Written by: Tradex
As the tax season draws to a close in Canada, it’s important to ensure that all tax-related obligations have been fulfilled. Here are six considerations to help investors wrap up the 2022 tax year:
1. Filing taxes on time
The deadline for filing individual income tax returns in Canada is April 30th (Since April 30, 2023, falls on a Sunday, your return will be considered filed on time if the Canada Revenue Agency (CRA) receives it, or it is postmarked, on or before May 1, 2023). It is essential to file your tax returns on time to avoid penalties and interest charges. If you owe taxes to the Canada Revenue Agency (CRA), it’s also important to pay them on time to avoid further interest charges.
2. What events trigger taxes on your mutual fund investments?
Generally, the taxable events on your mutual fund investments fall into two categories:
– When you sell or switch a fund
– When you receive income from a fund through a distribution (whether it was reinvested or paid in cash).
Principles related to taxes and investing:
Structure your overall portfolio to be tax-efficient
Placing different types of investments in different types of accounts (e.g., inside or outside of registered plans) can reduce your tax costs and increase the tax effectiveness of your overall portfolio.
Maximize cash flow with a tax-efficient portfolio
After-tax returns from your investments (especially non-registered) are what’s important. Choosing investments that benefit from favourable tax treatment can help you generate more after-tax income.
Work with an advisor
Working with a knowledgeable investment professional can help you learn about how different types of investments are taxed and how you can build a tax-efficient portfolio.
3. Which tax documents should I expect for my investments?
Depending on your investments, you should ensure that you collect all necessary tax slips before filing your tax returns.
Registered accounts: T4RSP, T4RIF, T4A – They indicate how much money you withdrew from or received out of your RRSPs/RRIFs/RESPs and how much tax, if any, was deducted.
Non-registered accounts: From corporations including mutual fund corporations: T5 – Statement of investment income includes any interest, dividends, net capital gain distributions, and royalties you earned in the tax year.
From trusts: T3 – Statement of trust income allocations and designations includes any interest, dividends, net capital gain distributions, and royalties you earned in the tax year.
T5008 – Statement of securities transactions – if you redeemed an investment during the tax year, this would indicate the sales proceeds and, generally, the book value to allow you to calculate the capital gain or loss on the sale.
4. Consider investing in Corporate Class: Smart tax-efficient investing in your non-registered accounts
For non-registered accounts, there are no contribution limits, no limitations on how long the plan can remain open, no restrictions on how much money can be withdrawn, and no restrictions on how the money may be used upon withdrawal. One strategy to defer or reduce tax on investments in non-registered accounts is to invest in corporate-class mutual funds. As a corporate-class investor, you own shares of the corporation. The corporation has the flexibility to offset gains and losses between different pools of investments or funds, which may improve overall tax efficiency. In addition, Canadian mutual fund corporations only distribute either eligible Canadian dividends, capital gains or return of capital, all of which enjoy a favourable tax treatment.
5. Claim deductions and credits
Investors can reduce their tax liability by claiming various deductions and credits, such as medical expenses, the 2022 “staycation” credit, charitable donations, and tuition fees. It’s important to review all eligible deductions and credits to ensure that you’re not missing out on any tax savings.
6. Plan for next year
Contributing to RRSPs: Contribute to your RRSP/Spousal RRSP up to your available contribution room to reduce your 2023 taxable income while maximizing the tax-deferred growth in your plan.
Contributing to TFSAs: Contribute to a TFSA to earn tax-free investment income. The TFSA contribution limit for 2023 is $6,500.
You may also have unused contribution room if you haven’t maximized your contributions in previous years. If you are thinking of making a TFSA withdrawal, do so before year-end so you can recontribute the amount as early as January 1 of the following calendar year.
Contributing to RESPs: if you are saving for a child’s post-secondary education, contribute to an RESP before the end of the year to make the most of tax-deferred growth and government grants (20% on $2,500 per beneficiary annually). Contributions to an RESP are subject to a lifetime contribution limit of $50,000 per child.
Contributing to FHSA: in 2023, the new tax-free First Home Savings Account will be available, allowing a tax-deductible contribution of up to $8,000 per calendar year (subject to a lifetime contribution limit of $40,000). To open this account, you or your spouse must not have owned and resided in a home currently or in the past four calendar years. Withdrawals made to purchase a home are tax-free.
Turning 71 in 2023 and have earned income: Even if you have no carry-forward room but have earned income that will generate RRSP contribution room for 2024, consider making a final RRSP contribution before the end of 2023, which can be claimed as a deduction on your 2023 tax return. Since the contribution is made before the end of 2023, an over-contribution penalty tax of one percent per month will apply on any amount greater than $2,000.
Wrapping up the tax season involves more than just filing your tax returns on time. It’s essential to review all eligible deductions and credits, understand the tax implications of mutual fund investments, contribute to RRSPs, and plan for the next tax year. By following these considerations, investors can ensure that they are minimizing their tax liability and maximizing their financial well-being.
Work with a trusted investment advisor to review your investment strategies, make any necessary adjustments to your financial plans, and navigate tax season more smoothly.
Contact Tradex at firstname.lastname@example.org, by phone at (613) 233-3394/ Tollfree: 800-567-3863 or visit their website at www.tradex.ca.