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4 Things You Can Do Right Now to Set Yourself up for Financial Success in 2016
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It’s getting kinda late to set up financial strategies that will have a tax-saving or other impact for 2015, but it’s definitely not too late to set yourself up to start 2016 on the right foot. There are a number of things you can look to before the year is out, including deductible payments, tax-loss selling, portfolio rebalancing, and RRSP maturity options. Here are four things you can do before the new year to get ready for a fresh, financially savvy start to 2016.

1. Deductible payments

A number of payments that you can make before year-end will give you a tax benefit for 2015. These include charitable donations and investment-related expenses used to earn income, like interest payments on money borrowed for investment purposes, investment counselling fees, even safe-deposit box rental fees.

Also, you can make any necessary medical or dental payments for items not covered by provincial health plans. These include such things as glasses, prescription drugs, and hearing aids. Pay before year-end and you can add them to your medical expense deduction for the year.

2. Tax-loss selling

If you’ve lost money on investment assets in your portfolio, consider selling before year-end if you wish to use losses to offset any gains you might have made earlier in the year on other investments. To qualify for a 2015 tax loss, the settlement of the transaction must take place in 2015.

Because it takes three business days to settle a transaction, the last possible day to sell securities to be eligible for a capital loss for the 2015 tax year is Dec. 24 for settlement by Dec. 31, 2015. (This year, Canadian markets are closed Dec. 25 to Dec. 28 inclusive.) For U.S. exchange-traded stocks, different rules apply, and you may have another day’s leeway. But check with your broker or advisor now, while you still have time, to be absolutely sure you can meet the various transaction deadlines.

3. Rebalance portfolios

Throughout the year, as markets fluctuate, assets in your portfolio will gain or lose value, and by the end of the year may have skewed your asset weightings. Perhaps a 50/50 fixed-income/equity split in your balanced portfolio at the start of the year has become a 40/60 split or even a 30/70 fixed-income/equity split at the end of the year. The net effect is that your overall portfolio risk has grown considerably, because your portfolio is now overweighted to stocks, which are considered riskier than fixed-income. If left unattended, this can have a serious impact on your portfolio performance during the next bout of stock market volatility.

So year-end is a great time to review your asset weightings with your advisor, with a view to normalizing allocations and diversification. Trim or switch where necessary, using capital losses to offset gains where available. Don’t forget to apply any unused losses carried forward from previous years.

4. RRSP maturity options

You must collapse your RRSP by the end of the year in which you turn 71. If you haven’t already done so, there are only a couple of weeks left to make some key decisions about the disposition of your RRSP. And you have three choices for what to do with the funds. You can take the entire amount into income (not very tax-effective if the RRSP is one of those big million-dollar ones), purchase an annuity, or convert your RRSP into a Registered Retirement Income Fund (RRIF). Or, what most people in your situation do is to build some combination of these choices to maximize income, security, and tax efficiency.

  • The RRIF alternative. This is a popular choice for many RRSP holders, because a RRIF is much like an RRSP in that investments in the plan continue to grow sheltered from tax. However, you must withdraw a minimum amount from the RRIF every year. That income then becomes taxable at your top marginal rate in the year of withdrawal. The annual minimum withdrawal is calculated by multiplying the market value of your RRSP account on December 31 of the previous year by a percentage pre-set by the government.
  • An annuity contract is designed to provide a guaranteed income stream. Putting it very simply, when you purchase an annuity, you essentially buy an insurance contract under which the issuing company invests the lump sum you provide and guarantees a regular payout over the life of the annuity contract. There are several types of annuities, and these can be complex products. It’s important to understand how interest rates and other factors affect how much income you will receive.
  • ‘Pensionizing’ retirement income can be done with an insurance product that offers a guaranteed income withdrawal feature. This product is similar to an annuity in that it guarantees a specific regular monthly, quarterly, or annual payment until you pass away. But unlike an annuity, you can take the “cash surrender value” if your situation changes dramatically (but this is not recommended). If you’re looking to make last-minute year-end planning decisions that involve larger assets or investments, or decisions that may lock you into contracts like annuities, definitely get the advice of a qualified financial professional first.
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5 tax breaks you may not know about
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Now that tax season is underway, it’s time to look over your financial records from last year and determine your options for reducing your tax liability. You should pay what you owe, of course, but why pay more than you need to?

We’ve also just passed the season for that well-known Canadian tax deduction: the registered retirement savings plan (RRSP). In the first two months of the year, many Canadians rush to their financial advisors or banks to put money into their RRSPs to get a tax deduction for the previous tax year.

There’s no doubt: Contributing to an RRSP is a great way to lower your tax bill. But the tax code is large, and you might not be aware of all the other options you may have to pay less income tax. This year, go beyond the common tax breaks you know and consider some of the others you might be eligible for.

Children’s arts amount (Line 370)
If you pay for your children to be involved in developmental, cultural, or artistic activities, you might be eligible for a tax credit. According to Mike Oseen, Senior Tax Manager at Grant Thornton LLP, this tax credit means effectively 15% of the activity fee is treated as tax paid.

For the children’s arts amount, you can take a credit of up to $500 per child for the cost of registration or membership in the activity. This applies to your spouse’s child, or your common-law partner’s child, as well as your own.

Children’s fitness amount (Line 365)
Not only are you encouraged to boost your children’s achievements in the arts, but you are also encouraged to help your child live healthier. The children’s fitness amount is a tax credit that applies to fees paid for participation in sports or some physical activity. Once again, you can claim up to $500 per child, for your child or your partner’s child.

Home-buyers’ amount (line 369)
Did you buy a home last year? If so, you might be eligible to claim up to $5,000 as a tax credit. To do so, you have to meet both the following conditions:

  1. The home you bought qualifies for the credit. (Find out if you have a qualifying home.)
  2. You didn’t live in another home you or your partner (spouse or common-law) owned last year or in any of the four preceding years.

The idea is to encourage first-time home buyers. If you have a disability, though, you don’t have to be a first-time buyer. (See persons with disabilities.)

Public transit amount (line 364)
Your efforts to be a little greener as you get to work can result in another tax advantage. If you buy monthly or annual passes for travel within Canada on qualified public transit, you can get a tax credit for what you spent last year.

Moving expenses (line 219)
Did you move to be closer to work? If so, you might be able to get a tax break for your expenses. You could be eligible for this advantage if one of the following applies to you:

  • You moved to be closer to your employer
  • You moved to carry on a business at a new location
  • You moved to study as a full-time student at a qualified post-secondary institution

You do have to move at least 40 kilometres closer to your new workplace (either a different location of your current employer or a new employer) or school to qualify, though. Eligible moving expenses include packing and moving your household goods, the cost of selling your old home, and utility hook-ups and disconnections.

Moving expenses are a little different from the other breaks mentioned in that they are a tax deduction as opposed to a tax credit (they reduce the amount of income you pay tax on, whereas a tax credit reduces the amount of tax you owe).

Consider your situation and think about what you spent last year. Check with the Canada Revenue Agency or a trusted tax preparer if you aren’t sure if you are eligible for these tax breaks.

More tax-time tips:

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Original source: Five tax breaks you may not know about, written by Jim Yih for © Sun Life Assurance Company of Canada, 2013.

Comments | Tagged under advice, money, taxes
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