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Useful tips. (Sorry)

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RYAN   By Guest Blogger Ryan Lewenza

We’re quicky approaching the end of the year so this is probably a good time to review some tax tips to get you ready for your favourite activity – preparing and filing your taxes.

If you’re like me and millions of others, the process and time spent organizing all your different tax documents, the back-and-forth emails and calls with accountants, the sometimes hours spent on hold with the CRA, and the ultimate filing and paying of taxes, sends you/me into a dark place that I wouldn’t wish on my worst enemies. Taxes suck but are unavoidable so let’s see if we can lessen the pain and the amount we have to pay to the government this year.

First, we always want to lower our taxable income through the use of (legal) deductions and credits. Here’s a list of some common ones:

  • The starting place is to try to max out RRSP contributions. When making an RRSP contribution you will receive a tax slip in the amount of the contribution. You can then deduct this from your taxable income, which will lower your taxes and possibly result in a tax refund.
    The maximum contribution is 18% of your previous year’s income, up to a maximum of $30,780. The higher the income the greater the tax benefit so be sure to max out RRSP contributions in any years where your income is high. And if you’re ever going to consider commuting a pension then accumulate as much RRSP room as you can as it will come in handy in the year you commute. When you commute a pension you receive a non-taxable amount and a cash or taxable component. In the year you commute the pension you then make a large RRSP contribution with the cash or taxable component, which helps to greatly reduce the overall tax of impact of commuting a pension.
  • Next is topping up your TFSA accounts with this year’s maximum increasing to $7,000 from $6,500 last year. These accounts are a great savings tool as all income and capital gains earned in the account are sheltered from taxes. And when you withdraw funds from the account, the withdrawals are not taxable, unlike RRSP withdrawals. TFSAs started in 2009 and the cumulative lifetime TFSA contribution limit is $88,000 ($95,000 in January). Doing some quick projections, if you contributed $88,000 into a TFSA (assuming no previous contributions) and then contribute $6,500/year (assumes no changes to current TFSA contribution limits) for 20 years, and the account earns a 6% return, you would have over $500,000 in 20 years. You can then pull this out and spend as needed. No taxes. Nice!
  • And we have the newly launched first home savings account (FHSA), which is an account to help first-time homebuyers purchase a home down the road. You can contribute up to $8,000/year and unlike a TFSA contribution, FHSA contributions are tax-deductible (like RRSPs contributions). These funds can grow tax-free (like RRSPs and TFSAs) but any withdrawals are tax-free (unlike RRSP withdrawals). These accounts are great for first time home buyers and should be contributed ahead of TFSA accounts if looking to purchase a home.
  • Other expenses/deductions include: 1) investment-related expenses such as investment advisory fees (for non-registered accounts); 2) charitable donations (federal and provincial governments offer credits for donations made); 3) work-from-from expenses (can claim up to $500); and 4) income splitting opportunities such as splitting pension income, a spousal RSP plan, and spousal loans.

Second, is tax loss selling. This is a completely legit tax strategy where you sell an investment which is down and trigger a capital loss. Losses can then be applied to any capital gains in non-registered accounts, thus lowering your taxes. Any capital losses incurred can be used in the year realized, carried back three years, or caried forward indefinitely.

Stocks trade in T+2, meaning, if you sell a stock on a Monday it will actually settle on Wednesday (two days later). So, to trigger any capital losses on stocks you have to sell the security two days before the final trading session of the year – December 27th for this year.

One important thing to note is the ‘superficial loss’ rule. You cannot sell an investment, trigger a loss and then buy back the same investment within 30 days. If you’re selling the investment to trigger a loss and then re-invest the funds be sure the new investment is sufficiently different than the one you sold.

Third, there were some recent changes to something called the Alternative Minimum Tax (AMT). The AMT is an alternative or parallel income tax calculated by the government. The AMT tax calculation allows for fewer deductions, exemptions and tax credits. The AMT is then compared to taxes under regular federal income tax rates and the individual pays the greater of the two. This will impact taxpayers who benefit from preferential tax rates like capital gains or greater deductions.

The Federal government made some changes which go into effect January 1st, including increasing the minimum tax rate (from 15% to 20.5%) and limiting certain deductions and credits. For example, in the AMT calculation they increased the capital gains inclusion rate from 80% to 100% and now will tax any benefits associated with employee stock options at 100%.

Given these changes, for some individuals with large capital gains and stocks options, they may want to consider triggering gains this year ahead of these changes in 2024.

Finally, one last tip I’ll provide is to create an excel spreadsheet to track all your different expenses and deductions. I have a fair amount of business expenses in helping run this investment practice (e.g., Bloomberg costs, licensing fees, client expenses) and this spreadsheet helps me easily keep track and organize all my expenses over the year. I started doing this a few years back and it helps me greatly as I now have a streamlined and consistent approach to organizing and completing my taxes. I then forward this excel file with all the supporting tax documents to my accountant. This makes his life and mine a lot easier.

Well, that’s a pretty good list to get you started. Sorry for ruining your day by reminding you tax season is just around the corner, but hopefully you picked up a few tips that will lower your taxes and your stress as you prepare for death day. I mean tax day.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

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