Year-end tax tips for 2023
These smart moves can help you avoid overpaying on your taxes.
December is a time for family, relaxation and the chance to indulge in a few too many sweets. Taxes, that’s an April problem, right? Sure – that is, if you’re willing to risk overpaying on your taxes. If you want to avoid the crunch in the spring and find opportunities to minimize your 2023 tax bill at the same time, then there are a few smart moves you may consider making before the curtain comes down on another year.
Of course, these are just guidelines to help you make sure you’re asking the right questions. Tax can be complicated and depends on your circumstances, so it’s important to talk to your financial and tax advisors to see what steps offer you the biggest benefit.
Balance capital gains and losses.
December is a good time to rebalance portfolios to smooth out the effects of capital gains and losses in your taxable non-registered accounts. If you have realized capital gains this year, you could offset the associated tax liability by selling securities with accrued losses before the end of the year. Keep in mind that a trade must be settled in the 2023 calendar year to be considered a 2023 disposition. Assuming a normal two-day settlement, a transaction must be initiated by December 27 to settle this year.1
Just be mindful not to make changes to your investments purely for tax reasons. The merits of your investment should trump any tax considerations, so talk to your advisor about which investments to sell. Also, be aware of the superficial loss rule, which denies a loss if you or an affiliated person repurchases the disposed investment or obtains a similar economic exposure within 30 days after the original sale.2
When you realize a capital gain matters.
Deferring the realization of capital gains to 2024 is another way to potentially minimize taxes. If a gain is realized in 2023, then tax on that gain would be due by April 30, 2024.3 If you wait until January to sell, then you won’t have to pay tax on that gain until April 30, 2025. Keep in mind that if you think you’ll have a lower marginal tax rate in 2024, the tax on the deferred capital gain will also be lower. If you expect to be in a higher tax bracket next year, then your capital gains tax will also be higher, which may be a reason to consider accelerating capital gains.
Carry-back and carry-forward rules can soften the impact of a capital loss.
One advantage of capital losses is that they can be used to offset capital gains accrued in other years – including previous reporting periods. While the current year’s capital losses must first be applied to this year’s capital gains, any remaining losses can be carried back to offset capital gains earned in the past three years.4 To illustrate, 2023 losses would first be applied to 2023 capital gains before being carried back to offset gains in 2020 through 2022. While losses can only be carried back for a maximum of three years, unused capital losses can be carried forward and applied to capital gains in any future year.
Check your instalments.
If you pay instalments, you’ll have received a payment schedule from the Canada Revenue Agency earlier in the year. The schedule is based on your previous year’s income. December 15 is the deadline for your final quarterly tax instalment payment, so it’s important to make sure you’re not overpaying.5
For example, if your income is heavily dependent on investments, but income from those assets has decreased in 2023, then you may owe less tax this year. That decrease in investment income won’t be reflected on your instalment schedule. To avoid possibly overpaying, carefully estimate your 2023 income and then make a final payment based on that calculation. The only caveat is that if your estimate is incorrect and you underpay income taxes for the year, you may be charged interest and penalties. Nevertheless, it is worth making the estimate to avoid overpaying. Although a tax refund is always enjoyed, a large refund doesn’t constitute good tax planning, given the loss of cash flow from mid-December until you receive your refund.
Settle expenses before year-end.
Certain expenses must be paid before December 31 if you want to claim them on your 2023 tax return. Some of these include interest, investment counsel fees, childcare expenses, accounting fees and professional dues. Similarly, expenses that can be claimed as tax credits for 2023 must be paid by the end of the year, including charitable donations, political contributions, tuition fees and medical expenses. Depending on anticipated income in 2024, you may want to consider paying these expenses by December 31 to benefit from the tax deduction or credit in 2023, rather than waiting until next year.
Work from home? There may be deductions for that.
Working from home may be one of the enduring legacies of the pandemic. If you are in this situation, you may want to consider the deduction for workspace-in-home expenses. The workspace must be either
- the place where you mainly do your work (more than 50% of the time)
- used exclusively for earning employment income, and used on a regular and continual basis for meeting customers or other persons in the course of performing your job6
This deduction may be available to you if your contract of employment requires you to pay the expenses, and the expenses were not reimbursable by your employer.
Common examples of deductible expenses include office supplies, long-distance phone calls, heating bills and a portion of your rent related to the home office. However, the cost of items such as furniture and computer equipment cannot be deducted (nor can a portion be claimed as deductible depreciation). Deductible employment expenses are a deduction on your personal income tax return.
As with all tax deductions, remember to keep track of your expenses. Having a paper trail of the receipts is important in the event that you are audited and need to prove the deduction.
Give securities instead of cash.
If you are planning to make a charitable donation, consider donating publicly listed securities or mutual funds instead of cash. This strategy will allow you to claim the full value of the gift as a donation without the realized capital gain being subject to tax. But if you plan to claim the donation credit on your 2023 return, you must make your donation by December 31 – or earlier, if possible. The administrative process for donating securities in kind can take a while, so it’s best to do this well in advance of the year-end, to ensure donation receipts have 2023 dates.
Optimize your RRSP.
Given the frenzy to make registered retirement savings plan (RRSP) contributions before the RRSP deadline – up to 60 days after the current year ends – it’s clear many Canadians appreciate the benefits of the tax-advantaged account. Because we’re heading into a leap year, the next RRSP deadline is February 29, 2024.7 However, if you are 71 at the end of the year, you have to make a final RRSP contribution no later than December 31. Similarly, your RRSP must be matured by the end of the calendar year.
How? By estimating how much room you would have in 2024 and overcontributing in December 2023. You will be subject to a penalty of 1% for the one month when you overcontributed (in excess of the $2,000 allowable overcontribution), but the tax savings generated by making the contribution should more than offset the penalty.
Those turning 71 can also take advantage of unused contribution room by contributing to a spousal RRSP, so long as the partner is 71 or younger.
Take advantage of the new FHSA account
Buying a home can be a challenge for many first-time home buyers, but a new registered account is aiming to help Canadians save towards their first home. When it comes to contributions, the FHSA works like an RRSP, in that they are tax deductible. That means any amount you add to the account gets taken off your taxable income that year.8 When it comes to withdrawals, the FHSA works like a TFSA, in that money withdrawn from an FHSA for the purpose of buying a first home is tax-free.9 For this to work, you must be a first-time home buyer at the time the withdrawal is made and money has to go toward a property located in Canada. To find out more about eligibility and details, visit Fidelity’s FHSA page. The tax advantages offered by the FHSA make it increasingly attractive amongst the registered accounts available in Canada.10
Minimum annual RRIF withdrawals
You don’t need to make a withdrawal the year you set up your registered retirement income fund (RRIF), but you will have to make minimum withdrawals in subsequent years. The minimum withdrawal amount is calculated by multiplying the market value of your RRIF holdings at the beginning of the year by a “prescribed factor” that increases with age.
Don’t miss out on the RESP grant.
Registered education savings plans (RESPs) can help parents and other family members save for a child’s post-secondary education in a tax-deferred account. The real benefit, though, comes from the Canada Education Savings Grant (CESG). The federal government grant matches 20% of your RESP contribution of up to $2,500 per child per year. If you max out the grant, that could help you save an additional $500 towards your child’s education, up to a lifetime maximum of $7,200 per child.11 If you haven’t contributed in previous years, the annual grant can be as much as $1,000 on a $5,000 contribution. RESPs are funded with after tax dollars, and unlike RRSPs, contributions are not tax deductible. Their benefit is derived from both the 20% CESG and the ability to grow on a tax-sheltered basis before being used as an educational assistance payment for the beneficiary.
Save for Canadians with disabilities with an RDSP.
The registered disability savings plan (RDSP) is a federal government program to help families save for the long-term financial security of individuals with disabilities. The RDSP shares many similarities with the RESP. First, contributions made to an RDSP are not tax deductible, but earnings are allowed to grow tax-free. Second, like the RESP, the government also pays grant money into an RDSP, although using a different formula. The RDSP grant is based on the contribution and the beneficiary’s family’s net income. Consider contributing on or before December 31 to maximize the income deferral and benefit from the grant.
Grow your savings faster with a TFSA.
The tax-free savings account (TFSA) will mark its 15th anniversary on January 1.12 The contribution room in the account has changed over the years, but its ability to help Canadians save hasn’t wavered. In 2024, TFSA contribution room rises to $7,000, up from $6,500 in 2023. If you’ve never contributed to the account before and you turned 18 in 2009 (or earlier) then you’ll be able to contribute up to $95,000 as of 2024. Now is an excellent time to talk to your advisor about how to make the most of this contribution room – and be ready to make your 2024 contribution in January!
Don’t put off your tax planning to the spring.
Few people enjoy doing taxes, but as you can see here, it’s to your advantage to keep some of these tax considerations top-of-mind heading into the end of the year. Take advantage of every tax-saving opportunity you can today – your future self will thank you. Your financial advisor can help you identify and take advantage of these potential tax savings. Do things right and you may even receive a little post-holiday “gift” from the taxman in 2024!