Another year is winding down. That means it’s time again to start to think about how to minimize your 2022 taxes, and better position yourself for the future to optimize your tax savings.
Some of these strategies are complex. Investors should discuss these with an advisor or a qualified tax specialist before putting them into action.
1. Registered accounts strategies
Make your RRSP contribution in advance
RRSP contributions for the year 2022 must be made by the end of the first 60 days of 2023. The RRSP contribution deadline for 2022 is March 1, 2023. It’s a good idea to make this contribution as soon as possible. You will then have your money working for you sooner. Also, markets have significantly corrected in 2022. So by making your contribution early, you may also benefit from a potential upswing in markets.
To find out the maximum you can contribute to your RRSP, consult your latest Notice of Assessment . This will show your RRSP available contribution room. Any RRSP over-contributions exceeding $2,000 are subject to a 1% per month penalty, so it’s important to know your available room. If you don’t have available cash to put into a RRSP, consider borrowing to make your RRSP contribution. You can also think about transferring mutual funds or securities in-kind to your RRSP to make your contribution. Be warned that transferring securities-in-kind (like funds) that have appreciated in value will generate a capital gain. But if you recognize a capital loss on the transfer, it will be deemed to be nil, and such capital loss can’t be used at any time to offset capital gains. It’s best to talk to an advisor before going ahead with such a strategy.
Contribute to a spousal RRSP.
Make your spousal RRSP contribution before year-end to minimize the possibility of having the attribution rules apply on any future withdrawals. For example, if you make a spousal RRSP contribution this calendar year and no contributions in the next two year, your spouse or common-law partner (CLP) can withdraw funds from the spousal plan and pay tax on the income as early as January 1, 2025. On the other hand, a spousal RRSP contribution made in January 2023 will mean that your spouse will have to wait until January 2026 before they can withdraw funds without the attribution rules applying. Note that spousal RRSP contributions are available as long as the recipient spouse/CLP doesn’t turn 72 in the year, regardless of the age of the contributing spouse. Despite the possibility of income splitting being now available, contributing to a spousal RRSP can give withdrawal flexibility.
Consider making a RRSP over-contribution if you turn 71 this year.
RRSPs mature by end of the year in which you turn 71, with no contributions allowed after that. Typically, people choose to transfer their funds held in an RRSP to a Registered Retirement Income Fund (RRIF) by the end of that year. There are other options too: make a withdrawal or purchase an annuity
Also, if you turn 71 in 2022 and earned income during the year, it may be worthwhile to make an over-contribution to your RRSP in December 2022 before you turn 71. There would be penalties of 1% per month on the over contribution amount associated with the over-contribution above the $2,000 over-contribution buffer allowed. But once the calendar changes to January 1, 2023, your contribution room will increase based on your 2022 earned income, potentially eliminating the previously mentioned over-contribution.
It will be critical for your accountant or tax advisor to assess your 2022 earned income to ensure that the over-contribution penalty tax only applies for December 2022. The penalty is calculated based on 1% of the excess contribution per month. If this strategy is implemented properly, the tax savings from the RRSP deduction for 2022 will likely far exceed the penalty paid for the over-contribution in December 2022. If this over-contribution strategy is not used, the contribution room created by the 2022 income will be lost. The contribution would need to take place prior to closing. Also, if you have a spouse or common-law partner that is 71 or younger in the year, a contribution can be made to a spousal RRSP.
Contribute to your spousal RRSP if your spouse/CLP passed away in 2022.
If your spouse or common law partner (CLP) passed away in 2022 and they had unused RRSP contribution room this year, the executor of the estate should consider making a final contribution to a spousal RRSP by March 1, 2023. This will provide tax savings for the deceased, as the RRSP contribution can be deducted against income on the deceased person’s final tax return.
Consider maximizing your TFSA contribution.
The Tax-Free Savings Account (TFSA) dollar limit was $6,000 in 2022 (it is expected to increase to $6,500 in 2023). First-time users must be 18 years or older and a Canadian resident. Since the TFSA was first available in 2009, the maximum total amount that a new TFSA user can contribute is $81,500. This contribution can be made in cash, or by transferring investments in-kind, which may trigger a capital gain.
A capital loss generated on an investment transferred into a TFSA would be deemed to be nil and can’t be used to offset capital gains at any time. When deciding if it is better to contribute to a RRSP or a TFSA, it’s important to weigh the flexibility offered by the TFSA versus the tax deductibility of a RRSP contribution. Timing, age, and marginal tax rates are additional factors to consider, keeping in mind that while RRSP/RRIF withdrawals are fully taxable, TFSA withdrawals are tax-free. If you plan to withdraw funds from your TFSA in the near future, consider doing so prior to the end of 2022. The amount of the withdrawal in 2022 will be added to your TFSA contribution room in 2023.
Contribute to an RESP.
The lifetime contribution limit for Registered Education Savings Plans (RESPs) is $50,000 per beneficiary. However, the Canada Education Savings Grant (CESG) is only paid on for the first $2,500 contributed to a RESP for each child each year. The CESG is paid at the rate of 20% on contributions up to $2,500 in the year, to a lifetime maximum of $7,200. If you aren’t able to take advantage of maximizing the CESG in a year, the RESP incorporates catch-up provisions, whereby up to a maximum of $1,000 in CESG can be received when catch-up contributions are made. Finally, if a child or grandchild turns 15 in 2022 and has never been the beneficiary of a RESP, to benefit from the CESG until age 17 (the last year that a CESG is paid), there are two options:
- $2,000 must be contributed to their RESP prior to the end of the year.
- If there have been three prior years with contributions of at least $100, only $100 in RESP contributions will be required in 2022.
There are extra benefits available for lower-income families. Some provinces have additional incentives to promote saving for education and training. Your advisor can help you make these choices.
2. Non-registered accounts strategies
Consider postponing the purchase of a mutual fund.
Be aware that most mutual funds tend to make taxable distributions to their unitholders in the last couple of months of the year. This distribution includes accumulated underlying realized income since the last distribution was made, which may have been last year at this time. If you purchase a fund near the end of the year, the value of the fund, so the amount you paid, likely reflects this accumulated income and then you'll be taxed on that income when the distributions are made in the year, irrespective of the timing of your purchase.
Consider deferring realization of capital gains to 2023.
One common year-end tax strategy is to defer realizing gains until the next calendar year. By deferring the sale of a security with an unrealized gain until January 1, 2023, the tax bill associated with the gain will not be due until April 30, 2024. This strategy allows you to postpone taxation but also to possibly take advantage of lower graduated tax rates in a different tax year. This strategy can be especially effective if you plan to be in a lower tax bracket in the next tax year. There could eventually be a change in the capital gains inclusion rate, which may make deferral less attractive. But usually, these changes are announced in the Federal Budget. These changes are not usually implement on a retroactive basis. Your advisor can help you understand if this strategy can work for you.
Consider Tax Loss Harvesting.
Tax-loss selling is a strategy used to realize the tax benefits on an underperforming investment. This strategy is especially effective if you have realized capital gains in the previous three tax years. To realize a capital loss this year, the transaction must usually be completed two business days prior to December 31. The capital loss realized will offset capital gains realized during the year. If no capital gains have been realized in 2022 or the capital losses exceed the capital gains realized in the year, the net capital loss can be carried back up to three prior taxation years to offset capital gains in those years and recover tax previously paid. Also, if you want to be able to claim the capital loss, you must avoid triggering the “superficial loss” rules. For more details, please see the article “The Superficial Loss rules- Have you tripped the wire ? “ You should talk to your advisor or tax specialist before engaging in any tax-loss selling.
Consider transferring investments held at a loss to a child.
By transferring an investment that has dropped in value to a minor child before year-end, you will trigger a capital loss on the disposition that can offset capital gains realized this year or potentially carried back to any of the previous three years. By doing this, you can transfer the tax liability for any future growth of the investment to the minor child. The attribution rules do not apply to capital gains realized by minor children, but attribution will apply for dividends paid, for example, on shares transferred.
Consider donating securities in-kind to a charity.
A donation to a registered charity provides tax credits (see this topic below). If you are planning to donate to a charity this year, consider directly donating publicly traded securities or mutual funds that have appreciated in value in-kind, instead of cash. You will receive a donation receipt equal to the value of the investment at the time of the donation and any resulting capital gain will be exempt from tax.
3. Other Tax strategies
Consider making charitable donations.
You can contribute to a registered charity by December 31, 2022, and receive a donation tax credit for the 2022 tax year. Any eligible amounts donated above $200 qualifies for a higher federal credit at the rate of 29% (up to 33% for high income earners) versus 15%. Provincial tax credits are also available, and their rates generally increase at the threshold of $200 as well. This is a non-refundable tax credit. It can be transferred between spouses/CLP. If not used in the year of the donation, it can be used in the next five following years. Donating securities in-kind that have appreciated in value is a very tax efficient way to give as explained above. There are other ways to donate other than cash. You can transfer the ownership of a life-insurance policy to a charity. Or you can donate a charitable gift annuity. Talk to your advisor to implement some of these strategies.
Consider lowering installment payments.
Some taxpayers are subject to tax instalments. These are usually due on the 15th day of the months of March, June, September, and December. Instalment payments are based on the previous year’s income. However, if your income for 2022 will be lower than previous years, consider reducing your final instalment payment on December 15. There is no need to pre-pay more taxes than you will owe. It would be wise to consult an accountant or tax specialist before making a lower installment payment. Interest and penalties will be payable if you end up owing taxes for the year.
Delay Home Buyer’s Plan (HBP) withdrawals until next year.
The HBP allows you to withdraw money in a tax-free manner from a RRSP to pay for a down payment for a home. However, some rules pertaining to this plan incentivize delaying the withdrawal until after year-end:
- The participant must purchase a qualifying home by October 1 of the year following the withdrawal,
- All HBP withdrawals must be made in the same calendar year, and
- HBP repayments must begin two years following the year of withdrawal.
Delaying a withdrawal until after year-end allows more time to purchase a home. It also means there is more time to make withdrawals and delays the time before repayments must be made into the RRSP.
Keep in mind that a new home savings vehicle will launch next year. Starting in 2023, the Tax-Free First Home Saving Account (FHSA) will be available. First time home buyers will be able to contribute $8,000 for the year 2023. Qualifying withdrawals from a FHSA will allow a taxpayer to buy a first home, but without the requirement of making repayments. An individual will not be allowed to use both the HBP or a qualifying withdrawal from the FHSA. They will have to choose one or the other. Also, taxpayers will be allowed to transfer funds from an RRSP to a FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits.
Create eligible pension income.
Spouses and common-law partners (CLP) are permitted to allocate up to 50% of their eligible pension income to their spouse/CLP. This allows for some income splitting between spouses/CLP. If you are age 65 or older in 2022 and have not received any eligible pension income, consider withdrawing from your RRSP or RRIF to take advantage of the opportunity to split pension income. Also, if your spouse/CLP is over the age of 65, you will be able to claim the pension income amount tax credit and your spouse/CLP will be able to, as well. In addition to the tax savings from income splitting, you will receive tax savings from the pension income amount tax credit. Talk to your advisor about applying this strategy.
Please don't consider this information as tax advice. Please consult a qualified tax specialist as needed.