Year-End Financial Checklist

Year-end lists are ubiquitous but that does not mean they are not useful. If you think you need to do something about your finances before the end of the year but aren’t sure what, maybe something on this list will be of help.


Contribute to Your RRSP

If you are planning on contributing to your RRSP by the March 1, 2021 deadline to count for the 2020 tax year, start now. One year I worked at a local bank branch until the 8 pm closing time on the last day you could contribute for the previous tax year. People were coming in until the final hour to make contributions to their RRSPs, which usually involved borrowing from the bank for an RRSP loan. Divide your planned contribution three ways: 1/3 in December, 1/3 in January, and 1/3 in February. When you have that taken care of, set up a monthly contribution plan so you never have to scramble to meet the contribution deadline again.


Contribute to a Spousal RRSP

If you regularly contribute to a spousal RRSP and there is an expectation that your spouse may withdraw some portion of the plan in the future, make that contribution before the year end to avoid the attribution rules.


Let’s suppose a situation in which one spouse is employed fulltime outside the home while the other spouse stays at home and has little to no employment income. The marginal tax rate for the employed spouse is 40%. For the homemaker spouse, the marginal tax rate is 20%. In the first scenario, the employed spouse contributes $5,000 each year to the spousal RRSP of the homemaker spouse in January 2019, January 2020, and January 2021. In 2023, the homemaker spouse withdraws $15,000 from the RRSP. The attribution rules require that any money that was contributed to a spousal RRSP in the year of withdrawal or in the previous two years is attributed as income back to the contributing spouse. In this case, that means 2023, 2022 and 2021. The January 2021 contribution of $5,000 will be attributed back to the employed spouse meaning $2,000 will be paid in taxes ($5,000 x 40%), leaving only $3,000 available. The remaining $10,000 that was withdrawn will fall under the homemaker spouse’s 20% tax rate meaning another $2,000 will be lost to taxes ($10,000 x 20%) for a total of $4,000 in taxes or an $11,000 after-tax amount. The effective tax rate on the $15,000 withdrawal is 26.67%.


In the alternative situation, the employed spouse contributes to the spousal RRSP in December 2018, December 2019, and December 2020, just one month earlier. The homemaker spouse withdraws $15,000 from the spousal RRSP in 2023. There is no attribution back to the contributing spouse, so the withdrawal is taxed entirely at the homemaker spouse’s lower rate of 20% meaning tax payable $3,000 ($15,000 x 20%), resulting in a net amount of $12,000 being available. The effective tax rate is 20%.


Convert Your RRSP

If you turn(ed) 71 in 2020, you must wind up your RRSP. You can use the assets in the plan to buy an annuity or you can convert it into a Registered Retirement Income Fund (RRIF). Using an annuity is essentially “pensionizing” your RRSP. The money in the account is given to a life insurance company which in turn will give you a monthly payment for the remainder of your life. A RRIF is similar to an RRSP except that the RRSP is like a bucket with a hole in the top where you can pour in the money, while a RRIF has a tap on the side of the bucket for you to take the money out. Because the government imposes an Annual Minimum Payment from the RRIF you could think of that tap as having a leak that you are not allowed to fix.


You do not have choose one or the other exclusively. For example, you could use 25% of your RRSP to purchase an annuity and convert the remaining 75% into a RRIF. Five years later you could take 1/3 of the remaining balance in your RRIF and buy another annuity if you wish.


You also do not have to wait until you are 71 to “pull the trigger” on your RRSP. It can be done at any time, although there are certain tax incentives available for waiting until you are at least 65.


In my experience at the discount broker where I used to work, even if you do not take the necessary step to purchase an annuity or convert your RRSP to a RRIF, the firm will do it for you. The reality is that in the year you turn 71 you have effectively aged out of the RRSP. However, you will not be able to withdraw the funds until you have completed an account application for the RRIF that has been opened for you.


Convert Your Defined Contribution Pension Plan or Locked-In Retirement Account

The options here are almost identical to the RRSP above: buy an annuity or convert the assets into Life Income Fund (LIF). There are variations depending on the province and various names for this type of account, but one that should be noted is that there is both a minimum and a maximum withdrawal per year. In the case of a RRIF, which is based on the owner’s voluntary contributions, there is only a minimum. If you want to take out more than the minimum, that is your choice. However, since pension plans are designed to provide an income for the remainder of your life, a maximum is imposed as well so that you do not run out of retirement income prematurely.


Withdraw from Your TFSA

If you are planning to make a TFSA withdrawal make it before the end of the year. The amount withdrawn in one year is added to your contribution room in the following year. In the past, people have made the mistake of withdrawing from their TFSA and then recontributing all or a portion of the amount withdrawn in the same year, resulting in an overcontribution and a 1% tax per month on the amount in excess of the allowable contribution. If you did not have any contribution room available in that year before the withdrawal, you still do not have any contribution room until the new year.


Set Aside Money to Contribute to Your TFSA

If you have no plans to withdraw from your TFSA, you may instead be thinking about contributing to your TFSA in the new year. Once again, the contribution limit is $6,000 in 2021 for a total accumulated contribution limit of $75,500 if you have been eligible since 2009. Personally, my wife and I have some money set aside in a savings account that we will use to make our contributions in the first full week of 2021.


If you do not have the cash available, you can also contribute securities like stocks or funds to your TFSA from a non-registered account. However, do note that if you have a gain on that particular investment, you may have tax payable.


On the other hand, if you have a capital loss you cannot claim the loss against any gains when you contribute that security to the TFSA. To realize the capital loss, sell the position in your non-registered account, then contribute the cash to your TFSA and buy something different (for example, an ETF that tracks a different index) to avoid the superficial loss rule.


Contribute to Your RESP

Do you have children who will likely attend some form of qualifying post-secondary education? Make that RESP contribution before the year end. The sooner you make that contribution the sooner you get the 20% matching Canada Education Savings Grant (CESG). Sure, you can always defer contributing but you also defer that 20% grant. And while you can catch up, the maximum you can contribute to catch up and still receive the matching grant is $5,000 in any given year. And in the meantime you lose the potential value of compounding growth over a longer period of time.


Take Advantage of Tax-Loss Harvesting

This sounds like I am going to talk about agriculture. Not so. Do you have a non-registered (taxable) investment account? You may hold some securities in your account that have lost money. Consider selling them to use the resulting capital loss to offset any realized capital gains you may have had this year. If you did not have any capital gains, then you can carry the loss back three years or carry it forward indefinitely. The losses when applied against your gains will reduce your taxes. Note that this only applies in a non-registered account, not in your RRSP, TFSA, or other accounts in which income is tax-sheltered while it remains in the account.


Prepare for Tax Season

While RRSP “season” is a kind of myth, tax season is real. If you have not yet done so, now is the time to start organizing the necessary documents (beyond the T-slips that will be given to you by your employer or financial institution in the new year) to do your taxes. This is especially important if you have any income from self-employment.


Make Your Charitable Donations

You need to make your charitable donations before the year end if you want the tax credit to apply to your current year’s taxes due next spring. At the federal level you get a 15% tax credit on the first $200 you contribute and a 29% credit on the remaining donation. If you donate $1,000 that means you get a $30 credit on the first $200 ($200 x 15%) and a $232 credit on the remaining $800 ($800 x 29%) for a total credit against your federal taxes owing of $262. There are also circumstances in which an even higher tax credit is available depending on your net income.


If you are donating only $200 each year, it may make sense to carry forward the donation until the next year, when you can claim contributions for two years. For example, in 2020 you donate and claim $200. That gives you a $30 credit ($200 x 15%). In 2021 you donate another $200 and claim it for your 2021 taxes. You get another $30 credit for a total federal credit of $60 over two years. Now if you carry forward your 2020 donation to 2021, you will not get any credit in 2020, but for 2021 you get a credit of $200 x 15% = $30 plus $200 x 29% = $58 for a total of $88.


Remember as well that at tax time spouses can combine their charitable donations to further enhance the 29% tax credit.


Set Aside Some Money to Pay Tax on CERB

This is unique to 2020, I hope. If you received the maximum amount of CERB that amounts to $14,000. No tax was withheld on that money, unlike when you are employed and your employer must withhold a mandatory amount. Although the precise figure will vary by income or provincial tax rate, let’s assume that your marginal tax rate is the lowest tier in Ontario: 15% federal plus 5.05% provincial for a combined rate of 20.05%. That works out to $2,807 in taxes owing. It is reasonably safe to suggest that you set aside about 20% of whatever you may have received. You have until April 30, 2021 to file your taxes so if you do not have all the money now, you still have some time to gather the amount owing. Using the $2,807 scenario, set aside 1/5 or $560 this month, and $560 each subsequent month through to April. Throw in $7 at the end – maybe a little less if you earned some interest – and you will be able to pay the taxes you owe. Of course, if you have still not been able to return to work then you may not have the money available and you may have little in the way of taxes owing. But if you have returned to work this is an important step to undertake.


Final post of 2020

As 2020 comes to an end, oh how we hope that will spell the beginning of the end for COVID-19. I wish everyone a Merry Christmas, Happy Holidays, and a Happy New Year. Stay safe and healthy. Go outside and breathe some (properly socially distanced) fresh air. Expect new posts beginning the week of January 4, 2021.


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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.