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While not much is new in year-end tax planning this year, tried-and-true strategies can be good conversation openers with the potential to strengthen advisor-client relationships.
“By recommending these value-added strategies to clients, you’re going to add tremendous value to the relationship, show you’re really looking out for their entire financial well-being, [and that] you’re not just focused solely on investment returns,” says Jamie Golombek, managing director, tax and estate planning, at CIBC Private Wealth in Toronto.
He adds that a side benefit is that saving taxes means more money available to invest.
Clients aren’t looking at their financial advisors to become their tax advisors or to replace their accountants, says John Waters, vice president and director of tax consulting services at BMO Nesbitt Burns Inc. in Toronto.
“But it’s [important to have] an awareness of the strategies that are out there, things that are changing from a tax perspective, to highlight those and perhaps direct clients to their accountant to figure out how they’re affected and what plans could be formulated,” he adds.
Here are some of Mr. Golombek’s and Mr. Waters’ top year-end tax tips for individuals in 2022.
Deadline for tax-loss selling
After a year of market turbulence, some clients may benefit from realizing capital losses to offset capital gains in 2022 or any of the three prior calendar years.
Capital losses can also be carried forward indefinitely to use against future capital gains. Trades must be executed no later than Dec. 28, 2022, to ensure they settle by Dec. 30 as Dec. 31 is a Saturday this year.
For securities purchased in a foreign currency, be wary of the effect of exchange rate fluctuations, Mr. Golombek emphasizes.
For example, the U.S. dollar appreciated strongly against the Canadian dollar this year, and the difference between the exchange rate on the purchase date and the exchange rate on the selling date may turn what looks like a loss into a gain.
Remind clients that if they plan to repurchase the security, they must wait at least 30 days to avoid the superficial loss rules.
2. Registered plan strategies
People who turned 71 in 2022 have one last chance to make a registered retirement savings plan (RRSP) contribution, but it has to be made by Dec. 31, 2022, and not by the March 1, 2023 deadline that applies to everyone else for the contribution to be deductible in the 2022 taxation year.
Those who are planning to withdraw from a tax-free savings account in the near future should do it before year-end so the amount of the withdrawal is available as contribution room on Jan. 1, 2023. If they wait until January, they won’t get that contribution room back until Jan. 1, 2024.
Parents who haven’t yet set up a registered education savings plan for a child who turned 15 in 2022 have one last chance to contribute $2,000 by year-end to attract a Canada education savings grant (CESG) for this year and create CESG eligibility in the next two years.
Meanwhile, post-secondary students without other income should consider withdrawing taxable educational assistance payments (EAPs) up to the basic personal amount by year-end. Check in with families of recent graduates to remind them that EAPs can only be paid for six months after a beneficiary leaves post-secondary education and see if they’d like to arrange a final EAP.
Families building savings within a registered disability savings plan (RDSP) can make a contribution before year-end to attract this year’s Canada disability savings grant (CDSG) and Canada Disability Savings Bond (CDSB). Also, RDSP holders with a shortened life expectancy must file a special election with the Canada Revenue Agency before year-end if they wish to make RDSP withdrawals of up to $10,000 a year without having to repay CDSGs and CDSBs.
3. Strategies for homeowners
Renovations that make homes safer and more functional for seniors and people eligible for the disability tax credit may qualify for the home accessibility tax credit, doubled in 2022 to apply to eligible expenses up to $20,000. Payments must be made by Dec. 31 to apply this 15 per cent credit against 2022 income.
Clients who are planning to create a self-contained secondary unit in their home to accommodate seniors or adults with disabilities should delay starting this work until 2023 so they can take advantage of the new multigenerational home renovation tax credit. It kicks in for the 2023 taxation year and will cover 15 per cent of qualifying renovation and construction costs up to $50,000.
Clients who have bought a residential property with the intention of flipping it within 12 months need to be made aware that profits on properties sold on or after Jan. 1, 2023, will be taxed as business income – not capital gains and not qualifying for the principal residence exemption. Mr. Waters points out there are life event exceptions such as a birth, death, divorce, new job or disability.
4. Pay now, save sooner
Whether it’s charitable donations or deductible costs such as child care, education, medical and investment-related expenses, paying for them before Dec. 31 allows clients to apply them to their income tax returns for the 2022 taxation year.
Note that, starting in 2022, medical expenses include certain additional fees related to acquiring donor sperm or ova, and medical expenses paid on behalf of a surrogate mother or sperm, ova or embryo donor.
With charitable donations, in-kind gifts of publicly traded securities with capital gains provide a tax deduction based on the fair market value and also eliminate the capital gains tax. However, Mr. Golombek says this type of transfer should be planned well in advance, not slipped in under the wire at the very end of December.
Another payment that’s better made sooner than later is an appropriate fourth quarterly tax instalment. Mr. Waters says advisors should run a pro-forma tax estimate for people with self-employment income or significant investment income that is not subject to tax withheld at source, so they can catch up with their Dec. 15 instalment if necessary.
Mr. Golombek adds that if a client’s income tax rate will change significantly between 2022 and 2023, either up or down, consider whether income or expenses can be shifted from one year to the other.
For example, timing capital gains and losses and deducible expense payments strategically may save on taxes.
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