec. 24.
The federal government has allowed investors to contribute up to $5,000 per year into Tax Free Savings Accounts over the past four years. The contributions are not tax deductible, but the investments do grow within the plans tax free, and may be withdrawn tax free. Money withdrawn may be re-contributed after Jan. 1 of the following year. Based on that, if you are considering making a TFSA withdrawal soon, consider doing it before Dec. 31, so that you may re-contribute any time after Jan. 1, 2013. Incidentally, the TFSA contribution limit increases to $5,500 on Jan. 1, 2013.
If you need further information on any of the above points, I may be reached at 679-3443 or at email@example.com.
The views of the author do not necessarily reflect those of Raymond James. This article is for information only. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. Raymond James Ltd. Member-Canadian Investor Protection Fund.