2023 Year End Tax Tips for Canadians

As we approach the end of 2023, we would like to share some tax tips that may help your 2023 tax liability as it pertains to your non-registered investment portfolio. Many of these tips are time sensitive and must be executed before December 31st.

Tax Loss Selling

There may be certain investments in your portfolio where the market value is below the adjusted cost base. In this case, if you were to sell this investment before the end of the year you would trigger a capital loss. This loss could be used to offset any capital gains realized during 2023. If there were no gains in 2023 you can carry this loss back up to 3 years to offset capital gains from these previous years. Be sure to discuss this with an advisor to ensure you avoid “superficial loss” rules.

Maximize your Contribution to your Tax-Free Savings Account

The contribution limit for 2023 is $6,500. You may have contribution room from previous years – as of January 2023 every Canadian who was 19 or older in 2009 when the program was launched has $88,000 in contribution room. If you have TFSA room, you can move investments from a non-registered account into a TFSA but be aware that this transfer is considered a deemed disposition in your non-registered account and could trigger taxable capitals gains. A capital loss claim that occurs upon deemed disposition via transfer to a TFSA would be denied by CRA.  FYI the 2024 TFSA contribution room is $7,000.

RRSP Contributions for those turning 71 this year

You have until February 29, 2024 (normally March 1^st but 2024 is a leap year) to make RRSP contributions that would be eligible to deduct against your 2023 income. Making contributions earlier allows you to take advantage of tax-deferred growth.

Your RRSP matures the year you turn 71 and must be converted to a RRIF before the end of the calendar year. Once it becomes a RRIF no further contributions are allowed. If you do turn 71 in 2023 and you have earned income, it may be worth your time to make an over-contribution in December of 2023. There will be penalties associated with the contribution above the $2,000 over-contribution buffer, however once the calendar flips to January 1, 2024, your contribution room will increase based on your 2023 earned income. It will be critical for your advisor to assess your 2023 earned income figure so the over-contribution penalty tax only applies for December of 2023. The penalty tax is calculated based on 1% of the excess contribution per month. The additional tax savings from the RRSP deduction for 2024 will likely materially exceed the assessed penalty. If this over-contribution strategy is not used, the contribution room created via 2023 income will be lost.

RESP Contributions

The lifetime contribution limit for an RESP is $50,000. Only the first $2,500 contributed will receive the full 20% Canada Education Savings Grant or $500. A full $2,500 lump sum contribution before Dec 31, 2023 will attract the full grant for 2023. If you have contribution room from previous years you can catch up by making a $5,000 contribution in the calendar year and receive $1,000 in CESG. Be aware, that any amount over $5,000 will not attract the grant even if there is contribution room from previous years.

Maximize First Home Savings Account (FHSA) Contributions

FHSA’s were introduced by the government this year to help Canadians save for their first home. To be eligible for an FHSA, Canadians must be at least 18 years old and the money is to be used for purchasing your first home. You are considered a first-time homebuyer, for the purposes of this plan, if you haven’t owned a home within the last four calendar years. Contributions can be made by the account holder, up to a maximum annual contribution limit of $8,000 per year, and lifetime limit of $40,000. Similar to your RRSP, contributions to your FHSA will be tax-deductible, and unused room can be carried forward. If you don't use your FHSA to buy a home, you can transfer the funds to an RRSP account anytime within 15 years. If you hold funds in a non-registered account and are saving for your first home, taking advantage of FHSA contribution room will decrease your taxable income.

Charitable Donations

You can contribute to a registered charity by December 31, 2023 and receive a donation credit for the 2023 tax year. Any eligible amounts given above $200 will be eligible for the higher federal credit rate of 29%.

Another option to making a cash donation is donating securities with an unrealized capital gain. The advantage of this strategy is this in-kind disposition is tax exempt and you receive a charitable receipt for the fair market value of the security at the time of donation. Be sure to consult your advisor when considering this strategy.