Tax Planning: Vital for Any Wealth Management Strategy

Even though federal tax brackets are indexed to inflation, there are other ways to minimize your tax payable:
• Maximize your contributions to registered accounts like RRSPs
• Use income splitting and contributions to spousal RRSPs
• Make wise use of tax-loss selling of equities

While TFSA contributions are not tax deductible, they protect future growth and income from being taxed in those accounts. In the event of your death, your named beneficiaries can receive these funds tax free. RESP contributions are also not tax deductible but allow for tax deferral for your beneficiaries and continued protected growth without taxation until withdrawal.

Maximize contributions to registered accounts
RRSP contributions can reduce your taxable income for the year and may produce a tax refund. The maximum RRSP contribution amount for 2022 is $29,210. You have until March 1, 2023, to make deposits into your RRSP for the 2022 tax year. Talk with your financial advisor to review your best options based on your circumstances.

Spousal contribution
Spousal RRSPs are designed for couples to split retirement income, especially if there is a significant difference in yearly incomes. A spousal RRSP is registered in your spouse’s or common-law partner’s name and allows for contributions up to your personal contribution limit. When a spousal RRSP contribution is made, the contributor receives the tax deduction, but the partner has control of the account.

The result? As a family you may be paying less tax overall as you have received a reduction of tax owing at a higher rate than your spouse will pay when they take the money out.

When contributing to a spousal RRSP there are some restrictions. The most notable, beside the maximum allowable yearly contribution limit, relates to the attribution of the contribution. Canada Revenue’s attribution rule states spousal RRSP contributions cannot be withdrawn for at least three years after they were put in without attribution penalties; if the funds are taken out within those three years, it is deemed taxable income for the contributing spouse, negating any earlier tax savings.

For planning and tax purposes, it is best to make any spousal contributions prior to December 31 in any given year. Stated differently, it is the year of contribution plus two more. Therefore, if made by December 31 that would count as the year of contribution. If the contribution is made January 1, you are adding an additional year before attribution doesn’t apply. Your financial advisor can help you make the right decision.

Tax loss selling
With the challenges in the equity markets this past year, there may be opportunities to sell investments with accrued losses to offset capital gains realized elsewhere in your non-registered portfolio. Tax loss selling needs to completed no later than December 28, 2022, for settlement by the end of the year.

If you have net capital losses that cannot be currently used, they may be either carried back three years or carried forward indefinitely to offset taxable capital gains in other years.

Carrying back capital losses can be beneficial for tax savings now, especially if you are expecting to be in the same, or lower tax bracket in the future. If you expect to be in a higher future tax bracket, you may wish to carry capital losses forward and use those tax savings later when your overall income is higher.

There are strict rules that apply to tax loss selling, including the period where you cannot purchase the same or similar investments after tax-loss selling in any affiliated individual account, so talk to your financial advisor for guidance and advice.