Year End Personal Tax Planning Tips
As another year ends, it is important to review your finances and see if there are ways to improve your tax position heading into the new year. This year has been marked with significant volatility and rising interest rates should be top of mind in your tax and financial planning.
Top issues to consider heading into 2023
· Tax deadlines · Investment goals · Family situation · Retirement & estate planning · Other planning considerations
Payments that need to be made prior to December 31, 2022 in order to qualify as a deduction on your 2022 personal income tax return:
· Charitable donations · Medical expenses · Union & professional dues · Investment fees, interest, etc. · Spousal support payments · Political contributions · Interest on student loans · Contributions to an RRSP if you turned 71 during the year
** Deductible contributions to your RRSP or a spousal RRSP are due on March 1, 2023. Ensure you contact your accountant in early January if you need RRSP tax planning completed.
Tax Free Savings Account
You can contribute up to $6,000 into a TFSA in 2022 (must be over 18 and a Canadian resident). If you have not made contributions in previous years and are over the age of 31, you may be able to contribute up to $81,500 in total. Ensure you watch current year withdrawals when making a yearend contribution to ensure that you are not subject to over contribution rules & penalties.
Income splitting loans
Although not as beneficial as seen in recent years, prescribed rate loans to family members can be an effective way to split income. CRA’s prescribed rate will be increasing from 3% to 4% on January 1, 2023 so this planning should be enacted by the end of December 2022.
Any income earned in excess of the prescribed rate will be taxed in the hands of the lower income earning family member. Always ensure that tax on split income rules are carefully reviewed to ensure income is not subject to this legislation.
Your physical residence as of December 31, 2022 determines which jurisdiction your 2022 personal income will be taxed in. If planning to move, consider the tax rates of the new/old jurisdiction and schedule your move in conjunction with this knowledge.
Even if you are claiming the principal residence exemption in full on your tax return, you must report the sale of your personal residence to ensure that the disposal is not later reclassified as a taxable capital gain. If claiming the full exemption, you will need the address, year of purchase and the sale proceeds to complete this form on your personal tax return.
Retirement & estate planning
As noted above, you have until March 1, 2023 to make qualifying contributions to your RRSP and receive a deduction on your 2022 personal tax return. Ensure that you review your 2021 personal tax notice of assessment or your online CRA account to determine your RRSP contribution room. Over contributions are subject to onerous penalties.
Your applicable tax bracket determines the tax deferral of RRSP contributions made. For example, if your taxable income is in the 4th bracket and subject to combine federal & provincial tax in Alberta of 38%, you can expect a deferral of $380 for every $1,000 contributed (applies to income within this bracket only).
A spousal RRSP should be considered if you are in a position where you expect to see unequal retirement income with your spouse in the future.
Other planning considerations
Registered education savings program
If you have a RESP set up for your child(ren), you can contribute up to $2,500 per year to gain access to the Canada Education Savings Grant program. The grant is worth $500/year (up to $7,200 per beneficiary) for each year under age 18. If you can’t make the contribution before December 31, 2022, the grant can be carried forward to a subsequent year (within restrictions).
The final tax instalment for the year (if applicable to your situation) was due on December 15th. To reduce non-deductible instalment interest, ensure that all applicable instalments for the year are paid as soon as possible.
Your personal tax return might only filed once per year but steps to reduce your tax liability and improve your overall financial situation should be taken throughout the year. The above tips, in conjunction with discussions with RHF Accountants, can help you improve your tax position heading into 2023.