Poet T.S. Eliot wrote in 1921 that “April is the cruelest month”, suggesting that it brings with it the pain of rebirth and renewal, while also reminding people of their past failures and losses.* Canadians might say that April is the cruelest month for another reason: it’s tax time. And, for some of us, it can bring regret for not taking the steps we could have taken to minimize our tax bills when we had a chance.
Fortunately, there some things you can do before year’s end to manage and reduce your tax bill this coming April.
1. Tax-loss selling
With tax-loss selling, you intentionally sell an investment to lock in a capital loss, in order to offset taxable capital gains realized on the sale of other investments – and potentially reduce your taxes. A capital loss realized in the current tax year is first used to reduce any capital gains realized in the same year. If there are excess capital losses, they can be used to offset capital gains realized in any of the three previous tax years (i.e., 2020, 2021 and 2022) to potentially generate a tax refund. As well, net capital losses realized in the current tax year can be carried forward indefinitely and used to offset future capital gains. Before selling an investment for tax purposes, it’s important to consider whether or not the investment still meets your investment needs. We can help you assess your portfolio and identify potential tax-loss selling candidates – before the year-end deadline. Remember – before implementing this strategy, you should consult with your professional tax advisor.
2. Deferring your capital gains
When you sell an investment that’s held in a non-registered account for a profit, you may trigger a taxable capital gain. If you have investments you’re thinking about selling at a profit, consider whether it makes sense to wait until the beginning of 2024 to do so. By waiting, you can delay any taxes due on the capital gain until April 30, 2025 (instead of April 30, 2024). What’s more, you may pay less tax if you expect to be in a lower tax bracket in 2024 compared to 2023.
3. Year-end bonus
If you are eligible, and you anticipate having a lower marginal tax rate next year, consider deferring the receipt of your year-end bonus (if your employer allows it) to early 2024 to reduce the tax bite. And, if your employer allows it, reduce withholding taxes at source by contributing the amount directly into your RRSP (if you have the eligible space for the 2023 tax year).
4. Charitable donations
Donations to eligible charities create tax deductions. Remember that to be eligible to be claimed on your 2023 tax filing, you must make the donation by December 29. If you are considering donating eligible securities (like stocks) in kind, it may take some time, so plan accordingly to ensure you don’t miss the cut-off. It can be worth it – donating in kind allows you to avoid paying taxes on any embedded capital gains, and the donation is valued at the fair market value of the asset, not its cost or adjusted cost.
5. RRSP contributions if you are turning 71
If you are turning or have turned 71 in 2023, you must “mature” (close) your Registered Retirement Savings Plan (RRSP) and transfer your assets to a Registered Retirement Income Fund (RRIF) by December 31 (or purchase an annuity). If you have earned income in 2023, consider making one last RRSP contribution based on your 2023 earned income before your RRSP matures. You will have to pay a 1% overcontribution penalty – but the tax savings should outweigh this. Otherwise, this contribution room will be lost, and you miss out on the tax deduction – unless you have a younger spouse under age 71. If you do, consider making the contribution to a spousal RRSP in 2024, as this still allows you to use your RRSP contribution room without incurring any over-contribution penalty. You can contribute to a spousal RRSP until the end of the year your spouse turns 71.
6. Other year-end contributions
Along with charitable donations, here are a few more contributions to make before year’s end to maximize their benefits:
- TFSA: The Tax-Free Savings Account (TFSA) 2023 contribution amount is $6,500, and you can catch-up on any previous eligible contributions at any time. Tip: If you plan to withdraw any funds from your TFSA in the near term, consider doing so before the end of the tax year. You gain back TFSA contribution room on withdrawals – and by making withdrawals before year-end, you can recontribute the funds as early as January 1, 2024 (rather than having to wait until the beginning of 2025).
- RRSP: To be eligible for your 2023 tax filing, you have until February 29, 2024 (yes, 2024 is a leap year) to make a contribution to your RRSP or spousal RRSP. However, making a contribution sooner rather than later allows you to benefit from tax-deferred growth sooner.
- RESP: Consider maximizing the benefits of Registered Education Savings Plans (RESPs) – including tax-deferred growth and government grants – by making a contribution before year end.
7. Expenses
You can deduct or claim eligible expenses on your 2023 taxes if you make them before year’s end. These include expenses such as eligible investment management fees, tuition fees, deductible accounting and legal fees, childcare expenses, alimony, medical expenses, and any business expenses (if deductible on your personal taxes).
As always, it’s important to consult your professional tax advisor to determine if certain tax strategies are right for you based on your individual tax situation. But taking the time before year’s end to do so can help ensure this April doesn’t turn out to be the cruelest month.
Talk to us today – we can help.
*April is the cruelest month - How these famous words enlighten us about seasonal depression in the spring. Sami Grace Donnelly, The Auburn Plainsman (April 5, 2023).
This information is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / TM Trademark(s) of Royal Bank of Canada. Used under license.