At the end of each year it’s always a good idea to assess your financial situation and see how the year has gone for you financially.
Part of assessing your situation involves some basic tax planning. Depending on your circumstances, there may be a few things you can do to reduce your taxes before the end of the year.
Related: The Ways We Overpay on Taxes
Charitable Donation Super Credit
If you haven’t made any charitable donations for the year there is still some time, and now is a great time to start.
The federal government has introduced the Charitable Donation Super Credit, which means you’ll get even more money back when you make a donation.
The credit applies to first-time donors and basically gives you an extra 25% on the amount you donate.
So if you donate $600 this means you’ll get an extra $150 back when you file your taxes.
Selling Your Losing Stocks
If you have some stocks that have decreased in value during the year, you may want to consider selling them now.
Capital losses can be carried forward indefinitely, which means if you sell now for a loss you can use the losses against any capital gains you may realize in the future. Obviously, you can also you use capital losses to offset any gains made in the current year.
They can also be carried back to the 3 preceding tax years and be used against any capital gains incurred in that year.
Related: How to Fix Tax Return Errors
Timing your capital losses strategically means you can use them to offset the taxes associated with any capital gains (and reduce your tax bill).
You’ll want to be careful to avoid a superficial loss, which occurs when someone sells a stock and then buys it back within 30 days. This type of loss is not deductible for tax purposes.
Donating Your Stocks
If you don’t have the cash to make a charitable donation, no problem – you can donate shares instead.
When you donate shares the amount of the donation is determined by the market value when the transfer is made. The nice thing about donating shares is that it eliminates any potential capital gains.
Let’s say you buy 500 shares of BMO for $50 per share for a total investment of $25,000. They increase to $75 per share and are now worth $37,500. The capital gain of $12,500 that you’d normally need to realize would be eliminated and the amount of the donation would be $37,500.
Donating your stocks makes sense if you know you will be paying taxes for the current year, you want to make a donation but don’t have the available cash, or you have significant capital gains that will be realized but no offsetting capital losses.
Transferring Losses to Your Spouse
Normally for tax purposes when property is transferred from one person to another it is done at fair market value when the transfer is made.
However, capital property (ie. shares) can be transferred between spouses/common-law partners on a roll-over basis. This means an individual is able to transfer shares to their spouse as if the spouse had originally purchased the shares – the original cost gets transferred over to the spouse.
If an individual was set to realize a significant capital gain on the sale of shares but didn’t have any capital losses to offset the gain, it would make sense to transfer the shares to his/her spouse if they had some capital losses they could use to offset the gain.
Conclusion: regardless of your situation it is always a good idea to look at ways to reduce your tax bill before year-end. Using capital losses to offset any gains, donating your shares to avoid capital gains or simply making first-time donations to use the charitable donation super credit are all ideas you can use to decrease your taxes at year-end.