8 Ways to Get Out in Front of Tax Season – and Set Up Clients for Success

John Waters, Vice President, Director of Tax Consulting Services, BMO Wealth Planning & Advisory Services, shares important year-end tips and resources to help you structure ongoing planning conversations with your clients, and increase awareness of strategies to potentially reduce their tax burden – preparing you for a successful 2020.

Tax Season Shouldn’t Be Taxing: Start Planning NOW

Another month. Another tax conundrum. Though “tax season” ends in April, Canadians are overwhelmed by the nuances of taxation year-round – from when and how much to contribute to RRSPs, to the finer points of tax-loss harvesting, capital gains tax and foreign reporting. This creates an enormous opportunity for Advisors to add value for their clients – in partnership with tax specialists – by helping them navigate the complexities 12 months of the year, while keeping track of any tax law changes that may open up new avenues.

To help accomplish this, we’ve created a year-end checklist that every Advisor can use NOW as a tool for strategic planning conversations, ensuring no stone is left unturned in 2019. Not only could your proactivity save time and money (in taxes and accounting bills) for your clients, it will also serve to deepen the relationship and engender trust for the journey ahead.

Essential Tax Reading: 8 Ways to Minimize the Burden for Clients

1. Consider tax-loss selling opportunities – Before fall hastily turns into winter, recommend a review of clients’ non-registered investment portfolios, and consider a sale of any securities with accrued losses to offset any capital gains realized during the year – or the three previous taxation years (if a net capital loss is created in the current year). It’s important to ensure that “harvesting” makes sense from an investment perspective, since stocks sold at a loss cannot be repurchased until at least 31 days after the sale to be effective, under the Superficial Loss Rule.

   
   ! Note that Friday, December 27 is the last possible buy/sell date for most securities to settle in the calendar year for tax purposes (based on the cycle of trade date plus two business days). For a more detailed understanding of this strategy, consult the BMO Nesbitt Burns article, titled Understanding Capital Losses.

   ! Remember that capital gains or losses on foreign securities denominated in another currency are calculated in Canadian dollars, even if the sales proceeds remain in the foreign currency. Fluctuations in the foreign exchange rate over the period of ownership will therefore factor into the analysis for tax-loss selling.
   
   

2. Make ALL charitable donations (including those planned for early next year) by December 31 – Aside from the fast-approaching deadline to make donations eligible for claim in 2019, you may have clients for whom donating appreciated publicly-traded securities (instead of cash) is a consideration, potentially eliminating capital gains tax. For donations that exceed $200, the federal tax credit is calculated at the new top 33% marginal rate, but only on the portion of donations made from income that is subject to the new top marginal tax rate. For any donations made in excess of $200 where the individual’s taxable income is less than $200,000, a 29% federal tax credit will apply, which was the previous top federal marginal tax rate. Canadians can also choose to carry forward their donation credit for up to five years.
   

3. Discuss, determine and deduct– Encourage client awareness of all available deductions and credits (accessible on the CRA website) by discussing monthly expenses, and use this to jumpstart bigger planning conversations where you can add more value, such as the need for greater tax efficiency and cash flow.
   
   ! Note that December 31 is also the final payment date in order to receive a 2019 tax deduction or credit for expenses such as childcare, medical and tuition. Keep in mind that the maximum dollar amounts that can be claimed under the Child Care Expense deduction are generally $8,000 per child under age 7, and $5,000 per child aged 7 to 16.
   
   

4. Maximize tax-deferred savings through an RRSP or TFSA – Instead of waiting until the deadline, suggest getting out ahead for extra tax-deferred growth. By making a 2019 RRSP contribution now, instead of the March 1, 2020 deadline, the money can grow tax-deferred in the RRSP for an extended period. Similarly, advise clients planning TFSA withdrawals in the near future to do so in December instead of waiting until the new year, so the amount withdrawn is added back to their TFSA contribution limit on January 1, 2020 (rather than 2021).
   
   ! As a reminder: clients that turned 71 years of age in 2019 must collapse their RRSP by the end of the year, and should consider making a final contribution to the extent there is any unused room.

Source: Wealth Planning Facts & Figures – 2019, BMO Wealth Management.

5. Meet final quarterly tax installment deadline – Avoid any potential non-deductible interest or penalties and mark December 15 on the calendar as the due date for the final quarterly income tax instalment, which many Canadian investors are required to make since tax is not deducted at source on investment income. Clients may be required to pay these instalments if their estimated net income tax payable for the year, and net payable for either of the two preceding years, exceeds $3,000 ($1,800 for Quebec residents).

6. Cash in on pension income benefits – For your clients 65 or older in the decumulation phase, who aren’t already taking full advantage of the Federal Pension Income Tax Credit, consider converting a portion of their RRSP into a RRIF – and receive up to $2,000 of qualifying RRIF income before the end of the year to access this credit. Also be mindful of pension income-splitting legislation, which allows a transfer of up to 50% of eligible pension income to a spouse as a means to save on overall family tax.

7. Encourage rigorous record-keeping every month – Tax-planning is a year-round strategy, and requires foresight before you file. While keeping track of tax slips such as T4s, RRSP contributions and donation receipts is important, be sure to establish an open line of communication with your client’s tax advisor. It’s an excellent way to build and maintain a holistic picture of finances, keep abreast of any news in the tax world that could impact wealth plans, and to strengthen your own professional network.

8. Keep your ear to the ground NEXT WEEK – Tax law changes can be introduced at any time, so it’s wise to keep tabs on any proposals in the works, especially following the 2019 Federal Election next week. The federal parties have all promised a myriad of tax changes, some of which could be implemented shortly after the election. Also keep a close eye on proposed legislation introduced earlier this year, which seeks to change Canada’s beneficial employee stock-option tax treatment, effective for options granted on or after January 1, 2020. The draft legislation, which will limit the current beneficial tax treatment on certain option grants, has not yet been enacted and could be impacted by the election outcome.

Another new measure that originated from the 2019 Federal Budget was the Canada Training Credit, instituted to address barriers to professional development for Canadians by helping to cover up to half of eligible tuition and fees associated with training. The new refundable tax credit starts accumulating in 2019 and will be available to be claimed for expenses in respect of the 2020 taxation year.

As with all tax-related investment decisions, your clients should consult with a professional tax advisor to determine which unique strategies make sense for them.

To discuss investment solutions that offer greater tax efficiency, contact your BMO Global Asset Management Regional Sales Representative, and access the resources below.