Financial Focus: Early 2020 tax tips

By Craig Elder on January 25, 2020.

When the end of the year approaches, many individuals place a greater focus on tax planning to minimize their income tax liability. Beyond the end of the year, however, there are some areas of tax planning that often get overlooked. For example, there are tax planning strategies that may only be available early in the new year. With that in mind, this column summarizes some of the strategies that have deadlines in early 2020.

The deadline for you to make a contribution to a Registered Retirement Savings Plan (RRSP) that can be claimed as a 2019 tax deduction is March 2. If you don’t have sufficient cash on hand to make an RRSP contribution, you can consider making an in-kind contribution of eligible securities from your non-registered account to your RRSP or to a spousal RRSP. If the securities are in a gain position, you will realize a capital gain when you make the contribution. If the securities are in a loss position, you may not want to contribute the securities in-kind, as your ability to claim that loss will be denied. Alternatively, depending on your specific circumstances, you may want to consider borrowing funds to make an RRSP contribution. It’s important to note that using borrowed money to finance a purchase of securities involves greater risk than a purchase using your existing resources. Your responsibility to repay the loan and pay interest as required by the terms of the loan remains the same even if the value of the securities you purchased declines. Further, the interest paid on money borrowed to make an RRSP contribution is not deductible for tax purposes.

It’s generally a good idea to contribute to your RRSP as soon as possible to maximize the tax-deferred growth in your plan and to avoid the stress of trying to meet a last-minute deadline. Keep in mind that Jan. 1 is the earliest day you can make a 2020 RRSP contribution using the new room that’s created from your prior year’s earned income without triggering an over-contribution penalty. If you want to make an RRSP contribution early in the 2020 calendar year, you may need to estimate your 2020 RRSP deduction limit. This is because you may not have received your 2019 notice of assessment (NOA), which provides a statement of your 2020 RRSP deduction limit. To estimate your 2020 RRSP deduction limit, take 18% of your previous year’s (2019) earned income up to the RRSP dollar limit of $27,230 for 2020, and subtract any 2019 pension adjustment. If you’re unsure of your earned income for 2019 or the results of your calculation, consider waiting until you receive your 2019 NOA from the Canada Revenue Agency (CRA) before making an RRSP contribution for 2020.

Consider making a contribution to your TFSA early in the 2020 calendar year to maximize the tax-free growth in your plan. The TFSA contribution limit (per year) was as follows:

* $5,000 for the years 2009 to 2012;

* $5,500 for 2013 and 2014;

* $10,000 for 2015;

* $5,500 for 2016, 2017 and 2018; and

* $6,000 for 2019 and 2020.

If you’ve been eligible to open a TFSA since 2009 and have not yet contributed to one, your contribution limit would be $69,500 as of Jan. 1, 2020. If you didn’t use your contribution room in a previous year, the unused room is carried forward indefinitely. In addition, if you withdrew an amount from your TFSA (that’s not a withdrawal of excess TFSA contributions) in 2019, you can re-contribute this amount to your TFSA as of Jan. 1, 2020. Any prior-year withdrawal (that’s not a withdrawal of excess TFSA contributions) is added back to your TFSA contribution room for the following year. Be extra careful when calculating your room when recontributing to your TFSA, as the CRA can charge penalties for over-contributions.

A. Craig Elder, CFP, FMA, CIM, FCSI, is a Vice-President, Portfolio Manager and Wealth Advisor with RBC Dominion Securities Inc. in Medicine Hat. Source material provided by RBC Wealth Management. Contact a financial advisor before you act on any or all of the strategies mentioned above. RBC Dominion Securities is a member of the Canadian Investor Protection Fund. To attend our next workshop on February 12th, 2020 at the Medicine Hat Lodge, or for more information on this and other financial strategies, contact Craig at http://www.acelder.ca or 403-504-2723.

12
-11