Personal Tax Strategy

Cut your taxes and save your money

As the first decade of the new century draws to a close, it's an ideal time to run through a financial checklist that can help you save your money and grow your investments. To give you a head start, we've put together a list of things you should consider doing before 2010 comes to a close. "It's important to take the time to talk to a financial advisor about year-end tax planning," says Carol Bezaire, Vice-President, Tax and Estate Planning. "If you don't, you may end up paying more tax than you have to."

Contribute to a tax-free savings account (TFSA)

You can invest up to $5,000 a year in your TFSA, and on January 1, 2011 Canadian taxpayers who have not contributed previously will have $15,000 in contribution room. Remember, all investment income earned and any withdrawals made from a TFSA are tax-free.

Also, if you plan to make a withdrawal from your TFSA, do so in December. If you have maxed out your contribution room for the year, you can still replace your TFSA amount in 2011 if you have the money to do so. If you wait until January to withdraw, you won't be able to repay until 2012.

Don't forget about your RRSP contribution

RRSP contributions must be made by the end of the first 60 days of 2011. The RRSP contribution deadline is March 1st, 2011 and the RRSP contribution limit for 2010 is $22,000.

Check your Notice of Assessment from Revenue Canada to determine how much contribution room you have. And contribute early, so you can maximize returns.

Don't ignore your unused RRSP contribution room

If you have contributed less than the maximum permitted in prior years to your RRSP, you should have unused RRSP contribution room carried forward to 2010. To get your RRSP working harder, consider topping it up. If you're short on cash you may want to consider borrowing to make your RRSP contribution and repay the loan with your refund. Or you can transfer mutual funds and other securities to your RRSP. But before you do, talk to your financial advisor about ways you can maximize your RRSP contribution room.

Are you turning 71 this year?

If you will be 71 by the end of 2010, you must convert your RRSP to a RRIF and begin drawing an income from your RRIF. Consider basing the minimum RRIF withdrawal on the age of the younger spouse. This will keep your required annual RRIF income as low as possible and allow you to keep more in your RRIF by deferring the taxes on it.

Contribute to an RESP

There are important benefits associated with RESPs that you should take advantage of before year-end. Contributions to an RESP entitle you to a grant, known as the Canada Education Savings Grant (CESG) of up to $500 per year, or $1000 if there is unused grant room because of contributions of less than the maximum CESG-eligible contributions from previous years. Consider contributing at least $2,500 to an RESP by year-end to receive the maximum CESG for 2010. You may want to contribute more if you have unused grant room from previous years.

If you haven't started an RESP for your growing children it may not be too late to maximize the CESG. In fact, if your child is age 10 or younger, you still have the opportunity to maximize the CESG. Also, if your child is age 15 and you have never started an RESP, consider contributing at least $2,000 by year-end. A child is not eligible to receive any CESG at age 16 or 17, regardless of whether RESP contributions are made in those years. Speak to your financial advisor about obtaining as much grant as possible for your RESP.

Delay HBP withdrawals until after year-end

The Home Buyer's Plan (HBP) is a great way to help fund a down payment for a home. However, there are some tricky rules that can be handled more easily if you delay your withdrawal until after year-end. Specifically, you must purchase a qualifying home by October 1st of the year following the withdrawal, all withdrawals must be made in the same calendar year and repayments begin two years following the year of withdrawal.

Delaying your withdrawal until after year-end allows you more time to purchase a home, make more withdrawals under the plan and extend the time before which you must begin repaying funds to your RRSP.

Take advantage of the new tax credits

A variety of new non-refundable tax credits have been introduced recently, including the Child Fitness Tax Credit and the Public Transit Tax Credit. The Child Fitness Tax Credit is available to parents of children under the age of 16 who are registered in an eligible program of physical activity, to a limit of $500 per child.

The Public Transit Tax Credit is a credit for the cost of buying a monthly (or longer duration) pass for commuting on buses, streetcars, subways, commuter trains and local ferries. Unlike other non-refundable tax credits, you will need to provide original copies of receipts to claim either of these tax credits, therefore be sure to obtain all receipts for eligible expenses in 2010.

Defer your bonus

This is the time of year in which many employees receive bonuses for exceptional work. Consider speaking with the employer about delaying payment of the bonus until after year-end. Delaying your bonus by one month allows you to defer the resulting tax bill to April 2012, a full 16 months to when you have to file your 2011 tax return.

For a complete list of year-end tax planning suggestions click here.