Year End Checklist - 2020 (Investors)
Are you coming to the end of the year after unpredictable 2020 investment returns? The most common question of 2020 has been if the government will raise capital gains rates. At this point, there has been no official indication from the government that they will, but there is nothing stopping from them from doing so. Many people believe that they will raise rates because of the federal deficit while others believe they will not as there is a minority government and they do not want to be seen raising taxes during a pandemic (and that the government does not really care about debt). There is another group that thinks there may be a wealth tax or death tax implemented to cover the deficit (to appease the NDP demands), but at this point, all of this is speculation, but if you do want to trigger capital gains earlier then normally, you would not be alone.
Here are some year end tips to consider.
1. Review asset allocation in both registered and non-registered accounts. Consider holding investments intended for capital growth in non-registered accounts (to benefit from lower tax rates on capital gains and eligible dividends) and holding interest-generating investments in registered accounts.
2. Ensure that interest on investment loans and investment counseling fees for non-registered accounts is paid by December 31, 2020 to claim a deduction for 2020. Investment counseling fees for registered plans (e.g., RRSP, RRIF, TFSA, RESP, etc.) are not tax deductible.
3. Consider selling investments with unrealized losses before year-end sufficient to offset any capital gains realized in the year (or in the three previous years). Due to the “superficial loss” rule, individuals must wait 30 days after selling a share with a loss to repurchase the share.
4. Individuals may wish to delay selling investments with unrealized capital gains until 2021 unless they have capital losses to use or they fear a capital gains rate increase.
5. Consider making a TFSA contribution for 2020 (up to $6,000) and catching up on any unused TFSA contribution room from 2009 to 2019. Also consider loaning or gifting funds to family members (e.g., spouse, common-law partner or adult child) to contribute to a TFSA. TFSA contributions are not tax-deductible, but withdrawals and income earned in a TFSA are tax-free. Individuals who need to make a withdrawal from their TFSA should consider making it before the end of 2020 instead of early 2021 because withdrawn amounts are not added to TFSA contribution room until the beginning of the year following the withdrawal.
6. Consider making a prescribed-rate loan to a low-income family member (e.g., spouse, common-law partner or child) before December 31, 2020. To avoid attribution, interest must be charged on the loan at the prescribed rate, which is 1% until at least the end of 2020. The 1% interest rate remains in effect for the entire term of the loan, regardless of whether the rate increases in the future. The investment income earned on the loaned funds will be taxed in the family member’s hands as long as the accrued interest for each calendar year is paid annually by January 30 of the following year. Please consult us prior to going forward with this option.
7. Review outstanding debt to ensure that interest expense is deductible to the maximum extent possible. To be deductible for tax purposes, interest expense must relate to debt incurred to earn business or investment income (excluding capital gains).
8. Investors who own publicly-traded shares with accrued capital gains should consider donating the shares to a registered charity or foundation. Capital gains realized on gifts of publicly-traded shares are not subject to tax and the donor will receive a tax credit for the donation.
Note - Thank you to Thomson Reuters for support in developing this post