Allocation and other year-end strategies

December is a busy month, with Christmas preparations and office parties, but it’s a good time to take stock of your investment portfolio and make some alterations for tax purposes.

December is a busy month, with Christmas preparations and office parties, but it’s a good time to take stock of your investment portfolio and make some alterations for tax purposes.

One thing to review is the asset allocation of your portfolio. Asset allocation is an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to risk tolerance, goals and investment time frame.

Check the type of income you earned in your non-registered portfolio in 2011. If you earned interest income, which is more highly taxed than dividends or capital gains, consider restructuring your non-registered portfolio for better tax efficiency going forward.

For example, this could involve swapping dividend-paying securities out of your registered account and into the non-registered one and swapping an equal value of interest-bearing securities into your registered account from your non-registered account.

“While you are reviewing your asset location, it’s also a good time to review your financial plan and your insurance needs,” suggests Patricia Lovett-Reid, senior vice-president of TD Waterhouse.

Another strategy is to gift investments to your minor-age children before the end of 2011 if the value of the investments has decreased.

Gifting an investment to your minor children will allow you to realize a capital loss that you can use to offset capital gains this year or in the previous three years.

This strategy also shifts the tax liability for any future increase in the value of the investments to your children because capital gains realized by minor children are not subject to attribution rules. Gifting investments that you might otherwise hold until your death may also help you minimize any probate fees and estate costs at death.

Donating to charities with public securities is another strategy. Making a charitable donation by Dec. 31 will provide you with a donation receipt that can be used to reduce your tax payable or possibly increase your tax refund for 2011.

“Capital gain realized on your donated public securities is not subject to tax and yet you are still entitled to a donation receipt for the fair market value of donated securities,” said Lovett-Reid. “Donating with public securities that have an accrued gain makes better income tax sense than either donating with cash or selling the securities and then donating the proceeds from the sale of those securities.”

Make your retirement savings plan (RSP) contribution in advance of the deadline at the end of February or early March. Don’t wait until the last minute.

Also, you may be able to make an advance contribution to your RRSP.

If you turned 71 in 2011, you will need to wind up your RSP by Dec. 31, 2011. However, if you also have earned income in 2011 which can provide you with RRSP contribution room in 2012, or if you have unused RRSP contribution room, you might consider making your 2012 contribution or using up your unused contribution room before Dec. 31, when you should otherwise wind up your RSP.

While you may incur a small over-contribution penalty for the month of December 2011, you should be entitled to a tax deduction in 2012 for your RRSP contribution made in December 2011.

“This RRSP deduction will save you more tax dollars in 2012, and can ensure that you maximize contributions to your RRSP before it is closed, but you should speak with your professional tax and investment advisers to ensure this strategy is appropriate and your planned over contribution isn’t excessive in your circumstances,” Lovett-Reid said.

Another strategy is to base your retirement income fund (RIF) withdrawals on the age of your younger spouse or common-law partner. Again, if you are age 71 in 2011, you have to wind down your RSP by Dec. 31. Accordingly, you may likely be transferring most, if not all, of your RSPs to one or more RIFs before the end of the year.

If you have a younger spouse/common-law partner you may want to consider having your mandatory (i.e. minimum) RIF income withdrawal based upon the age of your spouse/common-law.

“This decision could reduce your required annual RIF minimum income, and allow you to defer tax on your RIF for a longer period of time,” Lovett-Reid said.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

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