It's now days to the end of the year and for many of us, personal finance and taxes is probably the last thing on our minds. Keep in mind that with the end of the year brings deadline for many payments that must be made to qualify for tax savings in 2003.
According to the “Tax News Flash” by KPMG, there are certain expenses that must be paid by December 31, 2003:
- Charitable Gifs
- Medical expenses
- Union and professional dues
- Investment counsel fees
- Interest and other investment expenses
- Certain child and spousal support payments
- Political contributions
- Deductible legal fees
- Interest on student loans
If you are investing in spousal RRSPs and you may need to make withdrawals in the near future (for retirement for example), you might consider making the RRSP contribution in December as opposed to January or February to help get around the 3-year attribution rules.
Investing in a spousal RRSP in December 2003 means you might be able to take money out of the spousal RRSP in January 2006. Deferring the contribution by only 1 month to 2004, means that you must wait an extra year (January 2007) before you can withdraw the money to avoid attribution of income. A one month difference in the contribution date can make a year's difference in taxation of income.
If your 69th birthday occurs in the calendar year of 2003, you must convert your RRSP to RRIF by December 31, 2003. One of the planning opportunities is you can still make an RRSP contribution for 2003 before December 31, 2003.
In fact, you can over contribute to your RRSP and prefund the RRSP for 2004 even though you cannot contribute to the RRSP in 2004. There is a great opportunity for tax planning for individuals who are turning 69 and have “earned income” (generally includes salaries and wages, self-employment income, and rental income). Let's review an example of how this works.
Michelle is 69 years old in 2003, has maximized her RRSP contributions and has earned income of $55,000 this year. In 2004, Michelle will have RRSP contribution room beginning January 1, 2004 equal to $9,900 (18% of $55,000). The problem is she can't make an RRSP contribution after December 31 of this year. The “plan” would have her make a contribution in December of this year, before the RRSP is converted into a RRIF.
This results in an overcontribution and, as a result, a 1% penalty per month will apply on the overcontribution above $2,000. In Michelle's case, a $7,900 overcontribution will result in a penalty of $79 for December. On January 1, 2004, the overcontribution disappears since she will have $9,900 in contribution room available because of her 2003 earned income. As a result, she will no longer have to calculate a penalty. The result is that this RRSP contribution is deductible on her 2004 tax return (provided she has income to report), with a saving (assuming a 35% tax rate) of $3,465. Not a bad return for a cost of $79!
If you expect to have earned income past age 69, you may want to consider making an even larger overcontribution before your RRSP matures as long as it is no more than 18% of your estimated earned income. You will incur penalties but the benefits could be substantial.
Unlike the RRSP deadline, which is 60 days after the end of the year, the RESP deadline is December 31. You are allowed to contribute up to $4000 to an RESP each year for a child. If this limit is not used, it is lost forever. Unlike an RRSP contribution that can be carried forward to future years, the RESP is a use it or lose it. One of the advantages of the RESP is the government will contribute up to 20% in grants on the first $2000 deposited to the RESP. Unlike the contribution room, the grant can be carried forward to a future year. If you did not make a contribution to an RESP last year, make the $4000 contribution this year and you will qualify for an $800 grant.
The timing could not be better. An RESP may make the perfect Christmas gift this holiday season.