Planning for the Creeping Tax Liability in your RRSP

I am back. I needed a hiatus to deal with various administrative issues relating to the blog, including having the blog suddenly disappear into the ether for a couple days. I believe everything is now sorted out and I am ready to resume blogging.

In January, I wrote a post titled RRSPs and Corporations – Your Silent Creeping Tax Liability. The blog noted that whether you are currently working, near retirement or in retirement, you  have silent creeping tax liabilities accumulating in your Registered Retirement Savings Plan ("RRSP") and/or corporation.

I received very positive feedback on this post and several readers asked me to follow up with some potential planning to mitigate these “creeping” taxes. Today, I will do just that in relation to planning for the tax liability of RRSPs (also some planning not directly related to your RRSP tax liability). Later next month I will follow-up with some planning in respect of corporations “creeping” tax liability. While most of the potential planning considerations relate to those close to or in retirement, there are some considerations for you “young-ins”.

RRSPs

Spousal RRSPs

As a quick refresher, spousal RRSPs are contributions typically made by the higher income spouse (contributor) based on their RRSP contribution room (not their spouses), on behalf of their lower income spouse (known as the annuitant). A spousal RRSP made by the higher income spouse will generate the maximum tax refund to the family unit.

Conceptually, by utilizing a spousal RRSP, retirement funds effectively move from a spouse that will be highly taxed in retirement to a spouse that will be taxed at a lower rate in retirement.

It should be noted,that if the annuitant spouse withdraws funds from their spousal RRSP within at least 3 years of a contribution, there is an attribution rule that will require the withdrawal to be added to the contributing spouse’s income in the year of the withdrawal (i.e. – if you made a spousal RRSP contribution in January 2020, your spouse must wait until 2023 before they make a RRSP withdrawal, or else the withdrawal is taxed in your hands). This rule seems to confuse many people; the CRA provides a good example of how this rule works here.

With the introduction of pension income-splitting in 2007, which allows you to transfer up to 50% of your pension income (including RPP, RRSP, RRIF and annuity income amongst other income types) to your spouse or common-law partner, by completing form T1032, many people assume spousal RRSPs have gone the way of the Dodo bird. However, this is not entirely true.

For example, in pre-retirement years, it may be prudent for a low-income spouse to withdraw funds from their spousal RRSP (as long as they do not breach the 3-year rule noted above) if they expect their marginal tax rate in retirement to be higher. This provides maximum planning flexibility. In determining whether the marginal income tax rate savings are worthwhile, you will need to consider the time value of money and inflation versus the actual tax savings.

A further benefit of a spousal RRSP is that a lower income spouse will receive 100% of the funds from their spousal RRSP/RRIF and be eligible to split their spouses RRSP/RRIF. If you do not utilize a spousal RRSP, only 50% of the higher income spouse’s RRSP/RRIF could be split. The spousal RRSP thus provides the maximum income splitting flexibility in retirement.

Your RRSP

Similar to a spousal RRSP, it may be beneficial to withdraw funds from your own RRSP in a low income year (say a poor commission year). Or more likely, in the years between retirement and when you have to convert your RRSP to a RRIF (by December 31st of the year you turn 71) if your income is lower and you expect a higher marginal tax rate in retirement.

Prescribed Rate Loan

Where one spouse has significant non-registered assets and pays tax at a high or the highest marginal tax rate and the other spouse has a low marginal tax rate with minimal assets or taxable income, consideration should be given to a prescribed rate loan. See this blog post on the topic. The current prescribed rate is 1% until June 30th, but the rate will very likely increase in the third quarter.

While this tax planning technically has nothing to do with a RRSP, it may reduce the taxable income of the higher spouse such that some of their RRSP/RRIF income is taxed at a lower rate.

Pension Credit

If you are between the ages of 65 and 71 with no pension income, you may wish to consider converting a portion of your RRSP into a RRIF and drawing $2,000 per year from the RRIF. This will allow you to claim the $2,000 pension income tax credit. If you do this, you may want to just transfer $14,000 at the outset and take $2,000 per year from age 65-71.

Old Age Security

To the extent you may draw your RRSP down in your early 60’s or take the minimum RRIF amount in your early 70’s, always ensure your planning considers the OAS clawback. The clawback for 2021 starts at $79,845 of net income ($81,761 for 2022). Once the $79,845 limit is exceeded, you will have to repay 15% of the excess over this amount, to a maximum of the total amount of OAS received which is reached at $129,581 of net income.

Tax Efficient Investing

I wrote on this topic in 2017, here are the links to my two blog posts, Part One and Part Two. These posts discuss which type of account (non-registered, registered, TFSA) is the most tax advantageous to hold investments and maximize returns. Investing efficiently may in some cases reduce your ultimate RRSP and thus your “creeping” tax liability, because you increase other more tax efficient sources of income than your RRSP.

Withdrawal Ordering Methodology

While the methodology of your retirement withdrawals will not directly affect your creeping RRSP tax liability, it is part and parcel of minimizing your overall tax burden in retirement.

Fixed Amounts  

You, your financial planner, or accountant can generally project what income sources will be included in your income each year in retirement. Those will include CPP, OAS and the minimum RRIF withdrawal amounts and non-registered account interest and dividends and possibly rental income etc. There may be other amounts, but these are the standard income sources. From these amounts you can determine an initial projected pension splitting amount. Once you do this, you will know how much income you will have to cover your yearly cash withdrawal requirements and what your marginal tax rate will be approximately. You then need to plan the most tax effective way to cover any retirement cash shortfalls with other accounts such as non-registered accounts, excess RRIF withdrawals and TFSAs in the most tax effective manner.

Ordering

So, what is the best ordering methodology? Depends on whom you ask.

Some people suggest that the best way to make withdrawals in pre-retirement and retirement is to take money from the least flexible and least tax efficient source first. This methodology would typically result in you first drawing from your RRSP/RRIF, then your non-registered account and then your TFSA. A somewhat similar suggestion is that you take money from accounts with the highest tax liability at the lowest possible marginal tax rate. Others suggest you keep your RRSP intact and defer the tax as long as possible. Then there are other financial experts who suggest you keep your TFSA intact to provide the utmost in tax-free withdrawal flexibility. Finally, in a recent Globe and Mail article by Frederick Vettese (it is behind a firewall for Globe subscribers only), he suggested it may be best to drawdown from multiple sources rather than trying to keep your RRSP intact (to defer tax) as long as possible.

What these various opinions prove, is that there is not a one size fits all methodology and each person needs to review their circumstances and run various scenarios (with your financial planner or accountant if you have one) to find what is the correct methodology for you.

Looking out at the Grim Reaper – Taxes on Death

The above planning may need to be tweaked when you consider the taxes due on your death. Typically, when the last spouse dies and the balance of their RRIF and the deemed gains on their investments are taxed, it leaves their estate in the highest marginal rate or at a much higher rate than prior to their passing. 

Tim Cestnick in another Globe and Mail article (again behind a firewall) suggests it may be more advantageous to bring in more RRIF income (and contribute the excess RRIF income less taxes to your TFSA) over many years at a lower rate, than to defer the tax on your RRIF to your death at the highest or higher marginal rate. Again, you need to review your own particular circumstances (the time value of money will require the tax savings to be large enough to make this worthwhile), but this is something that should be considered.

Much of the planning I discuss above unfortunately requires significant number crunching to achieve the optimal results. This planning can be complicated and requires a huge time commitment. I suggest engaging a financial planner or your accountant to prepare a plan for your retirement, it will be typically money well spent.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Taking a Hiatus

Due to several technical and administrative issues, I am placing the blog on hiatus.

I truly appreciate the loyalty of my readers and hope to resolve and clarify these issues over the next month or two, so that my hiatus is short-term and not permanent. I appreciate your patience.

Estate Planning Missteps -Observations from a Grizzled Accountant

On Friday, Canadian Family Offices.com published the first of a two part-series I wrote titled, "Three big estate-planning missteps, from a long-time accountant". Canadian Family Offices is a new resource for high-net-worth people and the family offices and advisors who manage their finances.

While the target audience of this series includes families that have their own family or multi-family office and high-net-worth individuals, the discussion is applicable, at least in part, to anyone whether your estate is $100,000 or $100,000,000.

The article can be found here. 

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

2021 Financial Clean-up and 2022 Tune-up

In prior years, my last post of the year was typically about undertaking a "financial clean-up" as a vital component to maintain your financial health. This year, I am combining a 2021 clean-up with a 2022 financial tune-up.

For each financial topic or issue below, I will discuss what you should do to clean-up for 2021 and get ready for 2022 so your finances and taxes will be in order. 

 

Yearly Spending Summary  

 

2021 Clean-up

I use Quicken to reconcile my bank and track my spending. A couple weeks ago I printed out a summary of my 2021 spending by category for the year. This exercise usually provides some eye opening and sometimes depressing data. However, the information is invaluable. It provides the basis for yearly budgeting, income tax information (see below), and among other uses, it provides a starting point for determining your cash requirements in retirement. As someone who retired at the end of 2021, I reviewed this data to determine what expenses could be reduced or cut-out in retirement and what my ongoing costs would approximate. Unfortunately, it appears many of my costs will likely remain constant in my early retirement years other than some disability insurance I decided not to renew.

 

2022 Tune-up

 

During my career, I often discussed financial, retirement and estate planning with my clients. One of the questions I typically asked for these planning exercises (especially for those whose spending was excessive), was what was the breakdown of their monthly costs? I would say in at least 60% of the cases, people had little idea of their actual spending and when they undertook the exercise they were surprised at the quantum of their actual spending. If you are one of those people, I strongly suggest you buy a software program that lets you download your bank data (so it limits your time tracking your spending) or create a detailed excel spreadsheet with expense categories down the vertical axis and the month across the horizontal axis. Then fill in the spreadsheet at each month end. 

 

By undertaking this expense tracking for 2022, you will be able to budget, plan short-term and project your retirement spending if you are nearing retirement.   

Portfolio Review

2021 Clean-up

 
January is a great time to review your investment portfolio and annual rate of return (also your 3, 5 and 10 year returns if applicable). The million-dollar question is how your portfolio and/or advisor/investment manager did in comparison to your investment policy and appropriate benchmarks such as the S&P 500, TSX Composite, an international index and a bond index. This exercise is not necessarily easy (although many advisors and almost all investment managers provide benchmarks, they measure their returns against). The Internet has many model portfolio's you can use to create your own benchmark if you are a do-it-yourself investor.

While 2021 was another strong year in the markets, I would not skip reviewing your investment portfolio because your returns were strong. I say this for the following two reasons:

1. Your returns should still be measured against the appropriate benchmark based on your risk tolerance and intended asset allocation for 2021 and on a multi-year basis. Even if you had strong investment returns in 2021, it is still quite possible you may have under-performed your benchmark last year or over a three, five or ten year comparative basis. This information is important when reviewing your advisor's performance.

2. We are usually concerned with ensuring our returns are not worse than a benchmark. However, what if your 2021 returns were way higher than the benchmark? This could mean that your manager is over-reaching their mandate. I would ask them to explain why they so outperformed. Make sure that the out performance was within their mandate and that they did not take on more risk then within your investment policy. If they did, that is an issue in itself and could also lead to outsized losses in 2022.

 

2022 Tune-up

 

In combination with your 2021 clean-up, you should consider if any circumstances have changed in your life such that you need to review your asset allocation and/or risk tolerance with your advisor.

 

In 2021 the market seemed to be constantly rotating amongst different sectors and thus, your asset allocation may be out of sync in say resources or technology. This should be reviewed with your advisor or reviewed by yourself if you are a DYI investor. 

 

While your risk tolerance should in theory typically remain relatively stable year to year, if you lost your job due to COVID or are retiring in the near future then maybe your risk tolerance may need to be adjusted downwards which could affect your asset allocation. Alternatively, if you work in one of the areas of the economy that boomed during COVID and have received a large pay raise and/or large bonus you may now have a bit more risk tolerance. In any event, this and your asset allocation should be revisited with your advisor or considered if you are a DIY investor.

You may also want to review the additional services your advisor has available and ensure you are taking advantage of these services. Many are now providing financial and wealth planning services.

 

Income Tax Items

2021 Clean-up

 
As noted above, I use my yearly Quicken report for tax purposes. I print out the details of donations and medical receipts (acts as checklist of the receipts I should have or will receive) and summaries of expenses that may be deductible for tax purposes, such as auto expenses. If you use your home office for business or employment purposes (remember, you need a T2200 from your employer), you should print out a summary of your home-related expenses.

Where you claim auto expenses (even if significantly less due to COVID restricted driving) you should get in the habit of checking your odometer reading on the first day of January each year. This allows you to quantify how many kilometers you drive in any given year, which is often helpful in determining the percentage of employment or business use of your car (since, if you are like most people, you probably do not keep the detailed daily mileage log the CRA requires). Keep in mind if audited, you will need to go back and complete a log; using an estimated percentage of business use based on your odometer reading will likely not cut-it with a CRA auditor.

 

As I have a health insurance plan, in January I start to assemble the receipts for my final insurance claim for the 2021 calendar year. I find if I don’t deal with this early in the year, I tend to get busy and forget about it.

To facilitate the claim, I ask certain health providers to issue yearly payment summaries. This ensures I have not missed any receipts and assists in claiming my medical expenses on my income tax return. You can do this for among others: physiotherapists, massage therapists, chiropractors, and orthodontists—even some drug stores provide yearly prescription summaries. This also condenses a file of 50 receipts into four or five summary receipts. 

 

2022 Tune-up

 

January or February is the perfect time to sit back and consider your income tax situation. 

 

On a personal basis, if you are married or common-law, review your 2021 income to see if there is a significant discrepancy in taxable income and marginal tax rates between you and your spouse/partner. If yes and the higher earning spouse has significant savings, consider a prescribed loan (the rate is still 1% for the first quarter of 2022, but many feel it will be raised in the second quarter of 2022).

 

If one spouse has lost their job and is helping the other while looking for another job, review whether a salary can be paid. A reasonable salary based on actual work undertaken will typically be deductible where the working spouse is self-employed or has a corporation. However, if the working spouse is an employee, this can be problematic unless an assistant is required by their employer and their T2200 reflects such. Claiming a spouse's salary when you are an employee is far more complex than that of a self-employed person. If you are considering it, you should review this with your accountant.

 

Another thing to consider where a spouse has lost their job or has reduced earnings due to COVID is whether they should draw down on their RRSP at a low marginal tax rate in 2022. This may make sense where they expect to be back at a much higher marginal rate in the near future (2023 or later).

 

Where your spouse has a spousal RRSP, you have to navigate certain rules (if a spousal contribution was made in the last two years, the withdrawal will be taxed in the higher income spouse's income so it is likely a non-starter). Also keep in mind the statutory tax withheld on the RRSP withdrawal may be lower than the actual tax your spouse may owe on their tax return.   

If you own a corporation, you should touch base with your accountant to discuss if your corporation has a tax-free capital dividend account available, if the company has refundable tax on hand, is your company going to be potentially subject to the small business claw-back etc. or if there are any tax reorganizations or planning that can be undertaken to minimize current or future corporate and personal taxes.

Year-end financial clean-ups are not much fun and are somewhat time consuming. But they ensure you get all the money owing back to you from your insurer and that you pay the least amount of taxes to the CRA. In addition, a critical review of your portfolio or investment advisor could be the most important thing you do financially in 2022.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

RRSPs and Corporations - Your Silent Creeping Tax Liability

Happy New Year and I hope 2022 brings you and your family good health and a quick return to something resembling normality. This is my first blog post since December 31st when I officially retired from my public accounting firm. The term “retired” is used loosely. I look at it as a bit of a sabbatical after almost 40 years in public accounting. I will be looking for a new opportunity outside the public accounting realm in accordance with the terms of my retirement agreement, possibly in the family office, multi-family office or investment manager space; I am too young (at least in my own mind) to full stop retire.

Back to the topic at hand. In late December I was updating a retirement spreadsheet I have for changes in my current circumstances and future income tax minimization. 

 

In reviewing the income tax section of the spreadsheet, the quantum of my future or "deferred" tax liability struck me once again. Whether you are currently working, near retirement or in retirement, you have silent creeping tax liabilities accumulating in your Registered Retirement Savings Plan ("RRSP") and/or corporation [for me, in my professional corporation ("PC")]. In my experience, we tend to "forget" or minimize this tax liability, so I though I would discuss it today.

RRSPs are Great while you are Working, not as Great when you Retire

I think most readers will know this, but to quickly recap, contributions to a RRSP result in a tax deduction in the year made (or subsequent year if you don’t fully claim the contribution) and your RRSP grows tax-free until you convert the RRSP by the end of the year you turn 71. For most people, a RRSP works well as their contributions are made at a time their marginal tax rate is higher than they expect in retirement, so they have an ultimate tax savings. Despite the tax effectiveness of your RRSP, the value is somewhat of an illusion, as you are also accumulating a large, deferred tax liability, as the entire value of your RRSP will be taxable in your retirement.

There are a couple options for a RRSP when your turn 71, including a lump sum withdrawal, the purchase of an annuity or the option most people select, converting their RRSP into a Registered Retirement Income Fund (“RRIF”).

Once you convert your RRSP into a RRIF any future withdrawals are subject to income tax (you are now paying tax on your accumulated lifetime contributions and earnings that were tax-free in your RRSP) a sometimes nasty surprise in quantum for some people. You must start drawing your annual minimum RRIF payment by December 31 of the year following the year you establish your RRIF. Since you will typically still be 71 the year following the establishment of your RRIF, the minimum withdrawal will be 5.28% (you may be able to use your spouses age to lower the withdrawal rate) and will rise each year to around 10.2% by 88 and the withdrawal rates will continue to rise dramatically after age 88.

Each year this minimum withdrawal will be taxable on top of any old age security, CPP, pension income and any other investment or other type of income you earn. The marginal tax rate on these RRIF withdrawals can be substantial depending upon your financial circumstances. Luckily for many, you can elect to split your RRIF pension income with your spouse (Form T1032 -Joint Election to Split Pension Income) and thus, you can often lower your effective family tax rate through this election. However, even with the election, the deferred tax hit on your RRIF withdrawals can still be substantial.

Corporations – You have only Paid Part of the Tax

As noted above, I was struck by the quantum of my tax liability for not only my RRSP, but the investments retained in my PC. For purposes of this discussion, consider a PC to be the same as any corporation you may have. Most active companies will have paid corporate tax historically anywhere from say 12% to 26%, depending upon the corporate province of residence. You have thus deferred anywhere from say 20%-40% in tax by keeping the earnings in your corporation (again depending upon the province). Assuming you need to take money from your corporation in retirement, you will then have to deal with this deferred tax liability when you take the money (typically as a dividend).

Similar to a RRIF, you will owe income tax on this deferred tax (the deferred tax is less than your RRIF, since the corporation paid some tax, whereas you paid no tax on your RRSP). If you have been earning investment income in your corporation, you may have some tax attributes like refundable tax to reduce your tax liability, but the original money earned and deferred by the original active company is still subject to a tax hit even though it is now co-mingled with investment income earned on these deferred earnings. Without getting technical, you still have a large, deferred tax liability as you withdraw funds from your corporation.

Income Taxes and Your Retirement Withdrawal Rate

I have written a couple times on how much money you need to retire. In 2014, I wrote an extensive six-part series titled How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does! (The links to this series are under Retirement on the far-right hand side of the blog). 

 

I updated this series between January and March 2021. Most of my various retirement articles and series revolve around the 4% Withdrawal Rule, which is one of the most commonly accepted retirement rules of thumb. Simply put, the rule says that if you have an equally balanced portfolio of stocks and bonds, you should be able to withdraw 4% of your retirement savings each year, adjusted for inflation, and those savings will last for 30-35 years.

In Part 1 of the original 2014 series, I had a section on some of the criticisms of the 4% rule. The first and the most impactful limitation being the model does not account for income taxes on non-registered accounts and registered accounts Note: many of the studies I discuss in both 2014 and again in 2021, still support that the 4% withdrawal works despite any income tax limitations, but I thought it important to reflect this limitation of the rule.

 

I plan to write a future blog post on possible tax planning that you can consider to minimize the tax hit from your RRSP/RRIF and corporation in retirement.

 

As discussed above, where you have a RRSP and/or corporation, income taxes are a creeping liability. Thus, it is important to ensure that when you are younger, you are cognizant of these taxes and as you get closer to retirement, you ensure you have a financial plan that accounts for these deferred/creeping taxes.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Get Your Bucket List Done!

This is my last blog post of 2021 and I wish you and your loved ones a Merry Christmas and/or a Happy Holiday and a Happy New Year. Today I veer off from my usual financial fare to potentially provide you impetus for a New Years resolution; creating and crossing items off on your bucket list.

In 2010, after I watched the movie the Bucket List starring Jack Nicholson and Morgan Freeman, I created my own bucket list. Over the years I have occasionally written about some of the larger bucket list items I have been fortunate enough to cross off my list from playing golf at Pebble Beach to my safari to Africa. I have also discussed some of the smaller bucket list items I crossed off my list such as going to the Rock and Roll Hall of Fame in Cleveland and attempting to learn how to play the guitar (ended up with tennis elbow) and writing my book Let’s Get Blunt About Your Financial Affairs.

What has been crucial in working through my bucket list was writing down my actual list and talking about the list often to others which functioned as a catalyst to actually move forward on many of these items. I discuss this in greater detail below.

My firm BDO Canada LLP (until December 31st when I officially retire) is celebrating its 100 birthday this year an impressive milestone for any company. BDO was also recently selected as one of Canada’s Top 100 Employers for 2022. One of the reasons BDO was selected as a top employer was for the various programs it has implemented in respect of mental health. This priority was reinforced during a recent firm-wide webcast when BDO had Ben Nemtin speak to everyone about mental health and the use of bucket lists.

Wikipedia states that Ben was “the creator, executive producer and cast member of the MTV series The Buried Life”. He also is” co-author of the book What Do You Want To Do Before You Die?, which entered The New York Times Best Seller list”. Today I am going to discuss how Ben used a bucket list/buried list to not only accomplish the above producing and writing achievements, but even more importantly, how he payed forward his accomplishments to help others.

During his BDO presentation, Ben started his talk by discussing the depression and anxiety he had in part due to the pressures of being a member of the Canadian Under 19 National rugby team. He told us how his friends got him out of the house and how he and his friends (again per Wikipedia) eventually ended “up on a two-week road trip with a camera and a borrowed RV to complete a list of "100 things to do before you die." Along their journey, they asked people the question, "What do you want to do before you die?" For each item they accomplished on their list, they helped a complete stranger do something on their own list”.

If you have ten minutes, watch this inspiring Ted Talk by Ben, which includes the key steps to creating and crossing items off your Bucket List and a great story how he and his friends payed it forward to help someone in an incredible way.

Here are Ben’s six key steps:

1. What is important to you – listen to your heart and stop and think about what you really want to do

2. Write down your list – as I note above, it is so important to put your thoughts to paper

3. Talk about your list – if you don’t talk about it, you won’t accomplish it yourself and no one is going to help you (Ben notes many people help you accomplish your list when they hear about your items)

4. Be persistent – for bucket list items that may note be easy to accomplish, be persistent, you may be surprised what you can accomplish - no may mean not now

5. Be audacious – have some items that are not mainstream and go for them

6. Help others – Ben and his friends have done some incredible things for others (as noted in the Ted Talk).

While on YouTube you can find many other great talks on bucket lists, buried lists, life lists etc. Many of these talks are ways for you to reconnect with your true values and what you are enthusiastic about and to live life as your “true self”. So, whatever you want to call it, a bucket list is a wonderful way to not only create a list about things you want to do and accomplish, but it may be a means to self exploration. Anyways, I will get off my soap box/bucket and let you decide for yourself whether creating and/or acting on a bucket list is a worthwhile New Year's resolution for you.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Tax Gain/Loss Selling 2021 Version

In keeping with my annual tradition, I am today posting a blog on tax-loss selling, except this year, I changed the title to tax gain/loss selling (to include some planning for stocks with capital gains). I am posting on this topic again because every year around this time, people get busy with holiday shopping (or at least online shopping these days) and forget to sell the “dogs” in their portfolio and consequently, they pay unnecessary income tax on their capital gains in April. Alternatively, selling stocks with unrealized gains may be beneficial for tax purposes in certain situations.

Hopefully, based on the strong stock markets of both 2020 and 2021, you do not have many unrealized capital losses. However, the last half of 2021 has been very sector oriented and you may have stocks that were hit on the sector rotation. In fact, in a November 22nd Globe and Mail article by Tim Shufelt, he noted that 17% of S&P/TSX composite stocks were down by at least 10% year to date. That was before the large market drop on Black Friday.

In any event, if you have an advisor, ensure you are in contact to discuss your realized capital gain/loss situation and other planning options by next week and if you are a DIY investor set aside some time this weekend or next to review your 2021 capital gain/loss situation in a calm, methodical manner. You can then execute your trades on a timely basis knowing you have considered all the variables associated with your tax gain/loss selling.

I am going to exclude the detailed step by step capital gain/loss methodology I usually include in this post. If you wish the detail, just refer to last year's post and update the years (i.e., use 2021, 2020 & 2019 in lieu of 2020, 2019 and 2018). 

You have three options in respect of capital losses realized in 2021:

1. You can use your 2021 capital losses to offset your 2021 realized capital gains

2. You can carry back your 2021 net capital loss to offset any net taxable capital gains incurred in any of the three preceding years

3. If you cannot fully utilize the losses in either of the two above ways, your can carry your remaining capital loss forward indefinitely to use against future capital gains (or in the year of death, possibly against other income)

Tax-Loss Selling

I would like to provide one caution about tax-loss selling. You should be very careful if you plan to repurchase the stocks you sell (see superficial loss discussion below). The reason for this is that you are subject to market vagaries for 30 days. I have seen people sell stocks for tax-loss purposes with the intention of re-purchasing those stocks, and one or two of the stocks take off during the 30-day wait period—raising the cost to repurchase far in excess of their tax savings.

Thus, you should first and foremost consider selling your "dog stocks" that you or your advisor no longer wish to own. If you then need to crystallize additional losses on stocks you still wish to own, be wary if you are planning to sell and buy back the same stock. Your advisor may be able to "mimic" the stocks you sold with similar securities for the 30-day period or longer or utilize other strategies, but that should be part of your tax loss-selling conversation with your advisor.

Identical Shares

Many people buy the same company's shares (say Bell Canada for this example) in different non-registered accounts or have employer stock purchase plans. I often see people claim a gain or loss on the sale of their Bell Canada shares from one of their non-registered accounts but ignore the shares they own of Bell Canada in another account. Be aware, you must calculate your adjusted cost base over on all the identical shares you own in all your non-registered accounts and average the total cost of your Bell Canada shares over the shares in all your accounts. If the cost of your shares in Bell is higher in one of your accounts, you cannot pick and choose to realize a gain or loss on that account; you must report the gain or loss based on the average adjusted cost base of all your Bell shares.

Superficial Losses

One must always be cognizant of the superficial loss rules. Essentially, if you or your spouse (either directly or through an RRSP) purchases an identical share 30 calendar days before or 30 days after a sale of shares, the capital loss is denied and is added to the cost base of the new shares acquired.

Tax-Gain Selling 

While typically most people are looking at tax-loss selling at this time of year, you may also want to consider selling stocks with gains for the reasons discussed below.

Donation of Marketable Securities

If you wish to make a charitable donation, a great way to be altruistic and save tax is to donate a marketable security that has gone up in value. As discussed in this blog post, when you donate qualifying securities, the capital gain is not taxable and you get the charitable tax credit. Please read the blog post for more details. 

2022 Budget

While I don’t comment on rumours and conjecture, there are many tax commentators who feel there is a good chance the capital gains inclusion rate will increase from 50% to a higher rate in a future budget. If you are in that camp, you may wish to lock in capital gains at the lower rate. As no-one knows if the capital gains rate will change, you need to review this with your advisor as the sale will be taxable immediately, even if you buy-back the same security (there are no superficial gain rules).

Settlement Date

It is important any 2021 tax planning trade be made by the settlement date, which my understanding is  the trade date plus two days (U.S. exchanges may be different). See this excellent summary for a discussion of the difference between what is the trade date and what is the settlement date. The summary also includes the 2021 settlement dates for Canada and the U.S.

Corporations - Passive Income Rules

If you intend to tax gain/loss sell in your corporation, keep in mind the passive income rules. This will likely require you to speak to your accountant to determine whether a realized gain or loss would be more effective in a future year (to reduce the potential small business deduction clawback) than in the current year.

Summary

As discussed above, there are a multitude of factors to consider when tax gain/loss selling. It would therefore be prudent to start planning now with your advisors, so that you can consider all your options rather than frantically selling at the last minute.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.