Year-end is a time when we start thinking about winding down. However, in the field of tax planning, that annual deadline is when we need to take stock, and potentially take action. To help you keep your finances on track, it’s important to look at tax saving opportunities prompted by both time of year and time in your life. Here are few ways to utilize your money to work in your favour this tax season:
Tax Refunds and Source Deductions
Many people receive tax refunds after making their annual personal Registered Retirement Savings Plan (RRSP)contributions, usually because their employer was unaware of these non-workplace contributions when determining payroll deductions.
You may wish to begin 2023 by filing Form T1213 Request to Reduce Tax Deductions at Source to have your employer reduce its withholding (if you qualify), allowing you the use of that money, rather than it being a non-interest-bearing deposit with Canada Revenue Agency while you await your refund.
Working From Home
Employees working from home as a condition of employment may claim an office expense deduction. During the COVID-19 pandemic, a simplified method allows an employee to claim $2 for each day worked from home due to the pandemic, up to a maximum of $500 for 2022.
If you worked more than 50% of the time from home for at least four consecutive weeks in the year due to the COVID-19 pandemic, your year-end task is simply to tally the number of home work days over 2022. Alternatively, if you prefer the detailed method, your employer completes Form T2200S and you complete Form T777S - Statement of Employment Expenses for Working at Home Due to COVID-19. You will need to keep your supporting documents, so it would be prudent to begin assembling them before year-end.
If you work from home regardless of COVID-19, your employer completes Form T2200 and you complete Form T777 - Statement of Employment Expenses. Again, year-end is a good time to collect the documents.
Optimizing Your Pension Tax Credit (Age 65)
The pension credit saves you at least $350 (varies by province) on the first $2,000 of Eligible Pension Income (EPI) received in a year. Under age 65, EPI is generally limited to Registered Pension Plan (RPP) income. Most Registered Retirement Income Fund (RRIF) income will only qualify from age 65, and withdrawals from an RRSP don’t qualify no matter your age.
If you turn 65 this year, convert a sufficient amount of your RRSP holdings to a RRIF before year-end to take advantage of this tax credit. Unused pension credits do not carry forward, so if you don’t use it, you lose it.
Mutual Funds at Year-End
Mutual funds distribute their annual income to investors as of a record date near year-end, often mid-December. If you purchase late in the year but before the record date, you may be taxed on the full year’s distributed income, despite only briefly being a holder in that year. This is not a concern for non-taxable RRSPs, RRIFs or TFSAs.
If you wish to purchase a mutual fund in a non-registered account, it may be preferable to delay that purchase until the new year. While the early tax bill will eventually be accounted for in the investment’s adjusted cost base when you have a later disposition, you are out of pocket for the cash for the early tax payment in the present.
Review Wills and Powers of Attorney
While not a tax issue, year-end is a good time to think about your estate planning. We tend to see much more of our family during the holiday season, which is a built-in reminder of what estate planning is all about – the people around you, and your relationships with them.
As you review your tax planning, take time as well to consider whether any changes in your property might cause you to revise when or how you intend to share it with those people.
Also think about the changes you and others have undergone over the last year and what the next year may have in store, then revisit your estate planning so you’re comfortable it continues to fit your needs.
Get a head start for 2023 and book an appointment today with your Advisor to discuss how you can trim your tax exposure this year.
