The Annual Investment Review: Part 2 - Tax Matters

The preceding post contained suggestions for an annual review and revision of investing goals, performance, savings and withdrawal rates, portfolio structure and rebalancing. This second post completes the proposed annual review by listing some ways where income taxes can enter into plans for the coming year.

Tax-related actions aim to help save on taxes in the short or long term. Actions to consider:

• RRSP catch-up contributions and loan - pull out the CRA's confirmation letter from last year's tax return to see how much RRSP room you have; if there is too much room for your cash on hand, this might be an especially favorable year to take out a loan to do the catch-up since RRSP loan rates are as low as 2.5 to 3.25% at some financial institutions. RRSP loans generally pay off if either the loan is repaid within a year or if the tax refund from the contribution is reinvested, as CanadianFinancialDIY analyzes in RRSP Loans: What to Do and Not to Do.
• Charitable donations through donation in kind of securities with capital gains, since there is no capital gains tax to pay on in-kind donations, as opposed to selling shares and having to pay tax on gains, or to using cash on which income tax has already been paid. CanadaHelps.org even provides a convenient online service to make the in-kind donation to virtually any registered charity in Canada.
• Loan to a lower income spouse for him/her to invest, due to the current low level of interest rates that CRA accepts (1% as of 4Q09 - see CRA page updated once per quarter). TaxTips.ca's Income Splitting discusses ins and outs, pros and cons.
• Create pension income by converting an RRSP into a RRIF - At age 65, if not receiving $2000 of pension income from other sources, consider converting enough of RRSP or LIRA to a RRIF to obtain the pension tax credit as TaxTips.ca describes in detail.
• TFSA contribution - another $5,000 in contribution room for has become available for all taxpayers as of January 1st (to which can be added $5,000 for 2008 if no contribution was made last year), providing another opportunity besides the RRSP for investments to grow tax-free.
  
• RRSP/LIRA Conversion to RRIF/LIF at age 71 - if this is the year you turn 71, then the conversion must take place by Dec. 31, 2010, or else nasty penalties apply, so it is good to note and plan for this at the start of the year (see TaxTips again for details).
• Fixed Income in Tax-Sheltered Accounts, Stocks in Taxable Accounts - to the extent possible when you have multiple accounts and within the target asset allocations, fixed income investments that produce primarily interest should be in TFSAs, RRSPs and other types of tax-sheltered accounts, while a taxable account should contain equity investments that create dividends and capital gains.
• RESP Contribution - the new year for investing tax-deferred money to fund higher education and to obtain the government's CESG grant of 20% on contributions up to $2500 for 2010 was January 1st. The earlier the investment is made and the grant is received the longer the funds have to grow sheltered from tax.
• RRIF & LIF Withdrawals - the dollar amount for the 2010 withdrawal minimum (for RRIFs and LIFs) and maximum amounts is set by the standard percentages applied to the year-end account balance. It helps the year's planning to see early on when year end statements are available what those amounts will be.

That's a fair amount to keep the DIY online investor busy but the effort is worth it in taking advantage of all the opportunities as early as possible and making life easier throughout the year.

Disclaimer: this post is my opinion and for information only and should not be construed as investment advice or recommendations. Nor is it to be taken as tax advice, merely information to get started. To be sure, consult an accountant.