Gosh, almost the holiday season already??
While you might be focused on other things this holiday season, the end of the calendar year is also a great time to get recharged and financially reorganized before another year approaches.
Before you get too busy with your holiday chores, here are some of our favourite year-end tax season tips to save money now and build wealth later.
Year-End Tax Season Tips
1. Receipts matter. Be aware an audit from our Canada Revenue Agency (CRA) can happen essentially anyplace, anytime. As such, since tax files for auditing purposes may be selected at random, don’t be caught off guard. Ensure for any previous tax year you keep a sound six years of tax return documentation and receipts, at minimum, for any possible audit.
“Keep your records for six years from the end of the last tax year they relate to, unless you have permission from the CRA to destroy them earlier.”
2. $500 for free. Don’t ignore free money. If parents can find $2,500 before year-end then said parents will get $500 for free, to pad the Registered Retirement Savings Plan (RESP) contribution they just made. Employment and Social Development Canada (ESDC) provides an incentive for parents, family and friends to save for a child’s post-secondary education by paying a grant based on the amount contributed to an RESP for the child. The Canada education savings grant (CESG) money will be deposited directly into the child’s RESP.
No matter what your family income is, ESDC pays an amount of Canada Education Savings Grant (basic CESG) of 20% of annual contributions you make to all eligible RESPs for a qualifying beneficiary to a maximum CESG of $500 in respect of each beneficiary ($1,000 in CESG if there is unused grant room from a previous year), and a lifetime limit of $7,200.
So, if you can make your contribution to any RESP this year or any year really, please do so.
3. Collapse your RRSP and turn that into an RRIF. While the RRSP is an outstanding tax-deferred account for wealth-building (everything you should know about this account is in that link above), if you turned age 71 this year you must collapse this account by December 31st.
By turning your RRSP into an RRIF, you can continue to get the tax-deferred growth benefits for assets inside the RRIF while some forced withdrawals slowly take place over time. Even if those forced RRIF withdrawals occur slowly, those withdrawals can help smooth out taxes – which is actually ideal in many cases. The ability to “smooth out taxation” is a good thing to avoid major, lumpy tax hits in any given year if you’re already receiving CPP and/or OAS benefits.
There are a couple of extra tax benefits of starting your RRIFs in your 60s. Most of all, it’s eligible for pension splitting. So if you have a spouse and a large RRSP balance, now you can split the RRIF income by up to 50%! The icing on the cake is the RRIF income is also eligible for the pension tax credit! Pension splitting can start as early as age 65, so depending on your situation, you may want to consider converting at least a portion of your RRSP balance at that time to take advantage of the tax benefits. Every situation is different but we will say that we optimize pension splitting (and when to start) with the retirement projections we do with our clients.
Make sure you check out our case studies and projections on these subjects to learn more!
- When is the Best Time to Start Collecting CPP?
- What is OAS and how to avoid the OAS clawback?
- When to take CPP in retirement – a case study is found here.
4. Offset juicy capital gains. Managing capital gains to mitigate taxes payable is an important year-end consideration, in any year. My Own Advisor sold some assets in his taxable account a few years ago here and shared his experiences in doing so…
Based on an indifferent 2023 investment year thus far, we believe some investors may consider dumping some stocks that never performed as well as they might have liked to offset capital gains. Be mindful to get under the wire for any year-end capital loss, we think it makes great sense to ensure all transactions settle before Christmas to avoid transaction settlements that don’t get under the wire by December 31.
5. Set aside some income for the self-employed. As owners of corporations ourselves, we set aside income earned to avoid a tax hit come corporate tax filing time. We believe all self-employed individuals should do the same. As a rule of thumb, we like the idea of setting aside about 20-25% of your income earned for future taxes owed – that includes both RC (corporation tax filing) and RT (GST/HST tax filing).
6. Tax-deferred and tax-free is better than taxable income. We get it. The TFSA seems better than the RRSP for most but some feel the RRSP is still better to contribute than the TFSA. While we believe the TFSA is the best, wealth-building account for any adult Canadian regardless of income-level earnings we don’t want you to have investing paralysis by analysis. Pick either the tax-deferred account (RRSP) or the tax-free account (TFSA) to contribute to and just keep going…
A reminder with the TFSA you pay tax on money you’ve earned before you make a contribution; and with an RRSP you get a tax refund now on money you contribute, but will have to pay tax later, on money you withdraw from the plan/RRSP/RRIF.
Read on for tons of details in these pillar posts:
- Everything you need to know about the TFSA and the TFSA contribution limit.
- Can you retire just using the TFSA? (Yes!)
- And….How to decumulate assets in retirement is found here.
Here is a snappy summary table we share with clients why the TFSA generally wins over the RRSP for asset accumulation – given RRSP withdrawals will be taxed in an unknown taxable system future!
|TFSAs – Withdrawals are not considered taxable income. Income-tested benefits and income tax credits such as the GST Credit, Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) aren’t affected by any TFSA withdrawals. Withdrawals don’t reduce these benefits.
|RRSPs – Withdrawals are considered taxable income. RRSP withdrawals could reduce amounts you receive from income-tested benefits and income tax credits such as the GST Credit, OAS and GIS. RRSP withdrawals could reduce your post-retirement government benefits.
Since our site is often geared towards FIRE, early retirees, semi-retirees or folks already drawing down their portfolio in a tax-efficient way, here are some other tips:
7. Base any RRIF withdrawals on the younger spouse. If you do convert some of all of your RRSP to an RRIF, consider RRIF withdrawals based on the age of your spouse, if he or she is younger. This will reduce the required minimum annual withdrawal and will allow you to defer tax longer.
8. Withdraw losers sooner than from your RRIF. If you have to make withdrawals from your RRIF (but don’t need the cash to cover expenses) then consider making in-kind withdrawals of investments that have declined in value and holding those outside your RRIF. In doing so, any future gains will be taxed at capital gains rates outside of your RRIF – see comments above about capital losses. Then again, don’t hold any losers in any account!
9. Split your pension benefits. If you receive eligible pension income (including RRIF withdrawals if you’re over age 65, and any pension benefits from an employer pension plan), you’re able to split that income with your spouse. If you’re over age 65, you might get the first $2,000 of RRIF withdrawals as a pension credit.
10. Maximize government OAS and CPP benefits. If you reached age 65 this year, a reminder you could apply for OAS benefits but you don’t have to. You can defer OAS to age 70. The same goes for CPP.
By deferring CPP, that increases your benefit by 0.7 percent each month, or 8.4% annually.
Year-End Tax Season Tips Summary
As always, take some time to look at your financial situation and try and figure out what works best for you including the impacts of taxation related to your investment decisions.
On that note, we encourage and celebrate all Canadians to become savvy DIY investors. Because we’ve been DIY investors ourselves for a few decades now – we’ve learned so much – we want you to benefit from the same or even higher success!
We support all DIY investors who strive to tailor their own cashflow plans after their needs and wants because…
Nobody cares more about your financial future than you!
Need any support with your retirement income projections?
Knowing how to save and invest wisely, to help you get the most out of your portfolio, is something we can help with. We post free content every month to highlight how all Canadians take can more responsible saving and investing choices into their own hands – and avoid salesy financial advisors, money managers and insurance agents who want your money.
In addition to free asset accumulation articles and related content, we also offer something very unique: low-cost financial projections services to help any DIY investor at any stage of their investing journey work through any potential asset decumulation puzzle . That means, we support DIY investors with how to efficiently withdraw from their retirement accounts and/or figuring out if they have enough to retire on right now with inflation, taxation and other important factors involved.
As we start thinking about more year-end articles and support to close out this calendar year, we want to take this opportunity to sincerely thank almost 100 members that have reached out for our services over the last year. It’s been a pleasure to help you and provide value-added information at a fraction of the cost to others.
We also want to acknowledge all the returning/loyalty members who obtained a huge discount from us for coming back for yet another round of Done-For-You Personalized Projections Reports. We are only happy to support you again and again with a discount provided to you every, single, time!
A reminder to those who have recently joined our readership and new fans of the site – our site continues to grow thanks to you!!
As a fine example, a big thanks to Rob Carrick for mentioning our site a while back in The Globe and Mail. From Rob:
“TODAY’S FINANCIAL TOOL
Cashflow$ & Portfolios is the name of a website built to help people learn how to reach their long-term financial goals with budget and long-term investing. Brought to you by a pair of veteran personal finance bloggers.”
Stay tuned for more case studies, free tax tips, giveaways and much more over time.
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