Tax planning should be a year-round affair. But as year-end approaches, now is a particularly good time to review your personal finances and take advantage of any tax planning opportunities that may be available to you before the December 31st deadline.
As we enter the final weeks of 2022, here are some tax tips individuals should consider.
While it may be tempting to transfer an investment with an accrued loss to your RRSP or TFSA to realize the loss without actually disposing of the investment, the loss is specifically denied under our tax rules. There are also harsh penalties for “swapping” an investment from a non-registered account to a registered account for cash or other consideration.
To avoid these problems, consider selling the investment with the accrued loss and, if you have the contribution room, contributing the cash from the sale into your RRSP or TFSA. If you want, your RRSP or TFSA can then “buy back” the investment after the 30-day superficial loss period.
Although you have until March 1, 2023, to make RRSP contributions for the 2022 tax year, contributions made as early as possible will maximize tax-deferred growth. Your 2022 RRSP deduction is limited to 18% of income earned in 2021, to a maximum of $29,210, less any pension adjustment plus any previous unused RRSP contribution room and any pension adjustment reversal.
You can withdraw funds from an RRSP without immediate tax under the Home Buyer’s Plan (up to $35,000 for first-time home buyers) or the Lifelong Learning Plan (up to $20,000 for post-secondary education). With each plan, you must repay the funds in future annual installments, based on the year in which the funds were withdrawn. If you are contemplating withdrawing RRSP funds under one of these plans, you can delay repayment by one year if you withdraw funds early in 2023, rather than late in 2022.
The TFSA dollar limit for 2022 is $6,000 but there is no deadline for making a TFSA contribution. If you have been at least 18 years old and resident in Canada since 2009, you can contribute up to $81,500 in 2022 if you haven’t previously contributed to a TFSA. Any income earned within your TFSA is tax-free with some exceptions!
If you withdraw funds from a TFSA, an equivalent amount of TFSA contribution room will be reinstated in the following calendar year, assuming the withdrawal was not made to correct an over-contribution.
Be careful, however, because if you withdraw funds from a TFSA and then re-contribute funds in the same year without having the necessary contribution room, overcontribution penalties can result. If you wish to transfer funds or securities from one TFSA to another, you should do so by way of a direct transfer, rather than a withdrawal and re-contribution, to avoid an overcontribution problem.
If you are planning a TFSA withdrawal in early 2023, consider withdrawing the funds by December 31, 2022, so you would not have to wait until 2024 to re-contribute that amount.
If you turned age 71 in 2022, you have until December 31st to make any final contributions to your RRSP before converting it into a RRIF or registered annuity.
It may be beneficial to make a one-time overcontribution to your RRSP in December before conversion if you have earned income in 2022 that will generate RRSP contribution room for 2023. While you will pay a penalty tax of 1% on the overcontribution (above the $2,000 permitted overcontribution limit) for December 2022, new RRSP room will open up on January 1, 2023, so the penalty tax will cease in January 2023. You can then choose to deduct the overcontributed amount on your 2023 (or a future year’s) return.
This may not be necessary, however, if you have a younger spouse or partner, since you can still use your contribution room after 2022 to make contributions to a spousal RRSP until the end of the year your spouse or partner turns 71.
Tax-loss selling involves selling investments with accrued losses at year-end to offset capital gains realized elsewhere in your portfolio. Any net capital losses that cannot be used currently may either be carried back three years or carried forward indefinitely to offset net capital gains in other years.
In order for your loss to be immediately available for 2022 (or one of the prior three years), the settlement must take place in 2022. The trade date must be no later than December 28, 2022, to complete settlement by December 31st.
If you purchased securities in a foreign currency, the gain or loss may be larger or smaller than you anticipated once you take the foreign exchange component into account on the date of purchase and sale of the investment.
If you plan to repurchase a security you sold at a loss, beware of the “superficial loss” rules that apply when you sell property for a loss and buy it back within 30 days before or after the sale date. The rules apply if property is repurchased within 30 days and is still held on the 30th day by you or an “affiliated person”, including your spouse or partner, a corporation controlled by you or your spouse or partner, or a trust of which you or your spouse or partner are a majority beneficiary (such as your RRSP or TFSA). Under the rules, your capital loss will be denied and added to the adjusted cost base (tax cost) of the repurchased security. That means any benefit of the capital loss could only be obtained when the repurchased security is ultimately sold. However, if you repurchase the security on the 31st day or after, the “superficial loss” rules do not apply!
Certain expenses must be paid by year-end to claim a tax deduction or credit in 2022. This includes investment-related expenses, such as interest paid on money borrowed for investing and investment counseling fees, for non-registered accounts.
If you are in a high tax bracket, you may wish to have some investment income taxed in the hands of family members (such as your spouse, common-law partner, or minor children via Family Trust) who are in a lower tax bracket; however, if you simply give funds to family members for investment, the income from the invested funds may be attributed back to you and taxed in your hands, at your high marginal tax rate.
To avoid attribution, you can lend funds to family members, provided the rate of interest on the loan is at least equal to the government’s “prescribed rate,” which is 3% until December 31, 2022, and increasing to 4% on January 1, 2023. If you implement a loan before January 1, 2023, the 3% interest rate will be locked in and will remain in effect for the duration of the loan, regardless of whether the prescribed rate increases in the future. Note that interest for each calendar year must be paid annually by January 30th of the following year to avoid attribution of income for the year and all future years.
When a family member invests the loaned funds, the choice of investments will affect the tax that is paid by that family member.
You should consult with tax and legal advisors to make arrangements to implement a prescribed rate loan. By putting a loan into place before the end of the year, you could benefit from income splitting throughout the upcoming year and for many years to come.
If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.
Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.
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