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Joel Attis

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The end of 2008 is quickly approaching, so how are you going to minimize your tax bill? Here's some tips for year-end tax planning.

1. Invest in a resource tax shelter, commonly referred to as "flow-through shares," which will allow you to deduct your full investment (more in certain circumstances) against other income in 2008. If you are at a 46.95 per cent marginal tax rate, a $10,000 investment would cost about $5,305 after tax. The investment will then be tied up for a period of 18-24 months until the tax shelter is converted into mutual fund units, which can be sold, with all proceeds of disposition treated as capital gain. Resource tax shelters have been around for decades and are sanctioned by Canada Revenue Agency (to promote exploration in oil, gas and mining), whereas most other shelters carry considerable risk of being declared invalid by the CRA, even if they have a tax number. Two messages to investors seeking to reduce tax: First, on the risk scale, flow-through share investing is a high risk strategy due to the fact that oil, gas and mining stocks are volatile and have broad swings. Second, be very wary of non-CRA-approved tax shelters being peddled by non-licensed hucksters -- if a deal sounds to good to be true"¦ well, you know the drill"¦

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 enacted in 2007, 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 2009. That way, you will not have to pay income tax on the gains until you file the 2009 return in 2010.

4. Book losses on stocks and other securities held outside of registered plans. This is an especially tactical tax planning strategy this year due to the significant decline in market values all investors have experienced in 2008. 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 $500 or 20 per cent of your contribution up to $2,500) for 2008.

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. Your spouse will be able to withdraw the funds in 2011 without attribution to you. If you wait to make the contribution in 2009, the three-year waiting period won't end until 2012.

7. If you are turning 71 in 2008, 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 2008 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 2008. However, the over-contribution penalty you will pay for the short time will be small compared with the income tax refund you will receive.

9. If you are past the age of 71 and still have employment income, contributing to a spousal RRSP (which must be done before year-end for spouses who turn 71 this year) is another way to defer taxes.

10. Avoid investments 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 2008 will be attributed to those holding the mutual fund units at year-end. On the other hand there are no such tax obligations arising with the purchase of segregated funds.

Out of the 10 tips, my favorites are numbers 1, 2 and 4. Number 1 (flow-through share investing) because it is one of the very few CRA-approved tax shelters -- and it brings immediate tax relief to investors, though this strategy is not suitable for conservative or risk-averse investors.

Number 2 (donation of securities to a charity) because it gives investors an opportunity to eliminate tax on an investment and at the same time help a worthy cause. You don't have to pay capital gains on the stocks donated plus you get the tax credit. Remember though, if you are considering donating securities to charity, you have to do it soon! The donation date is the date that the charity receives the stock which may take some time depending on the charity.

Number 4 (tax loss selling) is great for investors who invest outside of their RRSP -- especially with the tumultuous markets we've experienced this year. The premise behind this is to sell your losers, before the December 24 deadline, to offset your capital gains for the year. This will ultimately reduce your capital gains tax bill for 2008, or if you have no capital gains issues in 2008, the loss can be carried back 3 years, or forward indefinitely.

One final tip -- set up a Tax-Free Savings Account ('TFSA') through your bank or financial advisor. Although you can't invest in it until Jan. 1, 2009, this new investment tool will serve Canadian investors extremely well. Essentially you can save funds tax-free, and retain flexibility to withdraw your savings at any time -- without ever being taxed on the growth. Individuals over the age of 18 can contribute up to $5,000 each year beginning January 2009. Investment selections range from mutual funds to savings accounts to GIC's. Basically any type of investment that qualifies for a RSP will qualify for a TSFA. Although contributions to TFSA's are after-tax dollars, all the income earned (interest, dividends and capital gains) are tax-free for life.

Furthermore, withdrawals create new contribution room. So if an individual invested $5,000 and it grew to $7,000, they could take out the $7,000 with no tax on the $2,000 growth, and they would be left with $7,000 in contribution room, in addition to the $5,000/year room that accumulates.

Don't forget, tax planning is just as important as your investment planning! Minimizing your tax bill will help your net worth grow substantially faster.

* Joel Attis is a Financial Advisor with AttisCorp Financial Group, Inc. in Moncton. He is a mutual fund representative with Partners in Planning. Comments or questions may be submitted to joel@attiscorp.com, or he may be reached at 855-1155. Mutual Funds provided by Partners In Planning Financial Services Ltd. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.