Year-end tax planning for 2023

As 2023 comes to a close, it’s time for clients to consider year-end tax moves, including some new developments.

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“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,” said Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth, in a recent interview. 

One of the primary strategies Golombek emphasizes is tax-loss selling: selling securities or funds and realizing a loss to recoup tax paid on capital gains in the past or eliminate tax on future capital gains. Because Dec. 30 and Dec. 31 fall on a weekend in 2023, Golombek said clients have to settle trades no later than Dec. 27 to be able to use their loss for this year.

Clients with investments in foreign currency should also consider potential gains due to currency fluctuations. “What might look like a loss could actually be a gain,” he said.

However, investors need to be mindful of the superficial loss rule, which prohibits the repurchase of an identical security within 30 days of the tax-loss sale.

For those looking to claim deductions on investment expenses, Golombek recommends paying interest expenses and investment counselling fees by the end of the year to ensure deductions can be claimed in 2023. 

He also reminds clients turning 71 that they must convert their RRSP to a RRIF by the end of the year.

Looking forward to 2024, Golombek cautions investors about the new alternative minimum tax (AMT) rules scheduled to take effect on Jan. 1, 2024.

The new rules impose a minimum level of tax on taxpayers who claim various deductions and credits to reduce their tax liability significantly. The changes include raising the AMT rate, broadening the base by limiting exemptions, deductions, and credits, and altering how capital gains and employee stock options are taxed for AMT purposes. 

“Any losses that are carried forward from prior years are only 50% allowable, while the gains are 100% taxable for the purposes of AMT,” Golombek said. 

To avoid potential AMT scenarios in 2024, Golombek said investors should consider realizing gains in 2023, as well as exercising employee stock options before year-end.

Additionally, as the exemption for high-income earners is set at $173,000, Golombek said those who donate large amounts to charity, especially in the form of appreciated securities, may face challenges in 2024. Starting next year, only 50% of the donation credit will be allowable, and a 30% inclusion rate will apply to donated appreciated securities for AMT purposes. 

To avoid these implications, Golombek recommends making donations before the end of 2023 or considering donor-advised funds as a tax-efficient charitable giving option.

Lastly, Golombek reminds advisors that the first home savings account (FHSA) — which allows first-time homebuyers in Canada to save tax-free for their first home — was introduced in 2023. 

The FHSA room accumulates at $8,000 per year, beginning when the account is opened, so Golombek advises eligible individuals to open an FHSA in 2023, even if they cannot make the full contribution, as the unused room can be carried forward. 

Unlike with RRSPs, contributions to FHSAs made within the first 60 days of 2024 can’t be deducted in 2023, Golombek said, emphasizing the significance of contributing before year-end.

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