Year-End Tax Planning for 2023

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Welcome to Advisor To Go, brought to you by CIBC Asset Management. A podcast bringing advisors the latest financial insights and developments from our subject matter experts themselves.

Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth.

Every year around this time, we sort of talk about year-end tax tips, and while the tips don’t really change much from year to year, there are a few things that we’re going to focus on in 2023 that may be a little bit different than in prior years.

So let’s begin, of course, with tax-loss selling. That’s, of course, the art of selling investments in a non-registered portfolio that have accrued losses before the year-end to offset other capital gains you’ve realized in the portfolio. And then any net losses that you don’t have in the current year can be carried back up to three years and then forward indefinitely to offset gains in those years.

So first thing to remember for this year is that to be able to use your loss for this year, you’ve got to settle the trade in 2023, and that basically means that your trade date, because we’re in a T+2 still for now, must be no later than December 27 to complete the settlement because December 30 and 31 fall on the weekend in 2023.

The other thing to keep in mind, of course, is that if you have purchased securities in a foreign currency like the U.S. dollar, if you go back like a decade ago, the U.S. dollar was trading about 1.05 Canadian, and then today it’s around 1.39 Canadian. So what might look like a loss could actually be a gain when you include foreign currency. So that’s really something that’s important to keep in mind.

We always tell people to be mindful, of course, of superficial loss rules, if you buy it back within 30 days, there may be alternatives. So if you’re in one particular ETF, you can get a slightly different ETF as long as it’s not identical to switch out of and take your loss. And there may be other stocks that are very similar that you may want to reposition. And again, this is something that clients may be very interested in doing.

Other things, of course, to remember are things like if you’re looking at paying expenses like investment expenses and you want to claim a deduction. So, for example, if you have interest expense that you paid on money that you borrowed for investing or investment counseling fees, things like that for non-registered accounts, you want to pay that by the end of the year to make sure you claim your deduction in 2023.

And then, of course, anyone who turns 71, you have to convert your RRSP to a RRIF by the end of the year. And there is that opportunity that we’ve talked about in the past where one could make a one-time over-contribution to your RRSP in December. If you think you’re going to have earned income this year, that will generate RRSP contribution room for next year. And what you do is you pay your penalty tax of 1%, let’s say, for the month of December, and the new room opens up on Jan 1, 2024, and the penalty tax stops. So again, this can be an interesting idea for 2023.

One of the things that investors should really prepare for is the proposed new alternative minimum tax rules that are set to come into force on Jan 1, 2024. So the AMT is a parallel tax system that imposes a minimum level tax on taxpayers who claim various deductions, exemptions, and credits to reduce the amount of tax that they owe to very low levels. And so effectively, what’s happening is changes to the AMT system that begin on Jan 1, 2024, include raising the AMT rate, increasing the exemption, broadening the base by limiting various exemptions, deductions, and credits. So, for example, someone who has a capital gain, capital gains are normally, ordinarily, taxable about 50%. When you calculate AMT, they’re going to be taxable about 100%.

Similarly, for the exercise of employee stock options from 50 to 100% in dividends are taxable on a cash basis with no gross-up in dividend tax credit. And any losses that are carried forward from prior years are only 50% allowable, while the gains are 100% taxable for the purposes of AMT.

And then specifically on the credit side, non-refundable credits will be only allowed at 50%. So, for example, the donation tax credit will only be 50% allowable. So a couple of things to think about.

If you feel that you could be in an AMT scenario in 2024, maybe there’s things you can do in 2023 to be able to not face AMT next year. So for example, if you have the opportunity to realize gains this year instead of next year, if you’re selling a business, selling a property, an income property, you’re selling up a residential piece of real estate that doesn’t qualify for the principal residence exemption. Maybe you want to sell it this year so you don’t have AMT. Exercise employee stock options, those are all opportunities.

And then on the charitable giving side, a couple of changes that could affect you if you’re a high-income earner because the exemption is $173,000, then if you are giving a large amounts to charity, there could be a problem next year, particularly if you’re giving appreciated securities. So starting Jan 1, 2024, only 50% of the donation credit will be allowable. And in addition to that, currently under the ordinary tax system, if you donate appreciated securities to registered charities, there is no capital gains tax. Starting next year, if you donate them in kind to a registered charity, there’s a 30% inclusion rate, and that starts for AMT purposes starting Jan 1, 2024.

So some clients would be very interested in maybe making donations before the end of this year, 2023, so they’re not subject to the AMT implications of a reduced donation credit and a tax inclusion rate of 30% on the appreciated securities.

If you’re not sure what charity to give to, many investors are interested in perhaps considering a donor-advised fund as an alternative to a private foundation, effectively allows you to get your own account as part of a public charity, as a public foundation, and you get to effectively make your donation this year, and then you get your receipt for 2023. You don’t have the AMT issue, and then you can then choose to redirect those funds in future years or decades going forward to any of the 86,000 registered charities in Canada. So a donor-advised fund can be a great solution for charitable giving if you potentially could be subject to the AMT rules that kicking on Jan 1, 2024.

Finally, we have to keep in mind that 2023 is also the first year for a first home savings account to be open. So if you’re a first-time buyer who’s a resident of Canada, at least 18 years of age, opening up an FHSA allows you to save tax-free for the purchase of a first home in Canada. So this is the first year it’s been available, and the room, the FHSA room, it’s $8,000 per year up to $40,000. That room only begins accumulating when you open the account. So our advice is that if you do qualify as a first-time home buyer, which is defined as no home in the current year or the previous four calendar years, then at least open up an account in 2023, that will then allow you to carry forward any unused room up to $8,000 to next year, and so that you can maybe make that contribution in a subsequent year.

It’s important to remember that you don’t have to claim a deduction in the year you make the contribution. So, for example, if you’re in a lower tax bracket, you’re going to be a higher tax bracket later on. Maybe you open up your FHSA in 2023, you put in your 8,000, but you don’t claim that deduction for many years until you’re a higher tax bracket. Keep in mind that, unlike the RRSPs, contributions that you make within first 60 days of 2024 cannot be deducted in 2023. So it’s really, really important to try to get that FHSA contribution in there if you can by December 31, 2023.

And again, if you don’t have the full amount to make the full 8,000, put in what you can, and then that carry-forward room will be available to you starting in 2024.