New Beginnings: Tax Planning Opportunities for the New Year

As we reflect on the past year, now is a good time to start thinking about options to help maximize your personal tax savings opportunities and prepare you for the upcoming tax season. With the rapid rise in inflation, uncertain economy, high interest rates and real estate prices it is more important than ever to look at tax planning strategies that can help you to realize your financial goals. Recent CRA tax measures impacting certain homeowners as well as trust reporting requirements should also be reviewed to ensure you are not impacted. The proposed changes to the alternative minimum tax (AMT) rules that are expected to take effect in 2024 could also impact high income earners who are claiming certain tax credits or earn tax-advantaged income.

Steps to take now:

1. Gather Necessary Information Required for Year-End Tax Planning

Investments: Review your portfolio statements to analyze any unrealized gains/losses in order to consider triggering gains or losses in 2023 or deferring to future years. This is also a good time to estimate your expected net taxable gains or deductibles losses. Obtain year end account statements with investment management fees and interest expenses to claim as tax deductions.

Employment Expenses: Retain receipts and track any expenses not paid or reimbursed by your employer such as annual professional or union dues. Self-employed individuals should ensure they maintain a good record of expenses along with receipts.

Charitable Donations: Giving to registered charities can result in tax savings of up to 50 percent of the value of the gift. Consider if giving a donation in 2023 would be more advantageous from a tax perspective given the proposed 2024 AMT tax changes (discussed below).

Multigenerational Home Renovation Tax Credit: Starting in 2023, the Multigenerational Home Renovation Tax Credit is a refundable tax credit that allows for a credit up to $7,500 for certain costs incurred to construct a secondary dwelling unit for a senior or a person with a disability. Compile all necessary receipts for your accountant in order to correctly determine your allowable credit.

2. Investment and Income Tax Planning Review

RRSPs: Calculate your total RRSP contributions made for the year and review against your 2022 CRA Notice of Assessment RRSP available contribution room for 2023. Consider maximizing RRSP contributions to reduce current or future taxes and earn tax-deferred investment income. Any excess contributions should be withdrawn immediately to stop penalties from accruing. Contributions made to a spouse or common-law partner’s RRSP are also deductible. Contributions must be made on or before February 29, 2024, to be deductible for 2023.

TFSAs: The 2023 limit is $6,500. Consider maximizing TFSA contributions to earn tax-free investment income. Check with the CRA and your financial institution to ensure you did not contribute in excess of your 2023 TFSA contribution room.

FHSAs: The First Home Savings Account (FHSA) is now available to Canadian residents who are 18 years of age or older and have not owned a home in the year the account is opened or the preceding four calendar years. The annual tax contribution limit is $8,000 up to a lifetime contribution maximum of $40,000. Any qualifying withdrawals (including investment income earned) to purchase a first home are non-taxable. Note that the FHSA contribution room does not automatically accrue like it does with the TFSA. This means you should consider opening an FHSA account now to start accruing contribution room, even if you do not plan to make a contribution this year.

RESPs: Calculate your total year to date RESP contributions during 2023 to maximize annual Canada Education Savings Grants (CESG) for the year (up to $500 annually and a lifetime maximum of $7,200 per child).

3. Plan for New Tax Legislation

Alternative Minimum Tax: Proposed changes to the Alternative Minimum Tax (AMT) could have an impact for high income earners as well as certain trusts. The changes are expected to take effect in 2024 and will limit certain tax exemptions, deductions, and credits in the AMT calculation. It will particularly impact those who have a significant amount of their income earned as taxable capital gains and those claiming significant tax credits, such as donations. Please contact your professional tax advisor if you are concerned about exposure to alternative minimum tax in future years. Your Raymond James advisor can work with your tax professional to execute your tax action plan with respect to your investments.

Trust Reporting Rule Changes: Effective for tax years ending December 31, 2023 and later, Canadian trusts with no income earned or realized in the year are now legislated to file an annual T3 trust tax return with the CRA. This is a new change as trusts with no income earned in the year previously were exempt from this filing requirement. Furthermore, these trusts will need to report additional information on all trustees and many more trusts such as bare trust arrangements will now have to start filling a T3 annually. Speak with your tax advisor if you think you may be impacted by these new rules.

Residential Property Flipping Rule: Starting in 2023 and for subsequent taxation years, profits arising from the sale of residential property (including rental property) owned for less than 12 months or from an assignment sale will be fully taxed as higher business income instead of the lower capital gains tax rates. There are some exceptions to this rule, however careful planning with your tax advisor should be considered prior to selling any property held for less than 12 months.

Underused Housing Tax: The Underused Housing Tax (UHT) is an annual federal 1% tax on the ownership of vacant or underused housing in Canada that took effect on January 1, 2022. The tax generally applies to properties owned by non-Canadian citizens or non-Canadian permanent residents of housing in Canada. However, in some situations, this tax also applies to some Canadian owners (such as certain partners, trustees, and corporations). Significant penalties apply if the UHT return is not filed on time. 2023 UHT returns as well as property owners that are affected for the 2022 calendar year have until April 30, 2024 to file without being charged penalties or interest.

Take the time now to discuss the above tax planning opportunities with your tax accountant and Raymond James advisor and ensure you are on track with respect to your financial goals.