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Making Wise Investment Decisions for Tax Planning

When considering investments we all want to maximize the return on the investments. Which type of investment and the annual investment returns may not be the only things to consider. You should also consider the possibilities of minimizing taxes on your investments through the opportunities listed below.

• Spousal RRSP’s are an effective way to minimize taxes in the current year and upon retirement. In situations where one spouse already has a pension plan, contributions to a spousal RRSP allow both spouses to split income on retirement. There is an added benefit as the contributor obtains the RRSP deduction against their current income.
• Interest on money borrowed for investment purposes is deductible for income tax purposes as long as you own the investment or a replacement investment. Once you dispose of the investment the interest ceases to be deductible.
• Management and administration fees on investment portfolios may also be deductible against investment income. Loan statements and statements of fees should be requested to ensure your tax advisor has the information to include all of the deductions you are entitled to.
• Investing in a labour sponsored investment fund through your RRSP will give you a 15% tax credit in addition to the RRSP deduction. However, as recent have shown, your investment may be at risk. Ask your investment advisor about investment choices that meet your investing needs
• If you turn 69 in 2005, you will have to decide what to do with your RRSP’s before the end of the year. RRSP accounts can be transferred to an Registered Retirement Investment Fund to defer tax until the amounts are withdrawn. As you must close your RRSP account, you will not be able to contribute to RRSP’s in the spring of 2006. You can however contribute prior to December 31^st to ensure you obtain a deduction on your 2005 return. Ask your tax advisor about the contribution amount available.
• If you invest in the name of your child, the interest may still be required to be reported on your tax return, regardless of the name that appears on the T5 statement of investment income. Attribution rules require that any investment income in the form of interest or dividends be attributed back to the parent. However, investments with capital gains will remain taxable to the child.
• Attribution rules do not apply to earned income on investments bought in a child’s name with proceeds from the Child Tax Benefit or from other cash from gifts, baby-sitting or other earned income.
• If you own real estate (other than a principal residence) that has gone up in value, you have an inherent capital gain that will be taxed when you dispose of the property or upon death. If you plan to leave the property to your children then gifting it to them before death will trigger the tax. As an alternative, you can consider an estate freeze to minimize taxes.
• If you hold foreign investments, you are required to report this income on your Canadian tax return. If taxes are withheld by the foreign country, you may be entitled to receive a tax credit on your Canadian tax return for the amount of foreign taxes paid.
• If you lent money to a Canadian corporation, and the debt is not collectible, you may be able to claim an Allowable Business Investment Loss for tax purposes. You will need to have documentation to establish that the loan in not collectible at the end of the year. Ask your tax advisor on the requirements for claiming these losses. In the case where you have to honour a guarantee given on a loan, the same treatment may apply.