Year-end tax planning tips

• Mark key dates on your calendar
• Open a First Home Savings Account (if you're eligible)
• Be strategic with RRSP deductions
• Time your TFSA transactions
• Make the most of RESPs
• Look at the full picture of your finances
• Bottom line

Stephen Meurice: It’s beginning to be that time of year.

[Dance of the Sugar Plum Fairy plays]

There’s a chill in the air. Store windows get a little more festive. Good cheer and merriment start to stir the soul. And before you know it, there’s just one thing on everyone’s mind: taxes.

[music stops]

Wait, isn’t that like a March or April thing?

Robbie Brown: Tax planning, like all wealth planning, is great to do throughout the year... 

SM: That’s our guest today, Robbie Brown.

RB: But in particular, as we approach the end of the year is a great time to look at it.

Robbie is the Director of Advanced Planning and Services and the Head of Wealth Management Taxation at Scotia Wealth Management. So, he’s a guy who thinks of taxes year-round.  And he says a little bit of planning now is going to save you some headaches come tax time in the spring.

RB: Exactly, Stephen. So, some of the tips we'll go over today will hopefully have our listeners well positioned to do that. Planning is key.

SM: So this episode, Robbie has 5 year-end tax planning tips. Everything from highlighting key dates, to maximizing government grants, to how to best use the new First Home Savings Account even if you don’t plan on buying a house in the near future. And who knows, maybe by the end of the episode you'll be so well prepared that April 30th will now be the most wonderful time of the year. I’m Stephen Meurice and this is Perspectives.

Robbie, welcome to the show.

RB: Thank you, Stephen.

SM: Okay. So as we mentioned in the intro, you have five year-end tax planning tips for us today. I believe your first tip is about some key dates to mark on our calendars. That's especially important, as I understand a big deadline has shifted this year, right?

RB: Exactly. So I'll start with the first one, which is December 15th, and that is the last of four quarterly income tax installments that will be due for 2023.

SM: Do a lot of people pay their taxes in installments?

RB: You know, if you just have a T4, so employment income, then your employer is taking off taxes as you go along. But if you have any sources of, say, self-employment income, or maybe you're retired and you have sources of investment income or pension income, then a lot of the population pays by installments throughout the course of the year. So, there's not as heavy a tax liability come April 30th.

SM: Right. So what's the next date people should be aware of?

RB: December 27th is the last trading day to complete a trade in 2023 for it to settle in 2023. And the reason that is important is if you are engaging in any sort of tax loss selling, which we won’t discuss today, but that date would be the day that if you wanted a transaction to settle in 2023, you would need to execute it on that day.

SM: So Christmas Day, Boxing Day and tax…

RB: Tax finite day [laughs]

SM: Okay, tax finite day.

RB: Investment trading day is the last day to make that happen.

RB: So the next in chronological order, December 31st. And there's three key reasons we'll talk about this one today. December 31st is the charitable donation giving deadline. Two of the other reasons you may look to December 31st as an important deadline is for Registered Education Savings Plans, RESPs, as well as Registered Disability Savings Plans, RDSPs. They have a December 31st deadline so that you may receive an eligible government grant based on certain criteria.

SM: Okay. And I think we're coming up to the big one.

RB: The big ones, two left — February 29th and this is the one that most Canadians likely have on the horizon.

SM: 29th did you say?

RB: 29^th. 2024 is a leap year. So, February 29th, that's the RRSP contribution deadline for 2023. So, if you want to be able to make an RRSP contribution and be able to claim that on your 2023 tax return, well, you have until February 29th, 2024. Now, that does differ, as you pointed out from other years where it is maybe March 1st and the rule states that is 60 days after the end of the year. Because we have a leap year this year, 60 days is February 29^th. The last date and likely the biggest. April 30th, that is the T1, so the personal income tax return filing deadline so that you do not have any penalties or interest applied.

SM: All right. Some key dates to remember just to go through it again quickly. December 15th, the deadline for when you're paying tax by installments for making that last payment of the calendar year. December 27th, the last trading day for 2023. If you want to…

RB: Engage in the tax loss selling.

SM: December 31^st, deadline for charitable donations, if you want to get that deduction on your taxes for that year as well as contributions to RESP and our RDSPs.

RB: Correct.

SM: February 29th, not March 1^st, is the RRSP contribution deadline for 2023. And of course, the most wonderful time of the year, tax deadline filing day, which is a Tuesday this year. And you have to get your taxes in by that.

RB: April 30th, 2024.

SM: All right, tax tip number two, Robbie.

RB: Tip number two, Stephen. If eligible, take advantage of the First Home Savings Account. And this is a new one. So very briefly, in order to open an FHSA, you must be a resident in Canada, at least 18 years old, and be a first time homebuyer. And generally, that means that you or your partner have not inhabited a qualifying home in the year or any of the previous four calendar years. The reason FHSAs might be on Canadians minds is this is a new account that essentially permits upwards of $40,000 to be tax free when saving for the purchase of your first home. This year, the first year's contribution maximum is $8,000. So, when you're looking at whether you contribute to an FHSA or a RRSP, Canadians who are eligible to open an FHSA say may be looking there. When contributing to an FHSA, if you know you're eligible and can open an account, if you say don't end up purchasing a first home down the road or within the allotted time period that an FHSA can remain open, you can transfer your FHSA contributions plus investment growth to your RRSP without having any RRSP room. So, it's like almost a bonus RRSP room, if you will. One caution would be the FHSA can only remain open for 15 years, so keep that timeline in mind. The other reason you might want to consider an FHSA or at least opening one this year, even if you don't have the funds to contribute to one, is there's a maximum carry forward on FHSA contribution room of $8,000. Which means if you opened an FHSA this year did not contribute, then in 2024 your contribution would be $8,000 for 2024 plus $8,000 for 2023. So, you could contribute up to $16,000 next year, which means if you know you're not going to have $8,000 this year, but you might have $8,000 or $16,000 next year, you could look to open one up this year so that you could max out at $16,000 in 2024. Also important to know about FHSAs, unlike an RRSP, you cannot contribute in the first 60 days of the following year and claim a tax deduction on your 2023 tax return.

SM: Okay. So tip number two was take advantage of the new FHSA if you can. Now what's tax tip number three?

RB: Know the basics of the Registered Retirement Savings Plan. An RRSP, likely the registered account most commonly known by Canadians, let's take a look at why you may want to brush up on them. When you contribute to an RRSP, you get a tax deduction which doesn't have to be taken right away. So, when you make it in the year or in the first 60 days of the year following, then that deduction is available to you for 2023. Or if you don't want to take it, you could wait and hold and then use it in a year, say, when your income may be higher and that tax deduction would be possibly generating a refund at a higher marginal tax rate. So, you could look to do that as well. Now, the maximum RRSP contribution in 2023, if you do not have any carry forward room is just under $31,000. And again, any un-deducted contributions if you don't take them this year can be carried forward and deducted in a future year.

SM: Can you push the tax deduction as far down the road as you want it or is only into the following year?

RB: No, it's indefinite. So whether you want to take it next year or three, four or five years down the road, that is up to you. And that's the same with the FHSA that we previously spoke about. Just because you make an FHSA contribution this year doesn't mean you have to take the deduction. You can take that in a future year where maybe your income's higher and you'll get a little more bang for your buck, if you will, and a larger refund at that time. I would note, whether you get a tax refund immediately and then use that tax refund to fund your lifestyle or further invest should be factored into that consideration with your wealth advisor.

SM: All right. Tip number three, we covered RRSPs. What's tip number four?

RB: Tip number four, Stephen, is knowing how to best use the tax-free savings account or the TFSA. Now this is a very commonly known registered plan, so it's not like an RRSP where when you contribute, you get a tax deduction on your tax return, rather when you contribute, there is no tax deduction, however, all future investment income earnings and growth are tax-free, both when earned in the account and then when they're withdrawn. And this differs from an RRSP where annual earnings and growth are tax deferred. You don't pay tax on it while it's in the RRSP, but when you take it out down the road, it's eventually taxable. I actually have two tips here. When it comes to utilizing and benefiting from your TFSA, if you can contribute early. So, if you can contribute this year's maximum, $6,500 back on January 1st, if you've done that, well you've benefited from the past 11 months of growth. That same principle applies for 2024. If you're in the position that you can contribute to your TFSA and let's say you've maxed it out right up until 2024, next year's contribution room, may be $6,500. It certainly won't decrease, and it could go upwards of $7,000. The TFSA limit is indexed in increments of $500. So we'll find out later this year. But, if you can contribute early in the year, in January or February, what you're going to benefit from that year's growth. Whereas if you contribute later in the year, you would have possibly missed out on 10, 11 months worth of growth.

SM: Right.

RB: Our other tip with regards to TFSA is if you may be in a position where you know you're thinking about making a purchase or you need to withdraw funds from your TFSA in order to use them early in 2024, you may want to consider withdrawing from your TFSA before December 31st. The reason being is when you withdraw from a TFSA, that withdrawal then gets added back to your contribution room, but not until January 1st of the following year.

SM: Right.

RB: So you think about maybe making a car payment or going on a trip or something, say January, February, March of 2024. Then you're going to be withdrawing from your TFSA. Well, if you withdraw between now and the end of 2023, that room will get reset January 1st, 2024. If you waited till January 1st of 2024 and withdrew, then your ability to re-contribute that amount unless you otherwise have TFSA contribution room, won't be until January 1st, 2025. So, it's just the timing and ability to re-contribute to your TFSA so you can put money back in if you have the capability of doing so and continuing to earn tax-free growth.

SM: Right.

RB: So two great tips for TFSAs there.

SM: Okay. Just one follow up, because people often just ask questions about the difference between TFSA and RRSP. For tax purposes, I guess, does it depend on the window of time that you're looking at? I mean, the RRSP can see the immediate benefit of it being tax deductible off of your return that you're filing in that particular year. Where the TFSA feels like a longer term thing because the benefit is on the growth and you don't get that immediate rush that you get from, you know, a bigger tax refund. How would you look at it in terms of comparing one to the other for tax purposes?

RB: This is a great question and one that a lot of our clients look to, should I contribute to my RRSP or TFSA? As you noted, you know, there is that rush, if you will, when you contribute to your RRSP and get that tax deduction or potentially lower your tax liability depending on what other sources of income you may have. But it's really taking a look from a holistic perspective with your tax and wealth advisors and determining with good planning what makes the most sense given your particular facts and circumstances. So, think your marginal tax rate, both now and in the future and your ability to maybe maximize both those accounts. Or maybe this is a, you know, should I do an RRSP because I know I'm not going to need that money until retirement. Or maybe it's I'm going to need that money to, three, four years down the road, for trips, education, homes, whatever it may be. The TFSA may be the better place at that time. It's really taking a look at it holistically. I would highlight that now with the FHSA, there's a third account in there for, you know, Canadians to take a look at and that'll come down to your personal situation.

SM: Right. Okay. Let's get to the final one. Tax tip number five.

RB: Let's talk about RESPs, Registered Education Savings Plans. RESPs are great because the investment income and growth are tax deferred. So similar to an RRSP, they're not tax free when the investment income and growth and grants are withdrawn down the road. But there's no annual taxation while the funds are earning and growing on an annual basis in those accounts. RESPs are also great because when you contribute to an RESP, on the first $2,500 of annual contribution, you can get a 20% return in the form of the Canada Education Savings Grant or CESG. There may be an ability to accelerate that depending on family income, but generally speaking, that's how the rules work. There is a maximum of $7,200. So in order to get the full grant, the $7,200 that the government may provide you based on your annual contributions, you would have to contribute $2,500 per year for 14 years and then $1,000 in the 15th year. And that would get you the full $7,200 grant. So a strategy that Canadians may employ where the parents or maybe the grandparents are looking to help out with post-secondary education, may be frontloading an RESP with an extra $14,000 in year one, the year that you open an RESP for the benefit of your child. So if you think about it, there's a $50,000 contribution limit and you need to make $36,000 of contributions to get the full $7,200 grant. There's still $14,000 worth of contribution room there. So, putting that in year one allows that to grow tax deferred for upwards of, you know, 17, 18, 19, 20 years or longer, depending on when the beneficiary is going to be attending post-secondary education. So, if you have the ability to do so, this is a strategy that we employ with clients to take advantage fully and really maximizing and utilizing an RESP.

SM: Alright. We've covered a lot of ground, I think we will leave it there. Robbie, thank you so much for coming on the show.

RB: Thank you, Stephen.

SM: I’ve been speaking with Robbie Brown, he is Director of Advanced Planning and Services and the Head of Wealth Management Taxation at Scotia Wealth Management. Robbie has a whole article featuring his 2023 year-end tax planning tips. So if you want to get more info or even check out some he didn’t cover this episode, we'll link to that in the show notes.