The rescue

Just sixteen sleeps until 2023. Finally. Because this year has sucked hard, the next one can’t come soon enough.

Our recent Blog Dog poll showed the majority, like me, think 23 will be a decent one. The most macho rate tightening in memory will end. Inflation should break. Growth should, be decent. Lots of jobs. The end of Kanye West, Alex Jones and (maybe) Trump. Ukraine probably fixed. Anyway, we can hope.

Others fret and vex. They worry about crazy Putin, nukes and WW3, not to mention a Taiwan invasion, a resulting chip crisis and US-China dustup. Maybe Covid 2.0. A debt crisis. Or Michael Bublé on world tour. So much to go wrong.

But here’s the thing. You can control only what you can control. That doesn’t include public health, the economy or NATO. Wasting time freaking over potential crises is as dumb as putting blind faith in the future. There are solid reasons at the moment to ensure you start off January on the right foot.

Interest rates are unlikely to come down a single basis point in 2023. Real estate will probably have a bad year. Mortgage renewals will be painful. We could have a period of recession. You might lose your job, or a contract, or some income. And it’s increasingly likely there’ll be more taxes. For sure housing-related fees will rise, but there’s a good chance Ottawa or your province may also up personal income taxes while reducing breaks such as the dividend tax credit, capital gains inclusion rate or the way options, RSUs and personal business incorporations are handled.

The T2 Libs are under pressure from the socialists (and the premiers) to dramatically plump health care spending as well as pay for the hideously expensive Canada Child Benefit, the ten-buck-a-day babysitting and the ever-swelling OAS pogey for the wrinklies. Revenues are not keeping pace with expenditures and with fat rates, the interest bill on a trillion dollars in debt will be epic.

In short, this is what to worry about. Not Zelensky, the S&P 500 or European gas supplies.

The first place to stick investment bucks

So in just over two weeks you need to make your 2023 TFSA contribution. We’ve now crawled up to the $6,500 mark in annual room, or $13,000 for a couple. Bear in mind this is the first place to stick investment funds. While there’s no deduction for making a contribution, growth is tax-free, withdrawals are free of tax and the income stream a fat TFSA can provide in retirement will not count as income nor reduce other benefits.

The math is compelling. A set of 30-year-olds maxing out for three decades and earning an average of 6% on their sheltered ETFs will have $1,085,000 after contributing a total of $390,000. That will throw off $65,000 in income – basically forever. No tax. And it will become sweeter in future as contribution limits rise more.

2023 also marks the first time ever the max RRSP contribution passes the thirty thousand mark. The limit will be $30,780 (rising to $31,560 in 2024). Unlike the TFSA – which everyone gets as the most democratic tax shelter we have – RRSPs shamelessly favour those who earn the most. Contributions are up to 18% of earned income, so the more you bring in, the more can be salted away in tax-free growth funds and used to reduce current tax payable. Folks pulling in $170,000 a year hit the ceiling, but most Canadians have accumulated a ton of unused RRSP room which they carry around forever.

Don’t squander it. Make a contribution in kind to shift existing assets into an RRSP – no cash required. Borrow money to invest then use the tax refund to pay down the loan. Open a spousal plan, so the higher-earner can deduct contributions and lower tax while the spouse gets the money which can ultimately be withdrawn at a lower rate.

Also remember that RRSPs shift tax. They’re not just for retirement. The plans are there to fund a sabbatical, or float you when unemployed or to lessen the tax if you take a commuted pension. You can even make contributions now and save the deduction for later years when your income – and the tax break – is greater.

Such flexibility and elegance. Perchance too much to last. Grab it all now.

2023 marks the dawn of the Frankenshelter

And, soon, we get the FHSA. It’s the Frankenshelter created because all the politicians say we have a housing crisis. (We don’t, actually.) This thing is an RRSP glued onto a TFSA, with annual contributions of $8,000 allowed which can be deducted from taxable income (like the retirement account). Investments inside the FHSA grow free of tax with a contribution cap of forty grand. Then the money can be extracted – no tax (like a TFSA) – and used to buy a house, which can generate tax-free capital gains. Gift on gift.

Earning money is a chore. In a time of recession, romping debt service costs or inflation, it gets even harder. But hacking tax is just as effective at building net worth. The three vehicles mentioned here are good places to start. Don’t blow it.

About the picture: “I can’t remember how long I have been reading your blog,” writes Robert. “Getting ready to plug next year. I have attached a picture of my dog. I picked her  up at the SPCA in Rimouski Quebec many years ago. Not sure of the breed. I think maybe Spitz and a bit of miniature collie.”

If you have a beast to share with the pack, send me a picture and some words of description. The address: [email protected]. – Garth