Still time to save on 2022 taxes
With year-end just around the corner, there’s still time for a few tax strategies that could cut this year’s tax bill. Here are some of my favorite year-end tax-saving tips.
Contributions to registered plans
Registered plans like RRSPs, TFSAs, and RESPs have annual contribution limits and deadlines for tax purposes. It makes sense to max out your contributions to these plans before year-end, if you haven’t already done so. For example, contributions to an RRSP generate a tax deduction for the year of contribution. If you make your maximum allowable contribution and then perhaps top up with any contribution room you’ve carried forward from previous years, your tax deduction could be significant. True, with an RRSP, you have 60 days after year-end to make the contribution for this year, but why wait? The sooner you contribute, the sooner you start earning tax-advantaged compound growth in your plan. Plus, it makes your bookkeeping a whole lot easier!
Defer RRSP/RRIF withdrawals
Many people are considering retirement, and often wait until year-end to start making withdrawals. But that could actually raise your tax bill for the year. If you’re planning a withdrawal from your Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF), wait until January if you can. Withdrawals from these plans are included in your taxable income for the year. By deferring a withdrawal if you can until early 2023, you’ll put off the tax hit for another year. Of course, if you turned 71 this year, you must choose an RRSP maturity option by Dec. 31. Consult with your financial planner for the best withdrawal options in this case.
Given this year’s bear market in stocks, you might well have some losing stocks in your portfolio. If you also have some winners that you’ve taken capital gains on (or have gains carried forward from previous years), consider selling your losers before year-end to generate capital losses for tax purposes. The capital losses can be used to offset this year’s capital gains. To qualify for a 2022 tax loss, the settlement must take place in 2022.
Because it takes three business days to settle a transaction, the last possible day to sell most securities in Canada to be eligible for a capital loss in 2022 is Dec. 28 for settlement by Dec. 31, 2022. But don’t leave it to the last minute. Check with your broker or advisor now, while you still have time, to be absolutely sure you can meet the various transaction deadlines. Better to make transactions slightly earlier than waiting until the last possible day, just in case there’s some sort of delay or mix-up with your orders.
Avoid December mutual fund purchases
Making a mutual fund in December in a non-registered account could lead to an unwanted tax bill. It all has to do with year-end distributions made by mutual funds, which impact net asset value. Why pay for someone else’s distribution? Wait to make your fund purchase in January. Keep in mind that this won’t necessarily apply to exchange-traded funds. Check with your financial planner before making any mutual fund transactions around this time of the year.
Business tax tips
If you’re a business owner, consider buying a computer and other equipment now rather than waiting until January. If you purchase before year-end, your capital cost allowance (CCA) will increase for the year, even though you’re entitled to claim only 50% of the allowable CCA for a particular class (the “half-year rule”). In addition, your CCA claim for next year will be that much larger. Likewise, delay disposition of depreciable assets until January so as to avoid reducing your CCA claim for 2022.
You might also look at areas where you can bring forward deductible business expenses into 2022, for example, advertising or supplies. And on the other side of the coin, consider delaying business income due in December until January (if you have a Dec. 31 year-end), thus reducing your tax bill for the current year.
There’s also a number of payments that you can make before year-end to get a tax benefit for 2022. These include such things as charitable donations (you can do it online to ensure your donation is processed for 2022), interest payments on money borrowed for investment purposes, and applicable investment counseling fees. While not investment-related, ensure you make any necessary medical or dental payments for items not covered by provincial health plans. These include such things as glasses, prescription drugs, and hearing aids. Pay before year-end and you can add them to your medical expense deduction for the year. The strategies I’ve outlined here won’t apply to everyone, and may be subject to other tax rules and restrictions. As always, consult with a qualified advisor when contemplating changes to your investment portfolio or when considering tax-driven business strategies.