I had been up late studying for an industry exam the night before and was in no mood to be rudely awoken at 5:15 am. The familiar shrill ring of our bedside telephone stirred my sleepy brain like a lead pipe on a mirror. The voice was familiar - my darling newly-driving daughter. The announcement was also a little too familiar: "Something happened to the car. I don't know. It just started spinning. It's on the meridian near Foothills and First. I think it might still be running. I'm at work. Got to go." Click.
Although I was more than a little miffed, a colleague later pointed out that it was rather amazing that my 17 year-old girl 1) had a great job, 2) got herself up for work at 5 a.m., and 3) made it to work on time, despite the minor car accident on the way. Regardless, winter had settled in, and the -15 weather was accompanied by one of our characteristic snowstorms took another bite out of the little rust bucket.
There was really no point in fixing the little sedan. Bumped, bruised, beaten and abused, we decided to take the insurance proceeds as cash and let our girls continue to grind away the life out of the innocent little vehicle. If it was a pet, it would've been cruelty on a criminal level.
We made good use of the proceeds. There's nothing like a little cash windfall to brighten the news of an otherwise unpleasant run-in.
Speaking of unpleasant run-ins... and cash windfalls, part two of our handy year-end piece on tax planning follows.
Year-end tax and investment planning
Part two - more on capital gains and losses
Carry forward / carry back of capital losses
A capital loss must first be applied against any capital gains (including capital gain distributions from mutual funds) of the current year. However, once the capital gains of the current year have been offset the balance of the loss can be either carried back three years (to capital gains realized in 2010, 2011, or 2012) or carried forward indefinitely to offset future years' capital gains. When you apply a net capital loss back to a previous year's taxable capital gain, it will reduce your taxable income for that previous year. However, your net income, which is used to calculate certain credits and benefits, will not change. Note that this is the last year in which you can carry your losses back to 2010 and offset them against your 2010 capital gains.
Note that if you plan on triggering a capital loss in a corporation, you should speak to your accountant prior to triggering the loss as it may be advantageous to pay out the capital dividend account (CDA) balance prior to triggering the loss.
Defer realizing capital gains
Deferring a capital gain to next year is also a common tax planning strategy. As we approach the end of 2013, if you currently have unrealized capital gains you may want to consider deferring the realization of capital gains until 2014 for the following reasons:
a) Your marginal tax rate may be lower in 2014 compared to 2013;
b) Realizing capital gains at the end of this year means that any tax payable associated with the gains would have to be remitted to the Canada Revenue Agency (CRA) by April 30, 2014. Realizing capital gains at the beginning of 2014 means that any tax payable would not have to be paid until April 30, 2015 (unless you are required to make tax installments); and, c) If you have net capital losses in 2013, you can carry back those losses against previously realized capital gains in 2010, 2011 and/or 2012. However, before losses can be carried back, they must first be used to offset capital gains in the current year. Therefore, realizing capital gains at the end of 2013 would reduce the amount of capital losses you could carry back.
As always, the investment merits of deferring the sale of a security to the following year for the purpose of deferring the realization of a capital gain must be considered first before looking at the tax benefit.
Year-End Bonus Planning
Receiving a bonus prior to year-end creates additional RRSP deduction room for 2014 if you have not yet reached the maximum 2014 RRSP deduction limit.
If the bonus is paid directly to you there will be withholding taxes at source on the bonus payment. However, if your employer permits, some or all of the withholding taxes on the bonus can be avoided if it is transferred directly to an RRSP. You must have adequate unused RRSP deduction room in the year of transfer.
Note that if your bonus is deferred to 2014 the amount is deductible to the employer in the year it is declared if it is paid within 180 days of the corporation's year-end. The bonus is taxable to you as employment income in the year it is received.
This information is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy.
Mark Ryan is an advisor in Prince George with RBC Wealth Management, Dominion Securities, and can be reached at [email protected].
