Top Year End Financial Planning and Tax Tips for 2018

Top Year End Financial Planning and Tax Tips for 2018

The decorations are up.  The holiday marketing campaigns are in full swing.  People are becoming more edgy by the day.  Yup, the holidays are approaching fast folks!

All jokes aside I’m very much looking forward to the holidays…

While I certainly intend to enjoy some much-needed down time away from the office, I also believe it’s a great time to start thinking about ushering out some old financial habits and bringing in some new, improved practices when it comes to our personal finances.

On that note, here is my list of top year end financial planning and tax tips for 2018.

Realize capital gains or losses

In the past I’ve sold some non-registered investments during the tax year.  When I did that, I needed to calculate my capital gains or losses on any transaction.

When disposing of a security, the sale will be deemed to have taken place on the settlement date. Assuming you have a two to three-day settlement period which is common with most discount brokerages, to employ a “tax loss” selling strategy, you must make sure your transaction(s) settle no later than December 27, 2018 – preferably a bit earlier just in case.

“Superficial loss rules” will also apply to you for taxable account transactions so you need to be mindful of that.

Here is my own case study on this – I sold a dud of a stock.

Revisit asset allocation and location

While asset allocation is important (the mix of stocks, bonds, cash, real estate and other investments), I believe investors often overlook asset location – what assets should go inside what accounts to be tax efficient.

I’ve gone as far as to suggest we should rename various savings and investing accounts in Canada to make it clearer, in layman’s terms, the tax implications associated with what-you-hold where.

I suspect my suggestions will never get any traction, but I dare to dream from time to time on this site.

I would suggest year end is a great time to determine if your approach to investing is both effective and tax efficient.

I’ve written about my asset location preferences here when it comes to dividend investing and low-cost ETFs.  Your mileage may vary!

Be tax efficient in any low-income year

Related to my point above, if you expect to be in a low marginal tax bracket for 2018 (or were), and you or your spouse expect to be in a much higher marginal tax bracket in retirement, you may want to consider making an early withdrawal from your RRSP before year-end.

The advantage of this strategy is multi-fold:

  • You can avoid a higher tax rate on any RRSP withdrawn (when your marginal tax rate may be higher).
  • You can decide to take those RRSP assets, move the proceeds into your non-registered account, taking advantage of the dividend tax credit and better taxation on capital gains.
  • You can decide to take those RRSP assets, move the proceeds into your Tax Free Savings Account (TFSA), so you don’t have to pay any future tax on the income earned or capital gains realized going-forward.

There are lots of great things you can do with your TFSA – and investing in stocks and ETFs is just one of them.

Make charitable donations

Making charitable donations is a great thing to do.  We do it throughout the year.

However, if you haven’t yet made a valuable donation to one of your favourite charities in 2018, you can do so (soon!) to significantly reduce the personal tax you pay.

The final day to make contributions to a registered charity in order to claim it for the 2018 income tax return is December 31, 2018.

As an alternative to cash, I am also aware you can donate publicly listed securities in-kind to qualified charities without being subject to tax on the realized capital gain.   In doing so, you will receive a donation tax receipt equal to the fair market value of the security at the time of the donation, which can help reduce your total taxes payable. If you plan on donating securities in-kind, the transfer must take place before year-end, so definitely start that process soon if you intend to do so.  Talk to your brokerage or tax accountant about the process.

Review your insurance coverage

Every fall, I get letters from my combined home and auto insurance company to highlight new or changed premiums to be paid.  I’m not thrilled about any insurance premium increases mind you, but rates in general are always going up over time.

On a related note, our term life insurance policy does not expire for a few more years.   That’s a good thing.  I know that because I reviewed the policy this year.

Regardless if it’s home, auto or life insurance coverage I think year end is a great time check your insurance coverage – ensuring you’re getting the right coverage for your valuable buck.

Review any requirements to pay tax by instalments

If you are required to make quarterly tax instalment payments to the CRA, you should make your final payment on or before mid-December, this year and every year, to avoid late interest charges.

This might also be a great time to review any instalment payments made to date and ensure you’re up to date on any taxes owing for previous years.

Make your RRSP contributions

Don’t want a huge tax bill?  There is another solution you can employ.

You have until March 1, 2019 to make a contribution to your RRSP or a spousal RRSP in order to be able to deduct the amount on your 2018 tax year return.

The use of the RRSP is an outstanding tax deferred account to grow your wealth – make sure you know the basics associated with this account – to maximize your tax-deferred growth here.

Collapse your RRSP account

If you are turning or turned age 71 this year, you must collapse this account by December 31st in the year you turned 71.  That means, you have a few key options to collapse the account:

  • You must withdraw the funds, in full (could be a big tax hit if you do…),
  • You must transfer assets to start a RRIF, (this way you can continue your tax-deferred growth but also start some withdrawals via the mandatory RRIF schedule),
  • You must use the RRSP assets to purchase an annuity.

Of course, you can do any combination of the above but in essence, the RRSP must be collapsed and the account must be shut down.

If you are turning age 71 by December, have income for the year, and plan to convert your RRSP to a RRIF, then consider making your 2018 RRSP contribution before your RRSP is converted/collapsed.  Any extra money that can grow tax-deferred is smart.

A reminder you don’t HAVE TO WAIT until the year you turn age 71 with collapse your RRSP.  I wrote about some RRSP withdrawal strategies I intend to make in the coming decade, long before I turn age 71 here.

Make some RESP contributions

A Registered Education Savings Plan (RESP) is an outstanding way to save for a child’s or grandchild’s post-secondary education.  Your child or grandchild, as the beneficiary, can receive up to the lifetime contribution limit of $50,000 – and that’s just contribution room!

Just by making RESP contributions, you may be eligible to receive the Canada Education Savings Grant (CESG) that will match 20% of the first $2,500 in annual contributions – to a maximum grant of $500 ($2,500 x 20%) per beneficiary, per year.   That a bunch of free government money!

I would strongly consider contributing to the RESP by December 31st if you haven’t already maximized your contributions year to date.  Remember the RESP is a tax-deferred plan.  Eventually contributions within the RESP will be taxed in your child’s or grandchild’s hands, but I doubt they’ll have tax rate as you when benefits are realized from the account.

Make some TFSA contributions

The TFSA is a gift to every adult Canadian – contribute to it and use it when you can!

If you missed one of my latest posts, I raved about the new TFSA contribution room next year.

Here’s why the new $6,000 TFSA limit for 2019 is totally worth it.

As a big fan of this site, you already know how I’m using the TFSA to earn and grow my tax-free investment/retirement income stream.

Conversely, if you are thinking about making a withdrawal from your TFSA, do it soon, probably a week or so before December 31.   Why?   Canadians should know any withdrawals will allow you to recontribute the amount withdrawn as early as January 1 next year without waiting until the following year to recontribute.

Unsure about RRSP, TFSA, RRIF and other beneficiaries?

I don’t blame you, it can be very confusing stuff.

That’s why I got some experts involved to help you with identifying and naming beneficiaries for your key accounts.  That’s a great thing to do any time of year but something you can consider at year end.

I could go on and on….but that’s a fine list of stuff to keep you very busy if I do say so myself.

Hopefully these year-end financial planning and tax tips for 2018 have been helpful if you haven’t already considered them.

Now, good luck with that holiday shopping everyone.

What year-end financial planning exercises are you undertaking?  What tax tips do you employ as the CFO of your household money?

Disclosure – My Own Advisor is not a tax whiz.  I have however learned these tax practices over time and I’ve used some of them to reduce my own tax burden.  If ever in doubt about any tax strategies please consult a financial professional before making any major financial decision.

Mark Seed is the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've grown our portfolio to over $500,000 - but there's more work to do! Our next big goal is to own a $1 million investment portfolio for an early retirement. Subscribe and join the journey!

13 Responses to "Top Year End Financial Planning and Tax Tips for 2018"

  1. Ready to contribute to RRSP, TFSA and RESP. With RRSP, I might just transfer some equities in kind, and RESP, it’s coach potato. Still wondering what I should do with TFSA though. Any ideas?

    Banks look attractive right now but I am already overweight with financials.

    Reply
  2. Just a couple of points on insurance from a retired guy. Home insurance policies can be changed at any time. A lot of people think it has to be done at the policy renewal date. No it doesn’t. You get a refund from one and pay the other. No biggee. Increasing the deductible is also a great way to save money. Why have a $500 deductible when you know you are only going to make a claim for a large loss? Everyone knows that your premiums go up with a claim, so why not cut your premium by going to a $2,500 or $5,000 deductible? Also interesting to know that in my experience the $2,500 deductible seems to be the best savings value. Not much more savings going to $5,000. Finally do you really need life insurance when you are retired and the mortgage is paid off? It won’t be much of a hardship for your spouse when s/he gets 2/3rds of your pension, all of your TFSA’s, all of your RRSP’s and doesn’t have to feed or entertain you any more! Plus you can sleep better at night knowing that you aren’t worth more dead than alive.

    Reply
    1. We went from $500 to $1000 deductible a few years ago. To tell the truth I never asked if there was a higher option. It’s now on my “to do” list to check out increasing it to $2500. I cancelled all the ordinary life insurance recently and just kept the pension sponsored one. Should probably get rid of it as well.

      Reply
      1. “just kept the pension sponsored one.”

        Just checked on this. The beneficiary of both policies is deceased so I will add doing something about this to the “to do” list. Have to decide whether to outright cancel them or designate one of the endowment funds as beneficiary.

        Reply
    2. “Finally do you really need life insurance when you are retired and the mortgage is paid off?”

      Totally agree. If you have assets, a paid off home, I’m not sure it makes too much sense to have a huge life insurance policy – maybe better to self-insure? Again, everyone is different.

      Reply
    3. Randy, I found that the home insurance people love it when you phone and ask questions. Someone has actually read their policy!! I got several useful tips for reducing my premium, one that surprised me is the reduction when you are mortgage free. I had not thought about a deductible as high as $2,500, I will note that.
      Regarding life insurance…..I have this awful feeling that if I cancel either my husband’s or my policy, that within a couple of months we would get a terminal diagnosis….so if I keep our policies we will keep our health. Sounds silly, but I lost both my parents at a youngish age. How does one get over superstitions like that? The life insurance premiums keeps going down every year (policy through employer, so group rates), but the disability insurance premiums keep rising, just got the notice this week.

      Reply
  3. Good reminders and tips list Mark.

    Good suggestion Randy re deductibles. On insurance same can be said for auto insurance re deductibles and raising them to save money.

    Reply
  4. Mark, I have just prepared my form for my RRSP withdrawal. I have been doing withdrawals for five years or so, given that my income is very low. Before that my husband could deduct me as a dependant.

    One thing I learned two years ago is to move some of the RRSP into a RRIF, because there is no fee for a RRIF withdrawal and previously I was having to pay a fee for a lump sum withdrawal from the RRSP. Of course now that my money is all self-directed and no advisor involved, it is all much easier. I much prefer it this way! No one to blame for any losses except myself (or bad luck).

    BTW, I could fax in the withdrawal form, but will have to use the mail. I no longer have fax at home, because I now have Ooma phone service, which cannot accommodate fax. Thanks to you, I have already saved a lot of money by cancelling my home phone service and using Ooma instead. The system you use (can’t remember the name) wasn’t available here, but I can recommend Ooma to others.

    Reply
    1. Very true – some brokerages charge a fee for RRSP withdrawals vs. RRIF.

      Great to hear about home phone. I use Fongo but Ooma is a great choice as well. 🙂 Keep us posted on your countdown!

      Reply
    2. Barbara, do you use a discount broker? If so is it not possible to make a RRSP withdrawal without forms- a simple online DIY?

      I am in 4th year of doing this. Simple, pretty well same as transferring money between accts.

      Reply
      1. Hi RBull,
        If I wanted to, I could do a RRSP or Spousal RRSP registered withdrawal online very simply. However,I am not sure why, but this option does not come up for a RRIF withdrawal. Not sure if that is a glitch for me or intentional? These accounts are with iTrade.

        Reply
        1. Ok that makes sense now- for an RRIF. Your post mentioned RRSP so that’s why I suggested the online withdrawal.

          I have a LIF set up last year and also had to do some paperwork for that. A letter is sent out confirming the amount based on year end balance for my annual minimum withdrawal the next spring. I’m sure you get the same.

          Reply

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