Tax Planning - Top 10 year-end tax planning tips for investors

There are several important tax-saving initiatives that must be carried out before Dec. 31 in order to get the benefit for the 2006 tax year.

Here are 10 in the investment area that need to be considered as soon as possible since they may take some planning and possibly a visit to your tax accountant.

1. Invest in a resource tax shelter, which will allow you to deduct your full investment against other income in 2006. If you have a 46 per cent marginal tax rate, a $10,000 investment would cost only about $5,400 after tax, although the investment would be tied up for a couple of years until the tax shelter is converted into mutual fund units. Resource tax shelters have been around for decades and are sanctioned by Canada Revenue Agency, whereas most other shelters carry the risk of being declared invalid even if they have a tax number.
2. Donate stock instead of cash to a charity to get a special tax break. Normally, half of a capital gain is taxed as income, but under new rules, a capital gain triggered by a donation of securities or mutual fund units to a charity is exempt from tax.
3. Defer any sales of assets that would yield capital gains until 2007. That way, you will not have to pay income tax on the gains until you file the 2007 return in 2008.
4. Book losses on stocks and other securities held outside of registered plans. Tax rules allow this year's losses to offset this year's capital gains and any remaining losses can be carried back and applied against any capital gains in the preceding three years or carried forward indefinitely. Investors should keep in mind that to get the tax loss, they can't buy the same security again, either in non-registered or registered accounts, until 31 days after the sale.
5. Make an RESP contribution before year-end to get the Canada Education Savings Grant (maximum of $400 or 20 per cent of your contribution up to $2,000) for 2006. If you are just setting up a RESP, keep in mind that you will need a social insurance number for the child to get the grant and this could take several weeks to obtain.
6. If you are planning on making a spousal RRSP contribution, do it before Dec. 31. Contributions made before year-end instead of in January or February will reduce the withdrawal waiting period. The spouse will be able to withdraw the funds in 2009 without attribution to you. If you wait to make the contribution in 2007, the three-year waiting period won't end until 2010.
7. If you are turning 69 in 2006, you have to convert your RRSP into a RRIF by year-end. When setting up the RRIF, you can base the withdrawal schedule on the younger spouse's age, thereby minimizing the withdrawals and the taxable income they generate in future years.
8. If you must set up a RRIF in 2006 and if you also have employment income, you can still make an RRSP contribution and get a tax refund next April. The contribution has to be made before your RRSP ceases to exist at year-end and it is technically tricky to do, since you are not supposed to make RRSP contributions on this year's employment income until 2007. However, the over-contribution penalty you will pay for a short time will be small compared with the income tax refund you will receive.
9. If you are past the age of 69 and still have employment income, contributing to a spousal RRSP (which must be done before year-end for spouses who turn 69 this year) is another way to defer taxes.
10. Avoid investment in mutual funds in your non-registered account prior to year-end in order to avoid being stuck paying taxes on gains you haven't benefited from. This unfortunate situation arises because Canadian tax rules provide that all capital gains taken within a mutual fund during 2006 will be attributed to those holding the mutual fund units at year-end.
    

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at www.smartinvesting.ca and he can be contacted at wcheveldayoff@yahoo.ca.