After years of earning income from work and investing as much as possible to build a nest egg, you might think your retirement years would be comparatively free of financial planning and paying tax. But if you were responsible about setting money aside for retirement and invested it wisely, the golden years require a good deal of money management to ensure you will continue to live well for many years to come.
This involves prudent investment management to retain some growth in your portfolio, yet protecting your capital -- which you can ill afford to lose now that you no longer have employment income from which to replace it. It also requires careful fiscal planning to keep as much of your nest egg as possible out of the hands of the tax man.
The following are some tax and investment matters to consider as the year winds down:
Conversion of RRSP to RRIF at age 71
A registered retirement savings plan must be collapsed by the end of the year in which you turn age 71. Most people transfer their RRSP assets to a registered retirement income fund (RRIF), while the other options are to purchase a registered annuity (which at current interest rates usually means locking in at a very low rate of return) or simply withdraw everything in cash (very expensive tax-wise). A RRIF is similar to an RRSP in that you can keep the same investments and continue to defer paying tax on income earned within it. However, an increasing minimum amount must be withdrawn each year.
However, you can contribute to your RRSP right up until the day you wind-up the plan. If you are converting your RRSP before the end of this year, the amount of these and other contributions made during 2018 can be deducted from your income when you file your tax return for this year, by the end of next April. Since the plan must be collapsed by the end of the year, the normal deadline of 60 days following the year-end does not apply. Remember, in order to make new RRSP contributions right up to the final year, you must meet the contribution requirements and thus must have reported earned income during the previous year or have unused contribution room.
Be sure to use up all of your RRSP contribution room (the cumulative amount of unused deductions from previous years, plus your entitlement for 2018, which is based on your 2017 earned income). You also can contribute up to $2,000 beyond that limit. While you can't deduct the excess amount, you will not have to pay the 1%-a-month penalty that normally is charged on overcontributions.
Moreover, consider this technique to squeeze in additional RRSP room just under the wire. If you turned 71 during 2018 and had earned income for the year, you can consider making an over-contribution in December 2018, pay the 1% over-contribution penalty, and then claim a deduction for the over-contributed amount when you file your 2019 income tax return. This is possible because your unused contribution room would have increased as of the beginning of the new year. RRSP contribution room for a particular year is based on the plan holder's earned income during the previous calendar year. The 1% penalty applicable to the December contribution likely will be less than the value of your 2019 tax deduction.
You may continue to contribute to a spousal RRSP until the end of the year in which your spouse turns 71, to the extent you have earned income and contribution room. The normal March 1 contribution deadline applies. When considering making a spousal contribution, there is a restriction: if he or she makes a withdrawal during that year or the next two calendar years, the amount you contributed will be taxed in your name, not in that of your spouse.
TFSA a valuable post-retirement tool
Unlike an RRSP, you can keep a tax-free savings account (TFSA) for life. As you move into retirement, it can replace your RRSP -- or money withdrawn from a RRIF -- as a tax-advantaged investment, to the extend you have contribution room. As of 2018, if you've never contributed in the past, the maximum room is $57,500.
If on the other hand you’ve made good use of the TFSA since its introduction in 2009, you may be considering making a withdrawal. If so, be sure to take the money out before the end of the year. By doing so, you will be able to replace the amount of that withdrawal in 2019, as cumulative TSFA contribution room is increased by amounts withdrawn in the past -- in addition to $5,500 of additional room each year. If you wait and withdraw from the account in the new year, the contribution room will not be restored until the beginning of 2020.
Income earned within a TFSA has no impact on your eligibility for Old Age Security benefits and some tax credits, such as the Age Credit and the GST Credit, which can be reduced (or, in the case of OAS, "clawed back") according to your income level.
Harvest tax losses before final 2018 trading date
If you have realized profit from the sale of stocks or other securities during 2018, you can offset those gains -- and the taxes payable on them -- by selling losing securities from your portfolio. You can use such losses to offset gains realized in 2018 or in any of the previous three taxation years. Similarly, you could delay the sale of securities that have paper gains until the new year, thus deferring capital-gains tax payable on these gains until you file your 2019 tax return.
You should confirm with your advisor the date by which a transaction must be done in order to be included in your 2018 income, such as a capital gain or loss. For example, the Toronto Stock Exchange’s last date for a 2018-qualifying trade is December 27.
Be aware of the rules that prevent you from creating a quick, superficial loss by selling a security and buying it back soon afterwards. You or your spouse (or a holding company controlled by either of you) must wait 30 days before repurchasing a sold security. Otherwise you will not be able to claim the capital loss from the sale.
An important part of the decision to sell a stock is to figure out just how much of a gain or loss would be taxable. That means determining the investment's adjusted cost base -- a taxation term for what you paid to acquire it, including brokerage commissions. If you made just one purchase, then your ACB is the price you paid for the shares plus the commission. However, if you bought the shares in batches at different points in time, you have to calculate the average cost by dividing the total amount spent to acquire all the shares and dividing that sum by the total number of shares acquired.
Delay mutual-fund purchases to the new year
While dividend and interest distributions normally are made at regular intervals during the year (monthly or quarterly), realized capital gains are distributed in a lump sum toward the end of the year. Most mutual funds set their year-end distribution dates of record during December. Check with your advisor to see which dates apply to the funds in your portfolio.
By purchasing fund units after the annual distribution date, you will avoid being allocated income earned by the fund before your purchase, which would boost your 2018 taxable income.
Similarly, if you sell units before the distribution date, you will avoid the distribution and resulting tax information slip, but you nonetheless will have to pay tax on the gain it represents. This is because the amount equivalent to the distribution would still be embedded in the fund's net asset value per share (NAVPS, or unit value) at the time you sell, and therefore would form part of your realized capital gain. If you don't sell, remember that a lower NAVPS will result from the distribution, something that needs to be taken into consideration later when calculating your investment's capital gain or loss when you do eventually sell your fund units.
To defer taxes, it's probably better to delay your purchase until after the distribution takes place, and thus defer paying tax on those gains for a year. By postponing, you can buy the units at the lower price and not have to pay tax on capital gains that were incurred before you bought in.
Elective medical procedures before year end
Have a medical or dental procedure done or opt to incur other medical-related expenses before the end of the year end so that you can claim them as a medical-expense credit on your 2018 tax return. Remember, only eligible medical expenses in excess of 3% of your net income can be claimed. You can claim medical expenses for any 12-month period ended during 2018. So, if you had expenses from last year for which you did not claim a credit on your 2017 tax return, you can report them on your 2018 return. However, depending on the 12-month period’s span, this might make it unnecessary from a tax standpoint to incur expenses on elective procedures between now and the end of this year.
Fourth-quarter income tax instalment
Most retirees must pay tax by instalment on minimum RRIF withdrawals and on any income earned on their other investments. For your 2018 income, one more income tax instalment remains to be paid, on Dec. 15 for the fourth quarter. Paying taxes this way may be a new experience, particularly if you had tax deducted at source by an employer during your working years.
If your net tax payable was $3,000 or greater in the current taxation year and in either of the two previous years -- that is, in 2018 and either 2017 or 2016 -- you are required to pay instalments. (In Quebec, instalments are payable when federal or provincial tax-payable amounts, individually, are $1,800 or greater.)
Instalments are due on March 15, June 15, Sept. 15 and Dec. 15, and can be paid by cheque (mailed by and dated no later than the deadline, or taken to a taxation office); or through a financial institution (in person or online, again no later than the deadline day). You can estimate your tax payable for a particular year and pay it in four equal instalments. Or you can pay the amounts calculated by the tax department. For the first two quarters of a calendar year, these are based on your income two years previous (so, for 2018, your 2016 taxable income) and for the third and fourth quarters, on your previous year's income (in this case, 2017).
For more information on instalment payments, visit the CRA website or Revenu Québec.
