November 2023 LifeSpring Insights

There’s good news on the financial front as we close out 2023: you have more financial tools and strategies available than ever to increase your savings and reduce tax payable – and some of them are brand new. 

Before getting to those, it’s important to note that your best move is to meet with your advisor and accountant to get a more complete picture of all the opportunities open to you. There’s simply no substitute for professional advice when it comes to navigating the economy and tax laws – both of which can change often and seemingly quite quickly.

Here are eight things to consider for your finances as the calendar gets set to flip to a brand new year.

1. Open a First Home Savings Account (FHSA) – or encourage  others to do so

Let’s start with housing, which is often top of mind. Arguably the biggest change on the savings front here is the newly-launched First Home Savings Account (FHSA). You can contribute up to $8,000 to an FHSA per year, to a lifetime limit of $40,000. Contributions are tax-deductible, like an RRSP. The funds grow within the plan and can be withdrawn to put toward a first home tax-free, like a TFSA. (You can also transfer funds from an RRSP to an FHSA, though they won’t qualify for a deduction.)

Here's where year-end comes in: You can carry forward unused contribution room, but to do so for 2023, your account must be opened before December 31. Even if you don’t qualify, consider recommending an FHSA to others who are dreaming of home ownership – the FHSA is a boon for younger generations, so you should discuss with a child or grandchild who is thinking about saving for their first home. You may even consider gifting them all or part of their first contribution.

2. Nail down these two home-reno tax credits

Two other changes on the housing front are the multigenerational home renovation tax credit (MHRTC), introduced for the 2023 tax year, and an increase to the home accessibility tax credit (HATC) that started in the 2022 tax year. As you ponder your 2024 plans, it’s a great time to speak to your accountant about them.

The MHRTC is a refundable tax credit – meaning it’ll result in a tax refund if it and any other deductions combine to outweigh any taxes you owe – that helps cover the cost of adding a unit to your home for a senior or a person with a disability. The amount is 15% of eligible renovation costs or $50,000, whichever is less.

Meantime, the HATC aims to help offset the cost of things like wheelchair ramps, bathtubs for people with mobility issues and much more; it returns 15% of the cost of the work or $20,000, whichever is less. That $20,000 amount is up from $10,000 prior to the 2022 tax year and results in a potential maximum credit of $3,000 if you have that much in tax payable to offset (unlike the MHRTC, the HATC is non-refundable).

3. Consider the timing of gains and income

To be sure, tax considerations should take a back seat to your lifestyle needs and longer-term goals when making investment decisions. But it still pays to consider the timing of capital gains and sources of income.

For example, if you’re in a higher tax bracket this year than you expect to be in next year or in following years, it may make sense to put off the sale of an investment. Conversely, if you’re in a lower bracket now, it may make sense to crystalize your gain in the current year. The same goes for things like a bonus at work (which could be deferred for up to three years after the end of the current calendar year if your employer agrees). If you are self-employed, you should also review your income distribution and consider increasing or decreasing your salary-to-dividend ratio based on your total taxable income. 

4. Don’t let this rule trip you up when selling investments 

If you own investments that are valued below what you paid for them, you might consider selling and using the loss to offset capital gains elsewhere in your portfolio. That’s a smart move, and a common one at year-end. But there’s a potential tripwire you – and your accountant – should keep in mind: the superficial loss rule. 

What that means is if you sell an asset, you cannot buy it back for up to 30 days before or after the sale. This also includes any person closely associated to you (such as a spouse or member of your inner circle).   If you do buy it back, you can’t deduct the loss. One potential countermove you could make here would be to buy something similar, so long as it’s not identical. But making sure you meet that standard in the eyes of the Canada Revenue Agency is something best discussed with a tax professional.

5. Charitable donations – donate “in kind,” not in cash

If you’re like many people, you sit down over the holidays and plan your year-end charitable donations so you can claim them in the current tax year. It’s a great move for both you and your preferred charities. But with a bit of planning, you can make it even better.

For example, if you have investments that have gained value that you wish to donate, you’re better off to do so without selling first, rather than selling and donating the cash. This way, you can claim the full value of the investment on your tax return without recording a capital gain – which would be taxable – on the sale. 

Also, charitable donations can be carried forward for up to five years, so it may be a good idea to claim them in later years if you expect to be in a higher tax bracket in the future.

6. 71st birthday in 2023? Consider this RRSP move

As lifespans get longer, so do our working lives . But that can create a bit of a problem on the retirement-savings front: by the end of the year in which we turn 71, our RRSPs must be converted to registered retirement income funds (RRIFs). At that point, contributions are no longer possible. But there are ways to make an “extra” contribution for investors turning 71 this year.

For one, RRSPs have a lifetime over-contribution limit of $2,000 that still may be available to you. Second, if you’re turning 71 this year – and have accrued contribution room from current-year earned income – you may want to speak with your accountant to determine your contribution room and make an over-contribution at the end of the calendar year. While this would count as an over-contribution and a small penalty would apply, the tax benefit could likely outweigh the penalty. It is critical to discuss this with your advisor and accountant. 

Additionally, if you are 71 or older, you may still contribute to a spousal RRSP if you have carried forward contribution room, and your spouse is under 71 years of age. 

7. RESPs: Make sure to contribute and benefit from government grants

One of the most powerful savings vehicles available is also one of the most underused – registered education savings plans (RESPs). In an RESP, your contributions grow tax-free, and the student you’re saving for can withdraw the funds when they attend post-secondary school. The money does count as income for them at that time, but they’ll likely be in such a low tax bracket that they’ll pay little – if any – tax on it.

The real showstopper here is the federal government’s Canada Education Savings Grant (CESG), which will match up to 20% of your yearly contribution, to a maximum of $500 annually, with a lifetime limit of $7,200 per beneficiary. That’s a good reason to start an RESP as soon as possible. There are also other funding opportunities , like the B.C. Training and Education Savings Grant (BCTESG), a one-time RESP payment of $1,200. 

8. Now is the time to adjust your financial plan – or make one – with your advisor

We’ve been through an unprecedented three years, starting with the pandemic and including high inflation and interest rates, not to mention soaring home prices. If you haven’t updated – or created – your financial plan, now is a great time to do so. Make an appointment with your advisor today to review your options, refresh your plan and start 2024 with a strong focus on achieving your financial goals.