With the end of the year fast approaching, Canadian taxpayers will want to consider all the tax planning opportunities available to them.
Which year-end planning strategies apply to you will depend upon your specific circumstances and objectives. While you can make an RRSP contribution in the first 60 days of 2023 that can be used as a deduction on your 2022 tax return, most tax-related strategies must be implemented by Dec. 31, 2022.
Overall, the key to effective planning is being well-prepared. In this week’s column, I’ll discuss key opportunities and strategies to consider:
Investment planning opportunities
If you have non-registered investments with unrealized capital losses, you may want to consider a strategy referred to as "tax loss selling.” Realized capital losses must first be applied against net capital gains realized this year. If those capital losses exceed the current year recognized capital gains, they can be carried back to offset net capital gains realized in any of the three previous years (or forward indefinitely).
If tax loss selling is something you are considering, it’s important to be aware of a complicated set of tax rules that can potentially deny those capital losses. These rules are called the “superficial loss rules” which I’ve written about before (email me if you need this info).
Lastly, if you are considering this approach, I also encourage you to speak with your accountant to ensure any losses you trigger can be claimed as intended.
If you are considering selling a non-registered investment that has an unrealized capital gain, you could delay the sale of the investment until the new year to defer the taxes on the capital gain one year. Although this may be beneficial from a tax perspective, you also need to consider your investment objectives in considering this option.
You may alternatively be considering making a charitable donation before the end of the year to take advantage of the charitable donation tax credit for 2022. If you have non-registered marketable securities (including mutual funds and stocks) with unrealized capital gains, you should consider using those investments to make an in-kind donation to the charity. You will receive a charitable donation tax receipt equal to the market value of the investment and the capital gain triggered by the donation will be exempt from tax.
From a registered account perspective, the planning considerations will vary based on the type of account and your specific situation. While not exhaustive, here are some examples of the issues that arise at the end of the year with each type of account:
• If you are considering making a TFSA withdrawal, a withdrawal before the end of 2022 would create additional TFSA contribution room in 2023 while a TFSA withdrawal in 2023 would not create additional TFSA contribution room until 2024. If you are planning a TFSA withdrawal in early 2023, consider whether it could be withdrawn before the end of 2022 instead.
• Do you have a child that turned 15 years of age in 2022 and have not yet opened a Registered Education Savings Plan (RESP)? Making an RESP contribution of at least $2,000 (but within the annual limit) before Dec. 31, 2022 would not only allow you to receive the Canada Education Savings Grant for this year, but also for an additional two years on contributions of up to $5,000 per year.
• If you are considering purchasing a home in 2023 or 2024 and using the Home Buyers’ Plan (HBP) to help fund the down-payment, you should delay the HBP withdrawal until 2023. This will extend the timeframe to purchase a qualifying home an additional year, compared to a withdrawal made before the end of 2022 (i.e. until Oct. 1, 2024 rather than Oct.1, 2023). This will also delay the timeframe in which you must start to repay the HBP withdrawals by a full year.
Income splitting opportunities
Income splitting can be one of the most effective ways to save tax for your family, now and in the future. Some examples include:
• If you are saving for retirement, consider a spousal RRSP. While the pension income splitting rules allow a spouse who is 65 years of age or older to allocate up to 50 per cent of their RRIF income to the other spouse, a spousal RRSP contribution will provide a tax deduction for you now and 100 per cent of the future retirement income is taxed in the hands of your spouse (assuming the spousal RRSP attribution rules are not triggered), regardless of age.
• Certain income splitting strategies can be implemented with adult children and/or your spouse or common-law partner, such as gifting money to a spouse or adult child to make contributions to their TFSA account.
• Another consideration is loaning funds at the prescribed rate to your spouse or adult child, directly or indirectly through a family trust, to invest in non-registered funds. While it began the year at one per cent, the current prescribed rate is three per cent with further increases possible in the new year.
There are many other strategies that could be suitable for you. Here are a few other areas that you may want to explore further with your certified financial planner:
• Charitable giving outside of donating securities described above
• Maximizing your tax credits and deductions
• Planning for disabled individuals
It’s important to plan ahead - Taking the time to review your tax situation before the end of the year can result in significant savings. For more information on this topic, please speak to your financial planner.
You can also email me if you’d like a free digital copy of the IG Wealth Management 2022 Year-End Tax Planning Checklist or the Year-End Tax Planning Checklist for Business Owners, to help assist you in your preparation and planning.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.