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The Investor’s Guide to Year-End Tax Savings

Strategies for Canadians can involve TFSAs, RRSPs, and capital gains/losses.

Matthew Elder 12 December, 2022 | 4:48AM
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Time is running out for 2022 and with it the opportunity to take action to potentially reduce the amount of income tax you will have to pay for the year. With inflation steadily on the rise – and with it interest rates and living costs – there’s added incentive to retain as much of your hard-earned income as possible.

While your income from work or investing this year is what it is by now, there may be some transactions you can make and other steps that could keep money in your pocket rather than of the tax man. The following is a year-end tax planning list compiled with reference to reports published by KPMG in Canada, CIBC and RBC.

Consider Realizing Capital Gains or Losses
There are several possible measures related to capital investments, such as stocks, mutual funds and the value of any bond holdings. If you have realized capital gains from the sale of such assets this year or in any of the three preceding years, consider selling money-losing securities in your portfolio now to realize a capital loss that can be used to offset those gains. Capital losses must first be used to eliminate gains realized during 2022.

Any additional loss amount can be carried back to reduce gains reported in 2019-21, resulting in a retroactive refund of tax paid in regard to those gains. Capital losses not used to offset any already-realized gains can be “banked” indefinitely, or carried forward, for use in the future For more information on year-end strategies related to capital losses, see The Silver Lining in Investment Losses.

An alternative to loss-harvesting is to consider delaying until the new year the sale of an investment that has a paper profit, thus deferring reporting the resulting capital gain until you file your 2023 tax return, if it would be to your advantage to do so in terms of tax savings.

Get Up to Date on TFSA Rules
You can contribute up to $6,000 to TFSA for 2022, in addition to any unused contribution room amassed from previous years. While contributions are not tax-deductible, income and gains earned within the account are tax-free, and withdrawals are not taxed.

If you’ve never started a TFSA, assuming you were over age 18 when the program was launched in 2009, your overall contribution room this year is $81,500, less any amounts you have contributed in the past. Your contribution room also includes any amounts withdrawn from the account, because you are allowed to replace amounts that you previously withdrew.

If you withdrew funds from your TFSA during 2022, you must wait until at least the beginning of 2023 to re-contribute that amount. So, if you are thinking about tapping into your TFSA savings, it would be wise to do so before the year ends. If you delay that withdrawal until early 2023, you would not be able to replace the amount of that withdrawal until the beginning of 2024.

In 2023, the annual TFSA limit increases to $6,500 (due to inflation), which means the maximum cumulative contribution room will rise to $88,000 – assuming you have been old enough to contribute since 2009 and you have not yet made use of the TFSA.

Consider Early RRSP Withdrawal
The deadline for contributing to a registered retirement savings plan that is tax-deductible for 2022 purposes is March 1, 2023, or 60 days following the end of the taxation year. The dollar limit for 2022 contributions is $29,210, up to 18% of your earned income during 2021, However, the earlier you contribute, the sooner your tax-deferred savings accumulate. (The RRSP annual dollar limit increases to $30,780 in 2023.)

While most people wait until retirement to begin withdrawing from their RRSP – or, at the latest, until the year in which they turn age 71, when a plan must be collapsed – it’s worth considering making an early withdrawal in a low-income year. Doing so means the withdrawal will be taxed at a lower rate than at a time when your income is higher. If this is the case, you would make a withdrawal prior to the year-end so that it would be taxed at your lower tax rate for 2022. Bear in mind, though, that you would lose the advantage of a future tax deferral on that money.

Final-year RRSP contribution
If this is the year in which you turn 71, to the extent you are able, consider contributing as much as you can to your plan before the year runs out – and your RRSP eligibility ends. Consider taking the following steps:

  • Make your 2022-deductible contribution by December 31. The March 1, 2023 deadline does not apply to you. This amount should include as much of your remaining RRSP contribution room as possible.
  • Contribute an extra $2,000 beyond your overall limit. (You are allowed to overcontribute $2,000 before a penalty applies.)
  • If you are still working, consider making an additional contribution beyond the above amounts that will be deductible for 2022. The rules state that the year in which you turn age 71 is the last one in which you are allowed to put money into an RRSP. Depending on how much earned income you have in 2022 (which will impact your 2023 limit), this will create additional contribution room of up to $30,780 for 2023. This amount would be eligible for a 2023 tax deduction – as long as you contribute this amount before the end of this year. While this would create a temporary overcontribution situation during the month of December, the penalty of 1% of the excess amount per month would be a small price to pay to gain a healthy tax deduction on your 2023 return.
  • Don’t forget you can continue to gain deductions for contributions you make to your spouse’s RRSP until after the year in which he or she turns 71.

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About Author

Matthew Elder

Matthew Elder  Former Vice President, Content & Editorial of Morningstar Canada, Matthew was previously an editor and columnist at the Financial Post and The Gazette in Montreal.

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