While it is important to take care of tax planning throughout the year, a strategic approach at the end of the year can help you make sure that you’re making the most of your tax situation and taking advantage of any year-end tax planning opportunities available before the December 31st deadline. As we enter the final weeks of 2022, here are some year-end tax planning tips to consider.
If you have investments that have decreased in value over the course of the year, ensure you trigger the disposition to create a capital loss before year-end. This loss can then be used to offset any capital gains realized during the same calendar year, carried back three years, or carried forward indefinitely to reduce capital gains in future years. In order for the loss to be available for 2022, ensure that the transaction settles before December 31st, which means that the last trade date should be no later than December 28, 2022.
If you purchased investments in a foreign currency, be mindful of the impact of the currency fluctuations on your capital gain or loss. In certain cases, the gain or loss may be larger or smaller than you anticipated.
Similarly, if you have accrued capital gains on your investments, consider delaying the sale until 2023 and thus deferring the capital gain. This could be advantageous if you anticipate your tax rate to be lower in 2023.
A prescribed rate loan is a tax-effective strategy for transferring income from a person in a higher tax bracket to one in a lower tax bracket, such as your spouse, common-law partner, children, or even a family trust. This type of loan involves lending funds to the recipient and charging interest at the rate of interest that is set every quarter by the Canada Revenue Agency (“CRA”), currently 3%. This is an excellent way for anyone with investment funds earning more than 3% and whose spouse is in a lower tax bracket than them to save tax.
Due to the latest interest rate increases, the prescribed interest rate will increase from 3% to 4% on January 1, 2023. As a result, if a loan agreement is entered into before December 31, 2022, the lower 3% prescribed interest rate will apply as long as the loan remains in good standing. To avoid attribution of income, interest on the loan must be paid each year at the prescribed rate by January 30th of the following year, and interest payment should be recorded.
If you want to read an in-depth analysis of how prescribed rate loans work, see our article, Benefits of Using Prescribed Rate Loans to Save Tax.
Contributing to an RRSP can help reduce your taxable income, as well as provide tax-sheltered growth for the future. Contributions made by December 31st are eligible for deductions on your 2022 tax return. You also have the option to defer your RRSP contribution deduction if you expect to be in a higher tax bracket in the near future.
It is important to note that the deadline for making RRSP contributions for the 2022 tax year is March 1, 2023, and your maximum 2022 deduction is limited to 18% of income earned in 2021, to a maximum of $29,210 less pension adjustment.
If you turned 71 in 2022, you must make your final RRSP contribution by December 31, 2022, before your RRSP is converted into an RRIF or registered annuity. If you still have unused RRSP contribution room even after making the contribution to your RRSP in 2022, you have the option to use your contribution room after 2022 to make contributions to a spousal RRSP until the end of the year your spouse or partner turns 71. This will not work if your spouse has already turned 71.
The deadline for making RESP contributions for the 2022 tax year is December 31, 2022. Contributions made before December 31st are eligible for the Canada Education Savings Grant (CESG). The CESG is an additional grant from the Government of Canada, equal to 20% of annual RESP contributions of $2,500 or a maximum annual grant of $500 per child.
Hence, before December 31, take a few minutes to check your RESPs to make sure that you are on track to receiving the full CESG for the year. If not, consider making a catch-up contribution to ensure that you don't miss out on any free grant money. For more information on how you can maximize your RESPs, read our article, How to Maximize your RESP?.
Plan ahead to pay any deductible expenses before December 31st in order to reduce your taxable income for 2022 and claim these deductions and credits on your return. These include but are not limited to the following:
For tax purposes, individuals are taxed on their income based on where they live on December 31st. If you are planning to move between provinces, consider:
Note that if you moved to be closer to work, your moving expenses may be deductible.
If you are an individual and are required to make quarterly installments, make sure to review your 2022 tax liability and make your final tax installment on or before December 15th to avoid late interest charges.
If you have missed an earlier payment and need to catch up, make sure you do so before December 15th as the CRA will apply a late interest charge on any unpaid tax installments. The required tax installments for individuals with payment due dates are listed on the CRA website.
If you anticipate your taxable income to be lower in 2023 or will have excess tax deductions or non-refundable tax credits, you can request your employer to deduct less by filing federal Form 1213.
You may want to consider deferring certain employment income from 2022 to 2023 if you anticipate your taxable earnings to be lower in 2023. This could include deferring bonus or commission income (if allowed by your employer).
As a business owner, you should consider paying reasonable salaries to yourself and family members who work in your business before December 31, 2022. This will help to reduce your corporate income tax bill while providing your family members and yourself with RRSP contribution room for 2022.
Before paying dividends to any other family members, speak with your tax advisor to review the possible application of the Tax on Split Income (TOSI) rules.
Consider declaring your year-end bonuses before December 31st to take advantage of the corporate tax deduction in 2022. A bonus is generally deductible to the corporation in the year it is accrued, if it is paid within 179 days of the corporation's year-end and appropriate source deductions and payroll taxes are remitted on time following payment of the remuneration.
Also, it is generally taxable to the individual as employment income when it is received. Hence, since you will receive the bonus in 2023, the taxes on that bonus will be deferred by a year.
If you have a shareholder loan from your corporation, ensure that you pay back the loan within one year following the end of the taxation year of the corporation in which the loan was made to avoid having a personal tax income inclusion. There are exceptions to these rules. For more information on the tax rules with respect to shareholder loans, read our article, "Shareholder Loans and Their Tax Implications".
If your business needs new capital equipment, consider making those purchases before December 31st, so you can claim depreciation on the asset for tax purposes in 2022, provided that the assets are available for use in 2022.
The deadline to pay your final corporate income tax balances is two months after year-end for most corporations (three months for certain CCPCs). Please ensure you are caught up on your payments to avoid non-deductible interest charges. The required tax installments for businesses with payment due dates are listed on the CRA website.
It is important to review your strategies from year-to-year in order to keep up with changing regulations and understand how they may impact your specific tax situation. Be sure to consult a qualified tax professional before making any major financial decisions in order to ensure that you are getting the best advice tailored to your personal situation.
If you want to learn more about other tax and accounting topics, explore the rest of our blog!
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.