Couple doing taxes
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(Runtime: 5:00. Read the audio transcript.)

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Capital loss planning may be especially important at tax time this year, given the lacklustre performance of the stock market, says John Yanchus, director of tax and estate planning with Canada Life.

Speaking on the Soundbites podcast, Yanchus said investment losses have been all too common in this bear market. But the good news is those losses can offset capital gains not just in the current year, but also in the previous three years, or in any future year.

An unrealized capital loss exists if an investment currently has a fair market value less than its adjusted cost base. But Yanchus cautions against selling investments at a loss purely to mitigate tax pain.

“The investment should be evaluated and sold for a loss only if the reduction in the fair market value is the result of a permanent loss of value or an impairment of the investment, or if the investment does not continue to fit with the investment philosophy or the goals,” he said.

Although the deadline to submit tax forms is months away, he said it is a good idea to start planning now while options are still available to create a more favourable tax outcome.

“The earlier the planning starts, the more time you have available to implement the solutions,” he said.

Among the deadlines to keep in mind are:

  • December 31, 2022 — the end of the current taxation year;
  • January 30, 2023 — the final day to make interest payments on prescribed-rate loans in order to avoid attribution rules kicking in;
  • March 1, 2023 — the last day to make a contribution to an RRSP for the 2022 tax year; and
  • April 30, 2023 — filing deadline for most individuals.

For many clients, step one will be to anticipate their marginal tax bracket and work from there.

“Some of the main thoughts would be understanding all the sources of income and the general tax bracket [they] will end up in,” he said. “I am a believer in taking full advantage of, or maximizing, the desired tax bracket.”

To that end, if total income level falls below the top of the desired tax bracket, there is an opportunity to include additional income from other taxable sources. Similarly, if total income puts the client into the next tax bracket, the client can consider claiming other expenses and deductions to reduce taxable income.

“You can take advantage of RRSP contributions or charitable donations to help reduce total income,” he suggested. “These solutions should be implemented before the end of the year.”

Another option is to top up a TFSA, if contribution room exists, with income that exceeds the maximum for the desired tax bracket.

Yanchus said tax strategies should be considered a collaborative effort involving the client, financial advisor, accountant and any other relevant professionals. And the most successful plans are not short-term affairs.

“The planning process is larger than a single year, and should continue year over year, and build from one year to the next, and beyond,” he said.

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.