2023 Year-end tax planning tips

Like all wealth planning, tax planning is not simply a one-and-done exercise. Instead, it involves ongoing annual planning and review with the Rosenberg Dri Team and your tax professionals, considering your particular facts and circumstances as they change and evolve.

The fourth quarter of the year is generally a good time to review your annual tax planning, especially as certain deadlines 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 2024.

If the deadline falls on a Saturday, Sunday, or holiday, taxpayers have until the next business day to file.

For further information on important tax due dates, please see our article 2023 Tax due date calendar.

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 held in your non-registered investment account(s) before year-end to help offset the capital gains. An accrued loss occurs 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 27, 2023, to ensure settlement of trades occurs in 2023. You must apply your current year’s capital loss against your capital gains realized in the year. Any excess net capital losses can reduce your capital gains in the three prior years or any year in the future.

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 are majority beneficiaries, such as your RRSP or Tax Free Savings Account (TFSA). 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.

For further information on tax-loss selling, please see our article Tax-loss selling planning considerations – turning a negative into a positive.

Deferring capital gains

If you plan to realize capital gains before the end of the year, you may wish to review your marginal income tax rate for 2023 as compared to 2024. If your tax rate is likely to be lower in 2024 because of your personal situation (retirement, maternity/paternity leave, back to school, etc.), you may consider deferring the realization of capital gains until January 2024 or later to reduce your overall tax bill for both years. Not only could you benefit from a lower tax rate next year, but this strategy would also enable a tax payment deferral of a whole year, as the tax on a capital gain generated in 2024 is due by April 30, 2025.

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 before implementing such a strategy.

Donations – cash and in-kind

Donating to registered charities can help reduce your potential income taxes payable. The federal donation tax credit of 29% applies to donations over $200 (33% if you have income over $235,675), and there is an additional tax credit available provincially or territorially, with rates varying by province or territory. Top combined donation tax credit rates range from 44.5% to 58.75%. Useful planning tips can include pooling donations with your partner, resulting in one partner claiming all donations. These can be made up to and including December 31, with the donation receipt dated accordingly.

You may choose to donate in-kind publicly listed securities with an accrued capital gain. Your tax credit is based on the FMV of the shares when donated, and any capital gain triggered on the disposition has a zero percent inclusion rate, rather than the normal 50% inclusion rate, which essentially yields a tax-free charitable donation. An in-kind donation of publicly listed securities may enhance the tax efficiency of your charitable giving. There is an increased complexity when making donations in-kind, so it is important to discuss these with your investment and tax advisors well before the December 31 deadline.

Proposed changes to the Alternative Minimum Tax (AMT) in the 2023 federal budget may impact your charitable donation planning after 2023.

AMT is an alternative way to calculate Canadian income tax when you earn preferentially taxed income, such as capital gains, and dividends from Canadian corporations, in excess of an annual exemption. AMT may also arise when you claim preferential tax deductions to reduce your taxable income, such as the lifetime capital gains exemption (LCGE), and certain credits to reduce your tax liability.

As its name implies, AMT is a “minimum” or “floor” amount of tax that you may be subject to. Essentially, it is an “alternative” tax calculation that runs parallel to the “normal” tax calculation in your annual income tax return; whichever result is greater is your final tax liability for the year.

The federal AMT rate is set to increase to 20.5% (from 15%). The basic minimum tax exemption is also set to increase to the start of the fourth federal tax bracket (from $40,000), which is expected to be approximately $173,000 for 2024, indexed annually for inflation. There will also be an increase in the AMT inclusion rate of capital gains on donations of publicly listed securities to 30% (from 0%) and a decrease of allowable non-refundable tax credits in the AMT calculation to 50% (from 100%) such as the donation tax credit.

So, how might this affect your charitable donation planning in 2023 and the coming years? Because of the proposed changes noted above, which modify the AMT calculation for 2024 and onwards, you may be more susceptible to AMT after 2023 if you are a high-income earner and donate cash or assets in-kind to registered charities. Different planning options may be available to continue achieving your philanthropic goals while limiting your exposure to AMT. It is imperative to consult with your tax advisor to discuss the proposed changes to AMT and how they may impact larger charitable donations if you are a high-income earner.

For further information on the proposed changes to AMT and their potential impact on your charitable giving, please see our article Proposed changes to Alternative Minimum Tax and the potential impact on your charitable giving.

First Home Savings Account (FHSA) contributions

If you plan to become a homeowner, consider contributing to an FHSA before year-end. To open an FHSA, you must be a resident of Canada, at least 18 years old, and be a first-time home buyer. For the purposes of opening an FHSA, you are considered a first-time home buyer if you have not inhabited a qualifying home owned by either you or your partner in the current or any of the four prior calendar years.

Once opened, this account allows you to contribute up to $8,000 annually, subject to any available carryforward room, and up to a $40,000 lifetime contribution limit to an FHSA. Like an RRSP, contributions to an FHSA are tax deductible, but all withdrawals to purchase a first home are non-taxable, like a TFSA. Indeed, an FHSA combines the benefits of an RRSP and a TFSA in one account. Unlike an RRSP, contributions you make within the first 60 days of 2024 cannot be deducted against your 2023 income, as FHSA contributions are deductible on a calendar year basis.

Like RRSP contributions, you are not required to claim the FHSA deduction in the tax year a contribution is made. The amount can be carried forward indefinitely and deducted in a later tax year, which may be beneficial if you expect to be in a higher marginal tax bracket in a future year.

Are you contemplating whether to contribute to an FHSA or an RRSP? Even if you have no intention of purchasing a home in the future, contributing to an FHSA rather than an RRSP maintains your RRSP contribution room for future use. If you decide not to buy a first home in the future, you may transfer your FHSA contributions plus growth to your RRSP without affecting your RRSP contribution room. Alternatively, if you contribute to your RRSP first, you can only transfer the RRSP contributions to an FHSA up to your available FHSA contribution room, and you do not get that RRSP contribution room back in the future. The FHSA may be the preferred savings vehicle, even if you do not plan on purchasing a first home. Notably, you should be mindful of the 15-year time limit of an FHSA account.

For further information on the FHSA, please see our article First Home 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. Instead, all investment income and returns earned within a TFSA are tax-free. The annual maximum TFSA contribution limit is $6,500 in 2023 – potentially rising to $7,000 in 2024 – and any unused contribution limit may be carried forward to future years. There is no deadline to make a TFSA contribution. The accumulated contribution limit since 2009, when the TFSA was introduced, and if you were 18 and older at that time, is currently $88,000.

TFSA withdrawals can be made at any time tax-free. Generally, the withdrawn amount may be re-contributed 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 2024, you may wish to consider doing so in 2023 so that you will not have to wait until 2025 to be able to re-contribute 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 2023 if you do not have any carryforward room is $30,780. RRSP contributions must be made by February 29, 2024, to be deductible on your 2023 personal income tax return. Any undeducted contributions may be carried forward to future years to deduct against your income when your tax rate may be higher.

Another option is contributing to your partner’s spousal RRSP to facilitate income splitting. To accomplish this, the higher-income partner contributes to the spousal RRSP of the lower-income partner. The higher-income partner can claim the tax deduction. Despite being contributed by the higher-income partner, withdrawals are taxed in the hands of the lower-income partner, allowing you, as a household, to take advantage of the lower-income partner’s marginal tax rate. Notably, if the lower-income partner withdraws a contribution from their spousal RRSP in the year a contribution is made, or if a contribution had been made in either of the two previous years, the withdrawal might be attributed back to the higher-income partner, meaning it will be taxed in their hands, rather than the lower-income partner’s.

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

If you are between age 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. This tax credit, applicable up to the first $2,000 of eligible pension income, may be available if you are not already receiving 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 generally includes annuity and RRIF (including Life Income Fund) payments, the taxable part of life annuity payments from a superannuation or pension fund or plan, and RRSP annuity payments (not withdrawals) if you are age 65 and over.

The Federal tax credit rate of 15% applies 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 in 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 is a smart way to save early for your (grand)child’s post-secondary education. RESP contributions are not tax-deductible but 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 non-to-low-taxed education savings if they do not have other sources of income. If your child ever decides not to continue education after high school, there are ways to transfer the funds to another qualifying child or 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 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 carryforward 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 growth 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 use the benefits of an RESP.

Pay investment expenses

Certain investment-related expenses must be paid by year-end to claim a tax deduction in 2023. 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. Instead, 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.

In conclusion

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/2023-year-end-tax-planning-tips/