Tax the season

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This article was published 25/11/2023 (1033 days ago), so information in it may no longer be current.

It’s the most wonderful time of the year… for tax planning.

Sure, taxes are the last thing on anyone’s mind as the holiday season kicks into high gear.

But for the financially crafty, it just might be prime time to consider a few tips to reduce taxes owing for a juicier refund come spring.

Mackenzie Investments feels so strongly on this subject, it released a year-end tax strategies brochure for your reading pleasure.

One reason for this effort is that many Canadians don’t engage in tax planning until spring, when many of these ideas no longer apply, says Jacqueline Power, assistant vice-president of tax and estate planning at Mackenzie.

“Most wait until tax time in March and April, and then it’s too late.”

For your convenience, we’ve gathered a few taxable ideas that could help you save money.

Give to charity and thou shall receive … a generous tax credit

It’s certainly the right time of year to be giving to charitable organizations, especially if you want to reduce taxes on this year’s return this spring.

“A lot of people think that because we’re able to make contributions to our RRSP for the previous year in the first 60 days of the year, they think that applies to charitable giving,” Power says.

But you only have until Dec. 31 this year to be able to claim the charitable credit for 2023, which can be quite generous over a certain threshold.

“What people may not realize is once you get over $200, the tax savings are very favourable,” says Dauphin-based chartered professional accountant (CPA) Howard Wirch, spokesperson for CPA Canada.

In Manitoba, the first $200 gets you a non-refundable credit worth about 25 per cent (federal and provincial credits combined), or roughly $50 in total tax savings. Over that amount, every donated dollar results in about 46 cents in tax credits. If you’re in the highest tax bracket, giving feels even better with a credit exceeding 50 cents on a dollar over $200 in donations per calendar year, he adds.

Be kind with in-kind

An in-kind donation is a powerful tax reducing option for individuals and businesses with non-registered investments. The idea being that you might have a stock that has a significant capital gain, which means that once you sell it, you owe taxes on 50 per cent of that increase in value. But if you donate it in-kind — giving it directly to charity — you avoid paying those taxes owing. As well, you get the charitable tax credit for the value of the gift. “It ends up being a real win-win,” Power says. “Not only do donors not have to pay taxes on the capital gain, they also get a donation receipt.” Now, not a lot of people have investments outside their RRSP or TFSA. Investments in those accounts are tax-sheltered so capital gains are not applicable and, as a result, the in-kind donation rule isn’t either. But many individuals may have shares in publicly traded companies they work for or have worked for in the past that are non-registered and may be worth considering, says certified financial planner MaryAnn Kokan-Nyhof, division manager with IG Wealth Management in Winnipeg. “But if you are going to make an in-kind donation this year, do it sooner than later,” she adds. “It can take time to process these, which must be done before Dec. 31.” Also noteworthy, the rule doesn’t only apply to stocks. Mutual funds, bonds, real estate and other investments with taxable gains may qualify too.

Tax-loss harvesting

It’s been a tough couple of years for investors with many having assets in loss positions. In the greater context, however, it’s likely many well-heeled investors have assets that have seen large capital gains over the last decade. With that in mind, it’s worth considering tax-loss harvesting, whereby they can sell an investment in a loss position that can be used to offset taxes owing on an investment that had been sold and realized a significant capital gain. “Losses need to be used first in the year that they’re triggered or they can be carried back three years (to apply to past realized capital gains), but they can be carried forward indefinitely” to use against future realized capital gains, Power explains. Again, this rule only applies to investments in non-registered accounts—those sold at a loss or at a profit — and not in RRSPs and TFSAs.

Help out with a home purchase

Not all year-end tax tips are for non-registered investments or “wealthy folks,” says tax expert Evelyn Jacks, president of the Winnipeg-based Knowledge Bureau. Here’s one that can help young, would-be home-buyers. “Don’t miss opening a First Home Savings Account (FHSA) for 18-year-olds and older family members who may qualify to capture the unused contribution room available for 2023,” she says, adding this savings vehicle first became available this past spring. By opening the account now, an individual creates $8,000 worth of contribution room for 2023, which can be carried forward into 2024. Opening it now offers a head-start as contributions grow tax-free (to a lifetime $40,000 in contributions) and are withdrawn tax-free for a down-payment. Contributions also come with a tax deduction — like an RRSP. Parents, grandparents and others can’t contribute directly to a young adult’s FHSA, but they can give money to that individual to contribute. For individuals close to purchasing a home, Power recommends the strategy, even contributing just $100 before Dec. 31. Then they would have $15,900 to contribute next year to their FHSA to purchase a home, potentially in 2024, with a $16,000-deduction for a tax refund in 2025. Of note, unused FHSA contribution room can only be carried forward one year, so this strategy only works well if they’re buying a home soon.