Strategies for investors to optimize tax-savings before year-end

Expert insights from John Natale, Head of Tax, Retirement & Estate Planning Services at Manulife Investment Management

This article was featured in Wealth Professional.

Delaying action not only hampers the achievement of dreams but also impacts potential large tax savings. With the year-end approaching, there's still an opportunity to implement measures to reduce tax obligations for 2023.

As December arrives each year, numerous advisors nationwide find themselves in a rush to execute year-end tax planning strategies for their clients. This period often involves a heightened focus on optimizing tax savings and making strategic financial decisions before the year concludes.

Tax planning is increasingly becoming a significant aspect of many advisory practices, as more advisors specialize in this area. From investing with tax efficiency in mind to navigating the tax implications of various life events, clients are seeking more advice and guidance from their advisors in these matters.

John Natale, Head of Tax, Retirement and Estate Planning at Manulife Investment Management offers thoughtful strategies designed to elegantly minimize tax burdens.

Key among these strategies is the utilization of Registered Retirement Savings Plans (RRSPs). Individuals turning 71 this year have until December 31st to make a final contribution to their RRSP, a move that we believe could significantly lower their tax bill. Interestingly, as Natale points out, the deduction from these contributions doesn't have to be claimed in the year they are made, offering flexibility in planning.

Another potential move for individuals turning 71 this year involves over-contributing to your RRSPs in December if you have earned income that will generate contribution room in 2024. This strategy, albeit with a small penalty tax of 1% of the overcontribution less $2,000, allows individuals to take advantage of the increased contribution limit in the following year.

Spousal RRSP contributions present another opportunity. You can contribute to your spouse (or common-law partner’s) RRSP until December 31st of the year they turn 71. By contributing to a spouse's RRSP before year end, individuals can start the clock on the attribution period sooner as it’s based on calendar years, potentially leading to tax benefits.

Natale also says, “Other year-end strategies include maximizing government benefits through Registered Education Savings Plan (RESP) and Registered Disability Savings Plan (RDSP) contributions, ensuring deductible expenses such as eligible interest, carrying charges and childcare expenses are paid, and opening a First Home Savings Account (FHSA) to start accumulating contribution room since unlike TFSAs, contribution room does not automatically accrue and unlike RRSPs, contributions in the first 60 days of 2024 can not be used for 2023. Donating securities like stocks, and mutual or segregated funds in-kind to charities is beneficial too, as it offers a charitable receipt and zero capital gains tax.

If you're 65 or older and not using the pension income credit, withdrawing $2,000 from a Registered Retirement Income Fund (RRIF) qualifies for the credit and can be used for income splitting purposes.”

A niche but common scenario involves TFSA withdrawals. If you need to withdraw, say, for an emergency like a furnace repair, doing so before year-end allows you to regain that contribution room the next year. A withdrawal in January means waiting an extra year for that room to be reinstated.

Delaying certain action

When planning taxes, Natale maintains, delaying certain financial actions such as the  realization of capital gains until January can defer taxes to the next year.  For the Home Buyers' Plan or Lifelong Learning Plan, delaying withdrawals to the new year postpones your repayment schedule by a year. If you're considering investments in mutual funds or segregated funds, be aware of potential year-end taxable distributions or allocations. To avoid these, you might place funds in a dollar-cost averaging fund or high-interest savings account until January, though this could mean missing out on market growth. That’s why taxes are just one factor to consider as part of the overall planning process.

Regarding GICs or insurance company GICs with terms over a year, waiting until January could defer taxable income to the following year.

Capital loss harvesting and strategic withdrawals

Another important strategy is capital loss harvesting. By realizing capital losses, individuals can offset gains, thereby reducing taxable income. These losses must first offset any capital gains in the same year, and if excess losses remain, they can be carried back up to three years or forward indefinitely, reducing tax payable.

“However, be mindful of settlement dates when selling stocks or mutual or segregated funds; the settlement date must occur in 2023. As trades take 2 business days to settle, complete your trade by December 27, 2023 to realize the loss for the 2023 tax year,” says Natale. Before selling investments purchased in a foreign currency, be sure to consider currency fluctuations and convert the proceeds of sale into Canadian dollars based on the exchange rate at the time of sale to confirm you’ll realize the capital gain or capital loss you’re expecting. Finally, the superficial loss rules will deny your capital loss if you or an affiliated person (e.g., a spouse or common law partner or a trust where you or your spouse or common law partner is a beneficiary such as your RRSP, RRIF or TFSA) buys the same or identical property within 30 days before or after the sale and still owns that property 30 days after the sale.

For corporations, Natale warns, be cautious with realizing capital losses. While beneficial for individuals, in a corporation half the capital losses reduce the Capital Dividend Account (CDA), impacting the ability to pay a tax-free capital dividend to shareholders. With corporations, consider paying a capital dividend prior to realizing the capital loss to avoid squandering this opportunity.

Natale’s insights underscore a crucial message: effective tax planning requires both a deep understanding of current rules and a keen eye on forthcoming changes.

Sponsored by Manulife Investment Management, as of December 2023.

This communication is published by Manulife Investment Management. Any commentaries and information contained in this communication are provided as a general source of information only and should not be considered personal investment, tax, accounting or legal advice and should not be relied upon in that regard. Professional advisors should be consulted prior to acting based on the information contained in this communication to ensure that any action taken with respect to this information is appropriate to their specific situation. Facts and data provided by Manulife Investment Management and other sources are believed to be reliable as at the date of publication.

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