It may not be everyone’s idea of a good time, but allocating time on tax planning in the final weeks of the year can potentially save you a bundle when you file your return in the spring. Here are six year-end strategies that can go towards helping you reduce your tax burden.
1. “Front load,” “back load” and combine charitable donations for maximum savings
First on the list is the one you can feel good about from all sides: charitable donations. You can claim donations on your 2022 return as long as you make them before December 31. In any given year, you can claim charitable donations up to 75% of your net income.
For the federal credit, you can claim 15% of the first $200 donated, plus 29% on amounts above $200. (Note also that some of your donation could be credited at 33% if you’re in the 33% bracket – now the highest – the federal government added in 2015.) BC also offers a 5.06% credit on the first $200 and 16.08% beyond that.
With those numbers in mind, it pays to donate as much as you can this year, and perhaps make donations you were planning for 2023 in 2022 instead, if you expect your income to be higher this year. Conversely, if you’re expecting higher income in 2023 or in the four years following, it could make sense to carry forward donations from this year. You can also combine your donations with those of your spouse and claim them on one or the other’s tax return to maximize their tax-sheltering impact.
One final tip: if you’re donating money held in an investment† such as a stock, you’re best to donate the investment itself, rather than selling and donating the cash. When you do this type of donation (called an “in-kind” donation), the charity will issue you a receipt for the investment’s current value, and you’ll decrease the capital-gains tax on a sale.
2. Take advantage of tax-loss selling (but watch for these two traps)
A more timely strategy is tax-loss selling, in which you sell a money-losing investment and use your loss to offset gains on other assets. Do note that this doesn’t apply to tax-sheltered investments like tax-free savings accounts (TFSAs) and registered retirement savings plans (RRSPs).
This move is top of mind for some because of the market decline this year (the TSX has fallen 8.4% as of this writing, while the S&P 500 is down 21%). This has left many investors with losing positions in their portfolios.
But if you’re considering this strategy, there are a couple things to keep in mind, starting with the “superficial loss rule.” This states that if you sell an asset, you or a person associated with you (your spouse, for instance) can’t buy it for 30 days before or after the sale. If that happens, you can’t deduct the loss.
And while tax-loss selling can be attractive in a year like this, tax considerations should always take a backseat to investment quality. For example, if you sell a strong stock just to book a loss, you may end up doing so just before its next leg up. Bear in mind also the market’s tendency to rise into year-end – a phenomenon known as a Santa Claus rally. That could lead you to buying back the same investment at a higher price.
3. Make the most of tax-sheltered growth in your TFSA
Speaking of down markets, this next tip won’t help you much in 2022, but it will help defer taxes in future years. That’s to maximize your 2022 contributions to your tax-free savings account (TFSA) and ensure your TFSA holdings are in assets that can appreciate and/or pay dividends (rather than cash – something 56% of TFSA holders hold in their accounts, according to statistics from January 2022).
You’ll want to hold growth assets in your TFSA because you can later withdraw dividends and capital gains without having to report them on your tax return. And with markets down this year, now could be a good time to add stocks to your TFSA, either directly or through a mutual fund or exchange-traded fund, if doing so fits your goals, timeline and risk tolerance.
You can hold up to $81,500 in total TFSA contributions as of 2022, if you were 18 years old before TFSAs were launched in 2009 and a tax resident of Canada. For 2023, the annual contribution room for TFSAs will be increased to $6,500.
4. Self-Employed? Make capital investments now – and consider incorporating
If you’re self-employed, there are two year-end strategies to consider. The first: if you’re eyeing a new computer, say, or other tools, it could pay to buy them before December 31. These assets depreciate over time, so under capital cost allowance rules, you can’t claim the entire amount of your purchase this year. But some of it will count toward your 2022 taxes if you use it to start generating revenue before December 31. Speak to your accountant or tax professional for details on capital cost allowance.
Moreover, if you’ve considered incorporating but haven’t quite gotten around to it, now may be the time. When you incorporate, your corporation would pay you a salary and you could keep excess cash in your corporation, where profits are taxed at a lower rate.
Before incorporating, speak with an advisor and your tax professional about the process, whether it’s right for you and, if you do incorporate, about tax-efficient ways to withdraw your capital from the corporation when the time comes.
5. Employed? Use your health benefits before December 31
This fifth tip isn’t so much a tip as a year-end reminder: if you have benefits through your employer and haven’t used your full allotment (such as eyewear, dental or massages), make sure you make use of them before December 31. Not doing so is essentially leaving money on the table.
One saving grace is that not using these won’t cost you in a literal sense, because residents of provinces outside Quebec don’t need to include employer-paid premiums for benefits such as dental and eye care in their income.
6. Retired? Keep track of health costs – and consider a partial RRIF conversion
If you turned 71 this year, you need to convert your RRSP to a registered retirement income fund (RRIF) by December 31. But even before you turn 71, you may benefit from converting a portion of your RRSP to a RRIF account to take advantage of the federal pension income tax credit – this credit is worth $300 in tax savings for the year. Anytime after age 65, withdrawing a minimum of $2,000 from your RRIF will allow you to take advantage of this valuable credit, if you haven’t already done so. Consult with a tax specialist for the course of action that is best for you.
Finally, a housekeeping note: make sure you’re tracking your medical expenses, as you can deduct them against your income so long as they total more than 3% of your net income this year. Even if you have benefits and they pay for, say, half of a new pair of eyeglasses, the remaining half would count toward the 3% threshold.
Moreover, you can use any 12-month period you wish, so long as the end of that period falls in the 2022 tax year. For example, if you had expenses from December 2021 but didn’t have enough in total to qualify for the deduction that year. This year, you could set your 12-month period from December 1, 2021, to December 1, 2022, so you could use those late-2021 medical expenses to get over the 3% mark.
Start the year with the right advice
One extra tip is to check in with your advisor and start the new year off ready to face the future. From investments to insurance, your advisor will work with you to ensure you’re putting your money to good use and can work with your tax professional to ensure a tax-efficient portfolio that’s focused on your goals. Make an appointment today.
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