Wealth Watch: Getting investors prepared for the end of the year

Derek, what should investors do to prepare for the end of the year?

With 2017 nearly in the rear-view mirror, it is a good time to wrap up a few closing points before we sing “auld lang syne” and pop the champagne cork. Depending on how you’re invested and what your priorities are, there may be a few points to consider before the year ends.

One strategy to consider, prior to ending the year, is to take a look at your regular investment accounts and determine what your taxable position may be. In a regular account the gains and losses that accrue may have an impact on your tax payable once you file your taxes. Once the calendar flips into 2018, it’s too late to take any actions to mitigate that potential bill. As such, some investors consider initiating “tax-loss selling” as we head into the end of the year.

When you file your taxes you will need to report any capital gains that were realized through the year. Said another way, any investment that was sold for a profit in a regular account may have a tax obligation to pay on that gain. Similarly, any losses that were realized may offset those gains from a tax perspective.

Tax-loss selling involves selling positions that which are currently in a loss prior to the end of the year. This doesn’t mean you blow out anything that is in the red, the point is that you’re strategically and purposely taking a loss on a holding with the point of using that loss to offset a gain made earlier in the year.

Prior to acting on this, you’ll want solid advice from a tax-specialist and your wealth advisor. These two parties can identify any notable gains you’ve had throughout the year and determine if it’s worthwhile to purposefully take a loss elsewhere to potentially reduce the tax bill.

Often, investors may be hesitant to realize a loss on an investment, particularly if they think it has the potential to become a gain someday. Part of the tax-loss selling process requires that any investment sold for a loss can’t be repurchased for a period of at least 30 calendar days. If it is repurchased before the 30-day period, the loss may be considered “superficial” and won’t be eligible to offset your gains.

As such, one consideration prior to taking a loss, is whether the investor is comfortable being out of the investment for a 30-day period. The risk is that within those 30-days if the investment performs substantially well the investor misses out on those gains, in some cases it could be notable.

One way to mitigate the concern about the 30-day period may be to buy an investment that is similar to the one you were holding, but not identical. The example being if you’re selling an oil and gas stock that is deep into the red, you could turn around and buy a different oil and gas stock with the proceeds. In this example, if the price of oil skyrockets, you’ll likely profit in the new name, while still being able to use the loss on the other.

Keep in mind that the new investment will not be identical to the other and unique circumstances may change the validity of the tax-loss selling strategy. The point being is that tax-loss selling must be done in a timely manner prior to the end of the year and your unique scenario should be reviewed by a tax-specialist prior to acting.

Another key consideration before the end of the year is to ensure that your Registered Education Savings Plan (RESP) deposits are maximized to your plan. The grants within the RESP are earned on a calendar year basis. Said another way, the grants will be deposited according to the amount of money deposited within a calendar year.

If you are aiming to maximize the grants each year within the RESP you’ll likely want to make a final contribution before the end of the year to ensure you’re getting the most out of the grants. You may have the option to access past years’ grants as well, so consider that as well if you’re looking to make a lump sum deposit and have the choice to do in December or January. Likely, a December deposit will make better sense than waiting until January. Please consult with a wealth advisor and tax-specialist prior to acting.

For those of you that are turning 71 in 2017, you’ll need to convert your Registered Retirement Savings Plans (RRSP) to a Registered Retirement Income Fund (RRIF) before the end of the year. I would hope that you’ve taken the time to do this prior to December, but if not, it’s a requirement before the calendar year flips over.

Finally, your Tax-Free Savings Accounts (TFSA) do not have a deadline on contributions and you maintain that room as you head into the new year. As such there is no need to rush to top them up, although it’s likely sound advice. Your RRSP deposits can also be made up until March 1, 2018 to count for the current year, so again there is no immediate need to get it done in December.

Remember, we are not tax advisers and we recommend that individuals consult with their professional tax adviser before taking any action based upon the information found in this publication.

Happy investing,

Derek Fuchs

Senior Wealth Advisor

Scotia Wealth Management – Red Deer

We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication.

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