Welcome to Soundbites, weekly insights on market trends and investment strategies, brought you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re looking for year-end tax tips from John Yanchus, director of tax and estate planning with Canada Life. We asked about the potential benefits of preplanning, how to build a general tax picture, and how to think about capital loss. And we started by asking why financial advisors should start thinking about all of this now.

John Yanchus (JY): It is a good idea to start planning now to consider different strategies and have these conversations with clients and potentially your client’s accountant. The earlier the planning starts, the more time you have to implement the ultimate solutions. If you’re thinking ahead, the main deadline would be December 31st. This is the end of the tax year, and anything falling outside of this time frame would generally not be included in the current taxation year. Other deadlines to consider would include:

  • March 1st, 2023, the last day to make a contribution to an RRSP that is eligible for the 2022 taxation year; and
  • January 30th, the deadline to have interest amounts paid on prescribed-rate loans to maintain the interest rate in effect on the loan.

Anticipating the tax bracket.

JY: When understanding the general tax picture, some of the main thoughts would be understanding all the sources of income and the general tax bracket you will end up in. I am a believer in taking full advantage of — or maximizing — the desired tax bracket. If the total income level is below the maximum of your desired tax bracket, this is an opportunity to include some additional income from other taxable sources. On the flip side, if you are in a tax bracket above your desired tax bracket, this may be the time to start thinking about expenses or other deductions that could offset some of your total income. Some examples would be to ensure all expenses you want included in the year are paid before December 31st. Also, you can take advantage of RRSP contributions or charitable donations to help reduce total income. Another component of this strategy would be to top up or fund a tax-free savings account with any income that may not be needed or to utilize the TFSA to generate additional cash flow where income has already been maximized.

How to view expenses and deductions

JY: When thinking about reducing total income, clients should pay any potentially deductible investment-related expenses before December 31st to use the deduction for the 2022 taxation year. To qualify for the deduction, expenses must be paid in the year, and paid pursuant to a legal obligation.

Thinking about capital loss

JY: Capital loss planning may be an important concept when we look at the performance of the stock market over the entire year. Stocks and funds may have a lower market value now, compared to the beginning of the year. First, it is important to understand that losses arising in the 2022 taxation year can offset capital gains in the current year, the prior three years, or in any future year. Next, an unrealized capital loss exists if the investments currently have a fair market value less than their adjusted cost base, which can loosely be defined as the original cost of investment plus any expenses to acquire it. If these investments are sold while the market value is less than the adjusted cost base, these losses will be realized and available for use to offset capital gains. I always try to highlight capital loss planning as most importantly an investment decision first, not a tax decision. 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 goals. The sale shouldn’t be initiated simply to obtain the tax outcome.

And, finally, what are the practical next steps in preparing for tax season?

JY: Make sure you understand the deadlines and time constraints applicable. Make sure you are on the same page with your client’s accountant when considering the desired strategies. And if you are taking advantage of any strategies or elections, be sure you’re within the rules of those specific strategies. The next steps would be to implement the plan or the strategies discussed. The planning process would continue year over year, and build from one year to the next, and beyond.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to John Yanchus of Canada Life. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.


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