As we approach the end of another year, it’s that crucial time again for our year-end tax planning checklist. In this blog post, I’ll be walking you through the essential steps to take before the year draws to a close. We’ll cover everything from capital gains and losses to maximizing contributions in your TFSA, RRSP, and RESPs. It’s not just about saving on taxes; it’s about setting yourself up for a successful and financially efficient new year. Let’s dive in together and make sure you’re on the right track for a strong start to the coming year.
Video Transcript: Year-end tax planning checklist for Canadian business owners
Let’s talk about year-end tax planning… our to-do list.
I’m George Dube, saving the world from tax one bow tie at a time®.
While I always recommend that tax planning needs to be done through the year, check out my New Year’s resolutions video to get started, but there are some key items you need to check off as the year draws to a close. It’ll help you save taxes, take advantage of credits and programs, plus ensure that you’re set up well for the coming year. And let’s go through the to-do list so you can talk with your advisors to make sure you’re on track and can step into the new year with confidence.
Before December 27th
So before December 27th, and this is critical, this is our first item to hit off of our list and the 27th is kind of 27th ish as you’ll see in a moment.
Triggering capital losses
So first is to determine with your investment advisor and tax advisor whether you should be triggering capital gains or capital losses. First, we’re going to focus on the losses. Assess what your capital gains were through the year. You’ll potentially be paying tax on this, or perhaps you have some prior capital gains over the past three years. If so, maybe you should carry back current year losses against these gains to pick up some tax refunds or reduce the amount of taxes that you owe.
Next, determine if you have any investments in a loss position. By selling a portion of those losing investments, you can offset your capital gains and generate tax savings or perhaps saving them for future gains you’re expecting maybe next year.
Makes sense?
But be careful if you’re triggering the losses in a corporation. This may reduce a CDA or capital dividend account balance, and this would allow us to make a payment that’s tax free to you, but if you’ve triggered those losses, that may reduce the amount we can pay out or eliminate it completely. So again, work with your advisors. You’ll need some time to trigger the sales, and this is why the 27th ish is important. Typically, at least two trading days are needed.
Also, beware of the something called the superficial loss rules. And essentially this is where someone’s going to buy back that same investment in the specified time, which is, I’m going to call it 30 days after you’ve sold. If you do that, your capital loss is going to be denied.
Before December 31st
So now we’re into December 31st. Our next item on the list, again completed for the calendar year end, but give yourself time. As you can imagine, most of your advisors are likely pretty busy with to-do lists from other clients and they’re going to have some time off very many professional services, whether accounting, legal offices, et cetera, around the December 15th timeframe, you can probably shoot a cannon off in the office with very, very little collateral damage. It’s our time for a break, so get it in beforehand.
Contributions or withdrawals
And let’s focus now on first those contributions or withdrawals. So time’s running out to make some of these final contributions or withdrawals to the different accounts.
TFSA
With respect to the TFSA, that contribution room accumulates on an annual basis. So if you want to put more in the new year, limit check with CRA to see if you have unused contribution room quickly. You can check your notice of assessment, for example, and if you’re going to withdraw soon, think about doing it before year end as the contribution room will be added back in the beginning of the next year. So some people accidentally over contribute to their TFSA due to the withdrawals. So while your TFSA limit increases for any withdrawals you make, it isn’t until the following year of the withdrawal that the limit is raised. So if you’re considering contributing funds, ensure you have the timing nailed down.
RESP
In terms of RESPs… Do you have a student, for example, with low income or do you need to make a deposit to get the matching money from the government?
RRSP or RRIF
With the RRSP or a RRIF, do you have the opportunity to withdraw funds to use up low tax bracket space or should you add funds to your RRSP? Although you normally have until March 31st. If you don’t need to convert to a RRIF though, what happens when you turn 71? So in other words, if you are being forced to go to a RRIF, now maybe the time to get that final contribution in before the end of the calendar year.
And if you’re using an RRSP to withdraw for the home buyer’s plan or lifelong learning plan, think about making withdrawals early in the new year instead of late in the calendar year. This will maximize the repayment period by one more year.
Lastly, should we be over contributing one final time? There’s a 1% penalty, but there’s an opportunity given an oddity in the set of rules, so you have an opportunity to contribute. You’ll be charged a 1% penalty, which all of a sudden will be eliminated come January 1st when more deduction room is created. Again, be careful with your advisors. You can certainly navigate that opportunity.
Creating eligible pension income
So think about how you can use up to a 50% split with a spouse of your pension income. This allows two things. First, a deduction for the person sharing with a spouse. So typically that high income earner is going to shift some of their pension income to the lower spouse or lower income spouse’s tax return saving taxes. Secondly, it allows for a tax credit to be used by both spouses instead of one. Effectively, this is doubling, if you will, a $2,000 pension tax credit if we’re talking 2023 so that if your spouse is over 65, they can get that same $2,000 tax credit.
First Home Savings Account
There’s a new home savings plan that’s available. Give it some thought. The FHSAA. So starting in 2023, Canadians can set up and start a tax free first home savings account. A little bit of a, again, what I’ll call an oddity, is even if you don’t have the funds today to put into the account, if you get it set up before the end of the year, you can still qualify for the $8,000 contribution room that exists and it’s carried forward allowing us the opportunity to top it up so that ultimately we have the chance to put $40,000 in there. So, the sooner we open up the account, the better. The account’s maximum period of participation is 15 years. So, if you open in 2023, you have to close it or purchase your house effectively by 2038. It’s a long time, but saving up if you can, the maximum per year, is going to be a five-year period.
Paying expenses eligible for tax deductions
So, we want to make sure we’re paying any expenses that are eligible for tax deductions and tax credits in calendar year as compared to post calendar year. And this oddity again works out in that, in contrast to most businesses in corporations, we have to, as an individual in many cases not all, pay or record our taxes on a cash basis as compared to an accrual basis.
So, for example, if you buy a desk on December 15th, we have it delivered to your home, but you don’t pay until January 15th. This means you get the expense in the following year if you’re following the cash method as compared to the accrual method of accounting. So, some examples of items that are covered off here in terms of the cash basis. So,you want to get this paid before calendar year end. There’s a list here you can see, I won’t read those off to you, but please make sure if you’re trying to get those credits and deductions in, you’ve done so prior to the end of the calendar year.
Making donations
With regards to donations, again, consider making those donations in 2023. There are proposed changes with the alternative minimum tax for 2024. In fairness, most people won’t be affected. But if you’re making a more sizable contribution and have income from other sources, this may be something to watch. It may not be, again, a problem if you’re not subject to the AMT, but just watch out. That AMT is essentially where they’re limiting within their calculation some of the donation tax credits we’re allowed. Formerly we were not impacted by the AMT for making donations. Now they’re going to knock off half of our donations as part of their calculation. Somewhat similarly, they’re impacting our capital gains. Where we used to be able to more generously give or donate publicly traded stocks and securities, they’re now going to be impacted by this new minimum tax in a very different way.
So the AMT is complex and figuring it out involves talking with your advisors. In fairness, even some accountants have trouble calculating the AMT and with the new calculation this year, everyone’s probably, or most of the accountants, including myself, will take a little extra time to determine whether or not AMT is going to be applicable. The AMT really, it’s a way of unfortunately punishing taxpayers, typically investors and business owners, for earning tax efficient income. So claiming childcare expenses, making donations. Essentially they’re going to hurt charitable organizations and whether you agree or disagree with that, now watching tax efficient income come into your hands may have a very different tax implication for 2024 and going forward as compared to 2023.
Capital gains
Earlier we were talking about capital losses or triggering capital losses. Now we’re going to talk about triggering capital gains. So we may want to trigger a capital gain before the end of the year. Again, one to use up lower tax rates if we have a lower income year or maybe we’ve got some capital losses, we can set those gains against. Again, watching out for opportunities and that big, big, big trading day issue, the December 27th ish.
Dividends
Ideally you’ve already declared the bonus or dividend at your corporate year end, but at the very least, remember to pay any tax withholdings on bonuses to the CRA on time. For many people this will be January 15th, but accelerated remitters will be even sooner as well. Don’t forget to file the T4 and T5 reporting by the end of February.
Expensive depreciable assets.
So, if you’re going to be otherwise needing assets shortly, consider acquiring before the end of the year and have those depreciable assets purchased and available for use by December 31st, 2023. That’s if you’re expecting and qualify for a full write off as compared to depreciating slowly over time. And unfortunately, rental properties aren’t going to be included with these rules, but other items will be, so take advantage of them. It’s not, not all that is lost. If we can’t do this before 2024, if before 2028 and the assets qualify, we can obtain it in an accelerated capital cost allowance claim. So again, take a look at what you’re needing with the business or the investment opportunities to see what will be most efficient from an investment after tax perspective.
Family trusts
For those using the family trust, it is important that the trustee have written or digital evidence of the trust allocations for the year. Assuming amounts haven’t already been paid out, of course, in which case it’ll be obvious. Further, the recipients must receive notice of the money or percent allocations owing to them. My clients will receive a video, actually already have, and a template package from us, to help guide them through this process. Other steps can be taken after December 31st, but ensuring the trustees have the proper documentation in place, again, is crucial as Revenue Canada becomes a little bit more picky with how they’re dealing with the family trusts.
Before January 30th – Interest on loans
So our next slide and yes, the date’s correct, it’s before January 30th, not the 31st. And so while not part of technically a year end, we think it’s important to understand and go through this. So interest on loans among companies or to individuals for income splitting purposes must be paid by January 30th to avoid having the income attributed back to the source, thus losing the tax savings purpose, probably, for the primary purpose, or one of, of setting up the loan in the first place and trying to split the income.
New trust rules
The next items with trusts isn’t technically again a year-end to do, but as of 2023, there are new trust rules in place that are really critical to plan before year end. These new trust rules starting for 2023 filings are due on March 30th or March 31st of the following year. Depending whether or not there’s a leap year and they’re going to catch a lot of Canadians off guard.
Bare trusts must now file
One of the items relates to a bare trust. They now must file a T3 Trust return for the first time starting in 2023. And for details on whether you may have a bare trust, see our bare trust explainer video.
Additional trust disclosures
Additional disclosures are also being required by the federal government for all trusts. Any stakeholder in a new trust now must be listed with their name, address, birthday, tax, residence, taxpayer ID…basic contact information for lack of a better word. So please watch the Bare Trust video and the trust video, which is I guess available to clients. Talk with your advisor and if you think that this may apply to you, check it out. Try and get it all taken care of. This is going to add a load of extra work for your accounting team and while again, technically they’ve got till the end of March, more or less, they also are juggling other deadlines starting with February, end of February, I should say. Deadlines with T4s and T5s. And then March brings into our trusts and our partnerships. And obviously most Canadians are very familiar with the April 30th deadlines and personal returns. There’s a smattering of other deadlines in there as well, including coming up UHT of course.
Underused Housing Tax
So as part of that extra load of work, if you own Canadian Real Estate, you’re probably aware now of the Underused Housing Tax. This has been a roller coaster, admittedly for new filings and part of that’s occurred this year and we witnessed that ride. So as of today, and I kind of have to specify that because of the changes that have been made through the year, really the deadline for the 2022 UHT returns had been extended from April 30th to October 31st, 2023. And now that’s been extended to April 30th, 2024. And so this means that both the 2022 and 2023 UHT returns are due April 30th, 2024. On the positive side, the government announced they are reducing the filing requirements for 2023 returns. So far, fewer Canadians are actually going to need to file and go through this paperwork exercise. For now, we’re going to take the win. A little frustrating but onward and upward.
Start that year-end tax planning checklist
So please, it’s time to get that to-do list underway. The clock is ticking. If you have questions or need help with your year-end activities, my contact information is below. Our team is happy to help talk with your advisors, talk with your accounting managers. You can also check out other videos for our tax planning and wealth building tips, including, coming up very shortly, or by the time you read this, perhaps it’ll already be there, our video on New Year’s resolutions. Please subscribe to stay up to date. There’ll be more. Thank you. And until next time, I want you to have the information you need to do wonderful things.
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Remember – circumstances are unique! This information is summary in nature. Seek out advice from your tax advisor about your specific situation.
