In 2022, a number of economic variables underwent changes far beyond what we had become used to in the past ten years. In this context, some of the decisions you make now could end up having significant budgetary and tax consequences in 2023. Here are a few that you might want to discuss with your advisor before the end of the year. 

To begin with, learn how to navigate in rough weather 

The turbulence of 2022 affected individuals in three main ways: buying power dropped due to inflation, investments declined in value due to market volatility, and borrowing costs increased due to higher interest rates – which also led to a slowdown in the real estate market. The best way to navigate in such conditions is to establish or review your budget before addressing the necessary decisions. In particular, if you have to take out or renew a mortgage in 2023, you will probably want to factor in much higher borrowing costs than you might have expected, as the following table suggests. Your advisor could help you evaluate your options, such as whether to choose a fixed or variable rate and the term of your loan. 

HBP: now or later? 

In this regard, our governments are proposing various measures to promote home buying in spite of selling prices that remain high and rising mortgage rates. The measure that’s been around longest is the Home Buyers’ Plan (HBP), which allows Canadian taxpayers to use up to $35,000 from a registered retirement savings plan (RRSP) for a down payment on their first property. Another program, the First-Time Home Buyer Incentive (FTHBI), established in 2019, allows you to obtain a mortgage with federal government "participation" that reduces your monthly payments. Lastly, in the 2022-2023 budget, the federal government announced the imminent creation of a tax-free “first home” savings account (FHSA) that would allow prospective first-time home buyers to save on a tax-free basis. 
 
If the good old HBP still seems like the best option for you, you might want to wait until 2023 to use it. That would give you an extra year to complete your plans to buy or build a home, since this must be done no later than October of the year following your HBP withdrawal. 

Lose now, gain in April 

One very common year-end tax strategy is to sell under-performing investments to realize the capital losses. These can then be applied against capital gains realized in the same year or the three previous years. Given this year’s poor stock market performance, this would be a way of transforming investment losses into tax savings. However, there are very strict rules around these transactions and the advice of both your advisor and your accountant could be paramount. Note, too, that tax-loss selling can only be done in a taxable account, which excludes RRSPs and tax-free savings accounts (TFSA), among others.  

Finally, don’t forget that in Canada the last day to trade securities for attribution to the 2022 tax year is December 28. 

Be aware of year-end distributions  

If you are getting ready to buy a mutual fund within a taxable account, you might want to ask your advisor about year-end distributions first. In fact, many mutual funds “distribute” their capital gains, dividends and interest income for the year to their unitholders just before year-end. When that happens, this income is added to the individual’s taxable income, even if the person just bought the investment and has yet to make any profit from it. Of course, these distributions also change the adjusted cost base of the units, so the individual will not lose out in the end, when the units are resold. Nonetheless, you might prefer to make your purchase after the distributions have been paid. 

Are you 71? It’s time to convert your RRSP. 

If you turned 71 in 2022, you have until December 31 to convert your RRSP, a retirement savings accumulation vehicle, into an annuity or a registered retirement income fund (RRIF). These are retirement savings decumulation vehicles that will pay out prescribed amounts to you each year. However, you also have until December 31 to make one last contribution to your RRSP if you have any unused contribution room. 

TFSA and RRSP: following the rules 

If you are planning to make additional RRSP contributions for 2022 to maximize your tax deduction, keep in mind that you do not have to do so before the end of the year. Any contribution made in the first 60 days of 2023 can be applied to tax year 2022 or 2023, whichever you choose. On the other hand, the rules for TFSAs can sometimes be trickier to apply, especially when it comes to withdrawals and contributions. For this reason, if you are planning to make a withdrawal in the near future, it might be better to do it before the end of 2022 rather than at the beginning of 2023. That way, if you make substantial contributions to your TFSA in 2023, you won’t risk recontributing amounts in the same year you withdrew them – which would result in penalties. Note, too, that with today’s high inflation rate, the TFSA contribution limit, currently $6,000 per year, is expected to increase in 2023. 

Tax credits for families: check them out! 

At both the federal and provincial levels, tax legislation provides many credits aimed at families and child care, and even informal caregivers. To get some idea of what’s available, take a look at the Government of Canada’s webpage on this topic, and the equivalent page of the website for your province of residence. One important point, however: to claim these deductions and credits on the income tax return you file next March or April, the situations and expenses that provide entitlement must be in effect in 2022.  

An RESP for Christmas? 

If you’d like to give a child or grandchild a more future-minded gift than the latest video game console, a registered education savings plan (RESP) could be a wise choice. It’s a savings plan where the returns compound tax free until the money is withdrawn to pay for expenses associated with postsecondary education. Even better, each year’s contributions provide entitlement to the Canada Educations Savings Grant (CESG), which consists of a Basic grant equal to 20% of annual contributions regardless of family income, and an Additional grant that could add another 10% to 20% if family income is below a certain threshold. Provincial grants may also be available (for example, 10% of contributions in the case of Quebec), along with the Canada Learning Bond, which could be as much as $2,000 for some families. To get grants for 2022, contributions must be made before December 31. Your advisor can give you all the necessary details. 

Time to give back 

A gift made to an eligible charitable organization in 2022 will provide a deduction on your next income tax return. There is a federal tax credit of 15% for amounts under $200 and 29% for anything over that, although some conditions apply. Provincial tax credits can also be claimed. Depending on the province, the total tax savings provided by a charitable donation could range from about 40% to 50% of the amount donated. If you have significant wealth, however, you might want to put a true planned giving strategy in place. This could be set up with professional advice and could include donations of qualified investments or life insurance policies. Something for 2023? 

Entrepreneurs, keep passive income in mind 

Finally, if you own a small business, the year-end is a good time to talk to your advisor and your accountant about the tax rules for passive income. These rules draw a link between the income your company earns from its investments – its “passive income” – and its eligibility for the reduced tax rate for SMEs on income from operations (known as the “small business” rate). Thus, any passive income above $50,000 will reduce the amount of your profits eligible for the small business rate. This provision may prompt you to make decisions about your investments, salaries, dividends and business expenses in order to minimize either your passive income or your taxable profits. 

This is simply a high-level overview of the decisions you might want to contemplate before the end of the year. For a more detailed consideration, contact your advisor – the sooner the better.