With 2023 coming to an end, now is a good time to discuss year-end tax planning strategies with your Welch advisor. We can help you review your tax situation and advise on the best course of action, considering the issues and upcoming changes noted below. Depending on your situation, the following are some year-end tax tips that may help you and/or your business.
Personal Taxes
- Capital losses – consider disposing of investments with accrued capital losses before the year-end. Note that the sale needs to happen by Wednesday, December 27 in order for the transaction to be effective this year due to the settlement date being two business days after the trade date. The realized capital losses can be offset against the current year’s capital gains. Any unused capital losses can be carried back to reduce capital gains realized in the previous 3 years in order to recover taxes paid in prior years or can be carried forward. It is important that you, or a person affiliated with you, do not repurchase the same or identical property within 30 days, as this will delay the use of the loss.
- Allowable Business Investment Loss (ABIL) – you may be able to claim an ABIL to offset any source of income if you dispose of shares or debt of a “small business corporation” at a loss. Discuss this with your Welch advisor to identify whether you would be qualified to claim an ABIL.
- Charitable donations – consider making charitable donations by December 31 to receive donation tax credits. Gifting of publicly traded shares instead of cash may increase the tax benefits of making the donation. You should also consider the potential impact of the proposed changes to the Alternative Minimum Tax (“AMT”) rules, as discussed below.
- New Alternative Minimum Tax (“AMT”) Rules – if you are anticipating making large donations or realizing large capital gains, consider completing these transactions in 2023 before the proposed new AMT rules come into effect. The new rules limit the claim for certain non-refundable tax credits, including the charitable donation tax credit as well as increase the taxable inclusion rate for capital gains from 80% to 100% for AMT purposes. The new rules may increase your tax burden, so contact your Welch advisor to discuss your options.
- RRSP contributions – consider contributing to your RRSP or your spousal RRSP now or within the first 60 days of 2024. Note that because 2024 is a leap year, the contribution deadline is February 29, 2024. If you are turning or have turned 71 years old in 2023, you must convert to a RRIF but, before you do, you have until the end of year to make an RRSP contribution.
- RESP contributions – consider contributing to your child’s or grandchild’s RESP by December 31. Employment and Social Development Canada will contribute 20% of your annual contributions up to a maximum of $500 per year for each beneficiary (up to a lifetime maximum of $7,200 per beneficiary). If there is unused grant room from a previous year, the annual maximum can be increased to $1,000 (with a contribution of $5,000).
- Planning your move – if you plan on moving between provinces, it is recommended to move to the province with the lower provincial tax rate by December 31. Your province of residence is where you are living on December 31, therefore if you live in a province with a higher tax bracket but move to a province with a lower tax bracket by December 31, your tax liability for the year will be based on the province with the lower rate.
- First Home Savings Account (“FHSA”) – if you are thinking about purchasing a new home and you or your spouse have not owned a home in the last four years, you should consider contributing to an FHSA. Like an RRSP, annual contributions to this registered plan are deductible, but are capped at $8,000 per year, up to a lifetime contribution amount of $40,000. Like a TFSA, any qualifying withdrawals from the account, including investment growth, are tax free. Withdrawals must be used to purchase a home in which you plan to live within one year, and the account may only stay open for 15 years. If there are any unused funds in the account upon closure, they can be transferred to an RRSP or RRIF on a tax-free basis without impacting the taxpayer’s RRSP deduction room.
- Instalments – ensure you make your December 15 instalment on time given the increased CRA interest rate (currently 9% and increasing to 10% in January 2024). In addition, consider making an additional “catch-up” instalment payment by the end of the year if you think your 2023 instalments to date are not sufficient.
Business Owners
- Year-end accrued bonus – consider accruing a year-end bonus to reduce your corporate income taxes for the current fiscal year, with the bonus only included on your T4 in calendar 2024. You must ensure that the bonus is paid out within 179 days of the end of the fiscal year and the related payroll source withholdings are remitted to CRA.
- Paying a salary to a family member – you may consider paying a reasonable salary to a family member if the person has provided his/her services to your business. The key is that the salary amount should be reasonable, which means that it should be a comparable market rate.
- Paying a dividend to a family member/shareholder – before you pay a dividend to a family member, consult with your Welch advisor because the dividend might be subject to “TOSI” (a special tax that may apply in certain situations), with the result that your family member may be taxed at the top personal marginal tax rate on that income.
- Delay the sale of depreciable assets – If you are planning to sell depreciable assets, consider selling them after your year-end to take advantage of an extra year of CCA claim.
- Zero-emission vehicle – if you are planning to purchase a vehicle, consider purchasing a zero-emission vehicle before the end of 2023 to take advantage of the final year of the enhanced first year CCA rate of 100%. You may be able to deduct capital cost allowance up to $61,000. Beginning in 2024, this enhanced CCA rate will decrease to 75%.
- Inter-corporate dividends and capital gains – an inter-corporate dividend is generally tax-free to the recipient corporation (Holdco) when there is sufficient “safe income” on hand (basically retained earnings on a tax basis). A safe income computation is recommended to be completed prior to paying an inter-corporate dividend. However, when the Holdco does not have safe income attributable to its Opco shares, the inter-corporate dividend may be converted to a capital gain which would result in tax being paid by Holdco. While this means tax is paid sooner than otherwise, it can result in overall tax savings if corporate funds are needed for personal use. The effective tax rate as a result of this capital gains treatment comes to slightly less than 29%, whereas the top tax rate on eligible/non-eligible dividends is 39.3%/47.7%. Please speak with your Welch advisor if considering the payment of inter-corporate dividends.
- Immediate expensing benefits – if you are looking to purchase a capital asset, consider purchasing it before December 31, 2023, to advance your tax savings. Canadian-controlled private corporations (CCPC) may be able to claim up to $1.5 million in tax deductions on eligible assets that are purchased and available for use before January 1, 2024. For individuals resident in Canada and certain partnerships, this deadline is extended to January 1, 2025.
- Regional Opportunities Investment Tax Credit – the ROITC is a refundable tax credit available to CCPCs that have a permanent establishment in Ontario and that incur expenditures to acquire, construct, or renovate a commercial or industrial building in designated regions of Ontario. There is currently a temporary enhancement of this credit, resulting in a total ROITC rate of 20%, up to a maximum amount of $90,000, for eligible investments that are acquired and available for use before December 31, 2023. As of January 1, 2024, the credit will be reduced to 10%, up to a maximum of $45,000.
Contact your Welch LLP advisor to discuss if any of these strategies are applicable to your situation.
