Most of us only think about our taxes come tax season, which is typically the two months leading up to the April 30 annual filing deadline, but it’s really the last two months of the calendar year when taxpayers should be paying attention.
After all, there’s little one can do once the year is over to retroactively minimize taxes. Here are a few things you may wish to consider implementing before year-end that are unique to 2023 tax planning.
Tax-loss selling
Now may be the opportune time to trigger some tax losses given that the real estate, communication services and utilities sectors are down between 12 per cent and 15 per cent year to date in 2023.
Tax-loss selling involves selling investments in your non-registered accounts that have accrued losses to offset capital gains realized elsewhere in your portfolio. Any net capital losses that cannot currently be used may either be carried back three years or carried forward indefinitely to offset net capital gains in other years.
In order for your loss to be immediately available for 2023 (or one of the prior three years), the settlement must take place in 2023. The trade date must be no later than Dec. 27 to complete settlement by year-end since Dec. 30 and 31 fall on a weekend in 2023 and there’s a two-day settlement period for stock trades.
If you purchased securities in a foreign currency, such as in U.S. dollars, the gain or loss may be larger or smaller than you anticipated once you take the foreign exchange component into account, especially if you purchased those securities a while ago.
For example, a decade ago, the U.S. dollar was trading for around $1.05, while today it’s hovering around $1.39. A security purchased 10 years ago in U.S. dollars could therefore have a significant embedded currency gain, which could more than offset what at first glance might appear to be an accrued loss.
First home savings accounts
This week, the government announced that more than 250,000 Canadians have already opened a tax-free first home savings account (FHSA) to save for a down payment on their first home. If you’re a first-time homebuyer (no home in the current year or prior four calendar years) who is a resident of Canada and at least 18 years of age, the FHSA allows you to save on a tax-free basis towards the purchase of a home. This is the first year the FHSA has been available.
You can contribute up to $8,000 per year (up to a lifetime limit of $40,000) towards saving for your first down payment. You can claim a tax deduction for contributions you make by Dec. 31 on your 2023 tax return, or you might choose to claim it in any future year when perhaps you are in a higher tax bracket. Note, however, that unlike RRSPs, contributions you make within the first 60 days of 2024 cannot be deducted on your 2023 return.
Withdrawals to purchase a qualifying home, including withdrawals of any investment income or growth earned in the account, are non-taxable, just like they are with a tax-free savings account (TFSA). If you end up not being able to use the FHSA to buy a first home, you have the option (until age 71 or 15 years after opening an FHSA, whichever comes first) of transferring funds from an FHSA to your RRSP or registered retirement income fund (RRIF) on a tax-free basis. These transfers won’t affect your RRSP contribution room. Funds in your RRSP or RRIF will be taxed upon ultimate withdrawal.
To obtain a 2023 tax return deduction, FHSA contributions must be made by Dec. 31, 2023. Even if you can’t put in the whole $8,000 this year, it’s still wise to open an account in 2023 with some level of contribution, as any unused room will carry forward to next year. But if you don’t open an account this year, FHSA room doesn’t start to accumulate.
As of Nov. 1, FHSAs are available at more than 20 financial institutions, and more institutions are working toward a launch soon.
Alternative Minimum Tax
You may want to get ahead of proposed changes to the Alternative Minimum Tax (AMT) system that are set to take effect Jan. 1, 2024.
The AMT imposes a minimum level of tax on taxpayers who claim certain tax deductions, exemptions or credits to reduce the tax that they owe to very low levels. If the amount of tax calculated under the AMT system is more than the amount of tax owing under the regular tax system, the difference owing is payable as AMT for the year.
The 2024 AMT changes include raising the AMT rate, increasing the AMT exemption and broadening the AMT base by limiting certain exemptions, deductions and credits that reduce taxes.
Your AMT may be higher in 2024 (compared to 2023) if your taxable income is more than about $173,000, and you have income taxed at lower rates than ordinary income, or deductions or credits that reduce taxes payable. These include capital gains, employee stock options, Canadian dividends, unused losses carried forward from prior years, certain deductions such as interest expense, and non-refundable tax credits.
As a result, if you think you may be affected in 2024, you may wish to consider triggering a gain or exercising employee stock options in 2023 before the new AMT rule comes into effect.
Finally, if you plan to make significant charitable donations, two proposed changes for 2024 AMT calculations could affect you. Only 50 per cent of the donation tax credit will be allowed when calculating AMT (100 per cent is currently allowed).
Also, if you make in-kind donations of publicly listed securities, or a donation is made on the exercise of a qualified employee stock option of publicly listed securities, 30 per cent of capital gains on those securities would be added to income when calculating AMT (versus zero in 2023).
Be sure to consult a tax adviser in the next couple of months to gauge whether the AMT could affect you in 2024 and, if so, consider making a charitable gift in 2023 rather than 2024. In this regard, a donor-advised fund offered through some public foundations allows a donor to get a donation receipt today, and then direct the funds to any registered charity for years to come.