As we approach year end, this is often a time when tax strategies are top of mind. Don’t forget: the tax rules allow you to carry back or forward certain tax credits or deductions not used in the current year. Here are the rules for some of the more common tax deductions and credits, as well as some considerations that may help to enhance your wealth management:
Tax-Loss Harvesting: Carry Back or Forward Capital Losses — If investments held in non-registered accounts are sold for less than their original cost, this will result in a capital loss. For tax purposes, 50 percent of the loss can be used to offset taxable capital gains realized during the year. Considerations: If you don’t have sufficient taxable capital gains to offset the loss, the net capital loss can be carried back three taxation years, or carried forward indefinitely to use against net capital gains. When “tax loss harvesting,” be aware of the superficial loss rules, which may defer, suspend or deny the capital loss if you or an affiliated entity acquires the same security 30 days before/after the date of the loss transaction.
Remember Both Registered Retirement Savings Plan (RRSP) Contributions and Deductions — Both unused RRSP contribution room and unused RRSP deductions may be carried forward. Considerations: While making RRSP contributions as early as possible can allow for tax-deferred growth, deferring the deduction may provide tax planning opportunities. For instance, if you make a contribution, you may choose to delay the RRSP deduction to a future year, perhaps one for which you will have a relatively higher income to offset the higher potential tax.
Fully Maximize Your Tax-Free Savings Account (TFSA) — Unused TFSA contribution room can be carried forward indefinitely. Considerations: If you need funds from the TFSA, consider withdrawing before year end. Contribution room resets itself at the start of the calendar year, so waiting until January 2024 would mean that this contribution room will not be available until the start of 2025.
Registered Education Savings Plan: Don’t Forget the CESG — While there is a cumulative contribution limit of $50,000, there are carry-forward limits for the Canada Education Savings Grants (CESG). The CESG is paid by the federal government in the form of a 20 percent matching grant, to an annual maximum of $500. However, if there’s unused grant room from a previous year, this can carry forward to a maximum of $1,000 per year. Considerations: If you haven’t made contributions in a prior year, the CESG limit will be achieved on an annual RESP contribution of $5,000.
Consider Year-End Tax Planning With Charitable Donations — Charitable donations not used in the current year can be carried forward for five taxation years. This may be particularly useful for donations made to U.S. charities, as these generally can only be claimed against U.S. source income earned in the year in which the credit is claimed. Considerations: If you donate shares “in kind” to an eligible charity, you will receive a donation receipt for the fair market value of the shares. If the shares are in a non-registered account and have appreciated in value, the donation will also eliminate the tax liability on the capital gains triggered. However, the shares must be donated in kind — do not sell them first and donate the proceeds, as part of the tax benefit will be lost. For securities that have declined in value, consider selling them and donating cash. You’ll be entitled to the capital loss, as well as a donation tax credit.
Be Aware: Medical Expenses — While medical expenses cannot be carried forward, you may claim eligible expenses for any 12-month period ending in the current taxation year. Considerations: When medical expenses wouldn’t otherwise exceed the minimum threshold for claiming the tax credit in a particular year, consider choosing a 12- month period that extends into a different calendar year. For instance, for the period of June 1, 2022, to May 31, 2023, medical expenses incurred from June 1, 2022, to December 31, 2022, would be available as a tax credit in the 2023 tax year.