7 quick actions you can take before year-end to improve your financial health next year.
Summary
Over the course of the year, we send out dozens of financial tips designed to help you improve your financial situation.
Sometimes, these are time-sensitive and this is never truer than at the end of the calendar year.
Many financial products and programs have December 31 as their deadline so it’s important to be aware of these if you wish to take advantage of them.
Below, you’ll find 7 key financial actions you can take this month to finish off your year financially strong and set yourself up for an even healthier 2022.
1. Make a final RRSP contribution at age 71
If you turned 71 in 2021 and have not yet converted your RRSP into a RRIF (Registered Retirement Income Fund), you still have time to make one final contribution. This can be done even if you do not have contribution room but have an income this year that generated contribution room for next year.
If you know your available RRSP contribution room or how much room your 2021 income created for next year, you can contribute that amount now. You would not want to exceed your 2022 contribution room because your over-contribution for 2021 would be eliminated come January 1 and any excess (greater than $2000) would incur a penalty.
You can also contribute to a spousal RRSP before December 31 and the RRIF conversion deadline.
Here’s a Balance Financial case study showing how this strategy can work for you.
2. Make a withdrawal from your TFSA
The additional Tax-Free Savings Accounts (TFSA) contribution room for 2022 was announced last month and it will remain at $6000. Come January 1, 2022, Canadians who were 18 or over in 2009 would have up to $81,500 in total contribution room since the TFSA was introduced.
One unique feature of the TFSA contribution room is the benefit of recapturing withdrawals from the plan. In other words, if you make a withdrawal in one year, you’re eligible to re-contribute that exact dollar amount the following calendar year, even if you have no other TFSA contribution room available.
Therefore, it makes sense to make a withdrawal from your TFSA in December instead of early the following year, provided you will need the money, you will need it soon, and you expect to be able to replace it in the year following the withdrawal. That way, the money is back in the plan and growing as early as possible.
3. Realize capital losses (or gains)
If you own property outside of a registered investment account, it may make sense to consider realizing either a capital loss or a capital gain before the end of the year.
A capital loss is when you sell an asset below its adjusted cost base (ACB, or book value); a capital gain occurs when the asset is sold above its ACB.
Capital losses may be carried forward indefinitely and used to offset a future capital gain. This would reduce the income taxes payable on that gain down the road. This is called tax-loss selling, or tax-loss harvesting. Since the asset may not remain in a loss position, it may be beneficial to sell it while it is. If you’re selling securities, other securities could be purchased to replace the ones that were sold.
Since capital gains are taxed when an asset is sold and that tax is based on your marginal tax rate (MTR), it may make sense to sell an asset when your taxable income is low. If your taxable income in 2021 is lower than you expect it to be next year or in future years, selling an asset today may result in lower capital gains taxes on an asset that has appreciated in value.
Assets that sell at capital losses or gains include non-registered investments, income properties, personal use properties (e.g. cottage), and other real property, among others.
4. Make RESP contributions and withdrawals
Registered Education Savings Plans (RESP) are one of the most financially effective ways for Canadians to save for a child’s post-secondary studies. One of the most beneficial features of RESPs is the Canada Education Savings Grant (CESG) and the Canada Learning Bond.
The CESG allows for an additional contribution to the plan by the Federal Government totalling 20% of the plan owner’s contributions, up to $500 per calendar year (and a lifetime maximum of $7200). While this grant room can carry forward from one year to the next (with some restrictions), only two years’ of CESG may be paid in any one year. That means, if you delay too often, you may lose out on this generous benefit. So try to contribute as much as you can each year so you can make use of the CESG as much as possible.
Withdrawals may also be wise before the end of the year. Withdrawals come in different forms. During the child’s studies, the most common withdrawals are Education Assistance Payments (EAP) and a refund of contributions (called post-secondary education contributions withdrawal, or PSE). Contributions and income may also be withdrawn if the child is not pursuing or has completed post-secondary education.
EAP withdrawals are taxed in the hands of the student and are added to the student’s taxable income. If the student’s income is lower this year than next, it may be a good idea to withdraw additional funds this year so the student pays less tax or no tax at all.
Here’s a great Balance Financial look at tax-efficient RESP withdrawal strategies.
5. Holiday budget
No one enjoys making and following a budget. It’s inconvenient, for one, and we don’t like to accept that our financial situation is one that requires monitoring and caution.
Yet, a budget is not intended only for those who need to watch what they spend. Everyone would benefit from a budget, especially for the Holidays.
During the Holidays, whether you celebrate or not, we tend to spend more than at other times during the year. We entertain, we go out, we travel, and, of course, we spend money on others.
To keep you within your means or simply to avoid spending too much, allocating a certain amount for various activities can let you enjoy the Holidays without the added stress finances sometimes cause.
6. DSC 10% fee-free
At one time, deferred sales charges (DSC) were a common sales fee structure on mutual funds and segregated funds in Canada. These back-end loads entailed a redemption fee when a unitholder withdrew money from a fund unit that was subject to DSCs. This can restrict fund to fund movement within the same account, transferring money to other institutions, or withdrawing money from the account.
The fee schedule could last as long as seven years. So, even if you purchased the DSC fund several years ago, your money may still be subject to redemption fees. To help accelerate the move from DSC fund units to fee-free fund units, fund companies and dealers allow unitholders to convert up to 10% of the units subject to DSCs into fee-free units of the same fund each year. If this privilege is not exercised by December 31, the unitholder loses that year’s privilege.
7. Prepare for tax season
Got time to kill this Holiday season? Looking for a fun activity to fill your down time? There’s no better time than right now to prepare for the upcoming tax season. Here’s a list of actions you can take before December 31 so you’re prepared to file your 2021 taxes next spring:
- Collect all receipts for deductible expenses, including donations – and don’t forget home office receipts this year!
- Gather whatever slips are already available, such as education/tuition slips
- Calculate percentage of home and vehicle use for work
- Organize income and expenses for rental properties
- Dig our last year’s T1 General Tax Return and Notice of Assessment
- Find documentation on investment capital gains or losses incurred
- Calculate Home Buyers’ Plan and Lifelong Learning Plan repayment amounts made and owed
For more information, please contact Balance Financial.
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