Investment portfolio mix – Because each type of investment is taxed differently, determine the optimal mix of investments in your portfolio and ensure that you are getting the best after-tax returns. Consider whether it is more beneficial to hold investments that yield eligible dividends rather than capital gains. This will depend on your marginal tax rate and province of residence.
“Eligible” dividends – Be aware that:
receipt of eligible dividends can trigger an alternative minimum tax (AMT) liability;
personal taxes on eligible dividends are increasing in 2011 and 2012 (except for 2011 in the Yukon, and Nova Scotia if Nova Scotia’s 2011 fiscal year budget is balanced and taxable income exceeds $150,000); and
for individuals in lower tax brackets, eligible dividends received could be tax-free or reduce tax on other income.
“Non-eligible” dividends received by residents of Manitoba or Prince Edward Island – Consider whether increases in personal taxes on non-eligible dividends affect your preference for earning capital gains and/or interest through a holding company (see Table 3 on page 17).
Tax-Free Savings Account (TFSA) – If you are a Canadian resident age 18 or older, contribute to a TFSA. Contributions will not be deductible, but withdrawals and income earned in the TFSA will not be taxed. In addition:
if you are planning a withdrawal from your TFSA, consider doing so before the end of 2010 instead of early 2011 – amounts withdrawn are not added to your TFSA contribution room until the beginning of the following year after the withdrawal; and
be aware that draft legislation penalizes taxpayers who use TFSAs in tax-planning schemes (e.g., income attributable to deliberate over contributions or prohibited investments is subject to a 100% tax).
Flow-through entities (FTEs) – Consider the implications of federal rules that apply starting in the 2007 taxation year for FTEs (i.e., income trusts and partnerships) first publicly traded after October 31, 2006, and beginning in the 2011 taxation year, for other publicly traded FTEs.
Stock exchange cut-off – Consult your stockbroker to determine the last day on which a sale executed through a stock exchange will be considered a 2010 transaction for tax purposes (likely December 24 for Canadian exchanges).
Interest deductibility –
If possible, pay off non-deductible debt before deductible debt (or debt for which the interest qualifies for a non- refundable credit; i.e., interest on student loans). Borrow for investment or business purposes and use cash for personal purchases that would otherwise generate interest costs.
Consider rules that limit the deductibility of investment expenses for Quebec tax purposes to the investment income earned in the taxation year. This limit does not apply to expenses incurred to earn active business income or to trusts, other than personal trusts.
Accrued capital losses –
Sell securities with accrued losses before year end to offset capital gains realized in the current or previous three years. Beware of superficial loss rules, which limit the deductibility of a loss.
Close out option contracts with inherent capital losses in 2010, rather than 2011, to shelter taxable capital gains.
Accrued capital gains – Delay selling securities or other assets with accrued gains until 2011.
Capital gains deferral – If you sell capital property in 2010, you may be able to defer tax on part of the capital gain by having the purchaser stagger payment of the proceeds. This may allow you to claim a capital gains reserve over a maximum of four years.
Mutual funds –
Delay mutual fund purchases to January 2011 or consider selling mutual funds before year end to minimize your allocation of taxable income for 2010. Be careful if you acquire a mutual fund during the year; you may be allocated income that was earned by the fund before your purchase.
If you are a non-resident investor in Canadian mutual funds, determine whether you can recover any excess Canadian withholding tax paid.
Donating securities – Consider the tax benefits of donating publicly listed securities with an accrued capital gain. See our booklet, Charitable Giving Guide for Donors.
Foreign exchange gains and losses – Consider changes in foreign exchange rates when selling foreign securities. Depreciation in the Canadian dollar relative to U.S. currency may reduce the capital loss or add to the capital gain that will be triggered on the disposal of these securities and vice versa when the Canadian dollar appreciates relative to U.S. currency.