2022 Year-end tax planning tips

Tax planning, like all wealth planning, is not simply a one and done exercise. Rather, it involves ongoing annual planning and review with your wealth and tax professionals, taking into account your particular facts and circumstances as they change and evolve.

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The fourth quarter of the year is generally a good time to review your annual tax planning, especially as certain deadlines start to approach. Here are some tax planning tips to consider:

Important year-end deadlines

Keep these important dates in mind through the remainder of the year and into early 2023:

^* If the deadline falls on a Saturday, Sunday, or holiday, taxpayers have until the next business day to file. The deadline for filing your 2022 T1 personal income tax return is Monday, May 1, 2023.

Tax-loss selling

If you realized capital gains this year or during the prior three years, it may be beneficial to sell investments with accrued losses that are held in your non-registered investment account(s) before year-end to help offset the capital gains. An accrued loss is generated when the investments have a fair market value (FMV) less than their adjusted cost base (ACB).

The last trading day to realize losses for Canadian and U.S. securities is December 28, 2022, to ensure settlement of trades occur in 2022. You are required to apply your current year capital loss against your capital gains realized in the year. Any excess net capital losses can reduce your taxable capital gains in the three prior years or in any future years.

It is important to ensure that, if securities are sold at a loss, identical securities are not repurchased by you or an affiliated person within 30 days before or after the sale. Affiliated persons include your spouse or common-law partner (partner), corporations or partnerships controlled by you and/or your partner, or trusts where you or your partner is a majority beneficiary. These rules are known as the “superficial loss rules” – the loss incurred on a security sale is considered a superficial loss, which will result in the capital loss being denied. Instead of being able to claim the capital loss it will be added to the ACB of the identical securities that were purchased, which may reduce your future capital gain or increase your capital loss when you sell those repurchased securities.

Deferring capital gains

If you plan to realize capital gains before the end of the year, you may wish to review what your marginal income tax rate would be for 2022 as compared to 2023. If your tax rate is likely to be lower in 2023 because of your situation (retirement, maternity/paternity leave, back to school, etc.), you may consider deferring the realization of capital gains until January 2023 or later to reduce your overall tax bill for both years. Not only could you benefit from a lower tax rate next year but, more importantly, this strategy would enable a tax payment deferral of a whole year, as the taxes on a capital gain generated in 2023 are due by April 30, 2024.

As explained above in “Tax-loss selling,” you may also be able to offset any capital gains triggered next year with capital losses carried forward from previous years, reducing your tax obligation even more. However, given potential changes in the value of investments, you should consult with your investment advisor prior to implementing such a strategy.

Donations – cash and in-kind

If you are contributing to charitable organizations, these donations can help reduce your potential income taxes payable. The federal donation tax credit of 29% is applicable to donations over $200 (33% if you have income over $221,709), and there is an additional tax credit available provincially, with rates varying by province. Useful planning tips can include pooling donations with your partner and having one partner claim all donations. These can be made up to and including December 31, with the donation receipt dated accordingly.

Another strategy, called donations in-kind, is to donate qualifying securities with an accrued gain, including publicly traded securities. Your tax credit is based on the FMV of the shares when donated, and any gain triggered on the disposition has a zero percent inclusion rate, which essentially yields a tax-free charitable donation. There is an increased level of complexity when making donations in-kind, so it is important to discuss these with your investment and tax advisors well in advance of the December 31 deadline.

Tax-Free Savings Account (TFSA) contributions and withdrawals

Canadian residents aged 18 and older may contribute to a TFSA. Unlike an RRSP, TFSA contributions are not tax-deductible. Rather, all investment income and returns earned within a TFSA are tax-free. The annual maximum TFSA contribution amount is $6,000 in 2022 — rising to $6,500 in 2023 — and any unused contribution limit may be carried forward to future years. There is no deadline to make a TFSA contribution. The accumulated limit since 2009, when the TFSA was launched, and if you were 18 and older at that time, is currently $81,500.

TFSA withdrawals can be made at anytime tax-free. Generally, the withdrawn amount may be recontributed to the TFSA in the following calendar year unless you have unused TFSA contribution room in the year of withdrawal. Therefore, if you are considering a TFSA withdrawal in early 2023, you may wish to consider doing so in 2022 so that you will not have to wait until 2024 to be able to recontribute the withdrawn amount.

RRSP contributions

RRSP contributions are another way to manage your effective tax rate and liability. Contributions are tax-deductible against income up to your contribution limit. The maximum RRSP contribution limit in 2022 if you do not have any carryforward room is $29,210. RRSP contributions must be made by March 1, 2023, to be deductible on your 2022 personal tax return. Any undeducted contributions may be carried forward to future years, possibly when your tax rate may be higher.

Another option is to contribute to your partner’s spousal RRSP to facilitate income splitting in retirement. To accomplish this, the higher-income partner contributes to the plan of the lower-income partner, with the higher-income partner receiving the deduction. Withdrawals, despite being contributed by the higher income partner, are taxed in the hands of the lower income partner, allowing you, as a household, to take advantage of the lower marginal tax rate. If the annuitant partner withdraws a contribution from their spousal RRSP in the year the contribution was made or a contribution made in either of the two previous years, the withdrawal may be attributed back to the contributor partner, meaning it will be taxed in their hands, rather than the annuitant’s.

A new registered plan called the First Home Savings Account (FHSA) will allow first-time home buyers to contribute up to $8,000 per year starting in 2023. FHSA contributions are tax-deductible, like those made to your RRSP. However, unlike the RRSP, withdrawals from your FHSA are tax-free when used to purchase a home. Given the unique attributes of the FHSA, if resources to contribute to your RRSP are limited, you may consider holding off on contributing this year in favour of opening and contributing to an FHSA when it becomes available in 2023. Speak with your investment and tax advisors to determine which tax-deferred plan options are best suited for your investment goals.

Convert your Registered Retirement Income Fund (RRIF) and get access to the eligible pension income tax credit

If you are between ages 65 and 71 and are considering or are currently taking withdrawals from your RRSP, you may consider converting a portion of your RRSP to a RRIF to take advantage of the non-refundable Federal pension tax credit, applicable to up to $2,000 of eligible pension income. There is also an applicable provincial/territorial tax credit, except in Quebec, which varies by province. Eligible pension income for purposes of the pension tax credit includes RRIF income, the taxable part of life annuity payments and Retirement Pension Plan retirement benefits if you are 65 and over.

The Federal tax credit rate of 15% is applicable to the eligible pension income. By transferring $14,000 from an RRSP to a RRIF at age 65 and withdrawing $2,000 per year from age 65 to 71, you are ultimately saving $2,100 (15% x $14,000) of Federal income tax over seven years by claiming the pension tax credit, as compared to withdrawing the same $2,000 from an RRSP. There would be additional tax savings with the provincial/territorial tax credit, except Quebec. For couples, this amount can be doubled to $4,200 of Federal tax savings over seven years when each partner converts $14,000 of their RRSP to a RRIF and each withdraws $2,000 per year.

RESP contributions

For new parents or grandparents, setting up and contributing to an RESP before December 31 could be a smart way to start saving early for your (grand)child’s post-secondary education. RESP contributions are not tax-deductible, but they do grow tax-deferred in the RESP. Withdrawals to pay for your child’s education costs will be taxed in their hands. Depending on your children’s marginal income tax bracket, this may yield low-taxed education savings if they do not have other sources of income. If ever your child decides not to continue education after high school, there are ways to transfer the funds to another qualifying child or to your RRSP, subject to your contribution limit, in a tax-efficient manner.

Contributing to an RESP allows you, or rather your child, to benefit from the Canada Education Savings Grant (CESG) equal to 20% of the first $2,500 in contributions per year, or $500 annually, up to a lifetime maximum CESG amount of $7,200 per beneficiary/child. There may be an acceleration to receiving the CESG depending on your family income. A CESG exceeding the $500 limit could be received in the following year if sufficient carry forward room exists, up to a maximum of $1,000 (20% of $5,000 in contributions). Although there is no annual contribution limit for an RESP per se, there is an annual CESG limit of $1,000. There is also a lifetime RESP contribution limit of $50,000 per beneficiary. If you have the available funds, consider front-loading a new RESP with $16,500 ($2,500 + $14,000) to receive the annual maximum CESG and to maximize tax-deferred investment earnings on contributions that will not generate CESG payments. Indeed, because the contribution limit is $50,000 and contributions of up to $36,000 will generate the maximum amount of CESG payments (20% x $36,000 = $7,200), the additional $14,000 may be contributed as early as possible to maximize investment growth. Speak to your investment and tax advisors for further details if you wish to fully use the benefits of an RESP.

Pay investment expenses

Certain investment-related expenses must be paid by year-end to be able to claim a tax deduction or credit in 2022. Generally, these expenses include interest paid on money borrowed to earn income from property or investment advisory fees paid for non-registered accounts.

Commissions and transaction fees paid for the purchasing and selling of securities in non-registered accounts are not deductible on your income tax return. Rather, the commissions paid are added to the securities’ ACB or claimed as a selling cost of the security, which may lower your capital gain or increase your capital loss when you sell the security.

This article is only a reminder of general year-end tax planning considerations and deadlines. Everyone’s situation is unique, and any general tax planning opportunity may not benefit every person. Speak with your own tax advisor for further discussion and analysis and before implementing any tax planning strategies.

source https://rosenbergdri.ca/2022-year-end-tax-planning-tips/