Suddenly, the end of 2023 is surprisingly close. This point in the year is always a good time to think about certain financial decisions that will make themselves felt later on – specifically, when you’re preparing your income tax return. In anticipation of the conversation you may want to have with your advisor on this subject, here are eight important reminders. 

New this year: the FHSA 

Are you putting money aside to buy your first home? Then you have no doubt heard about the first-home savings account, or FHSA. This is a new type of savings account that allows your savings to grow in a tax-sheltered environment while you save for a down payment on your first home. You can contribute a maximum of $8,000 per year to a lifetime limit of $40,000. Key point: unlike contributions to a tax-free savings account (TFSA), FHSA contributions are fully deductible for tax purposes. Does that mean you should hurry to deposit some money before year-end so that you can deduct it in a few months’ time? Maybe… but not necessarily: there are many factors to take into account. For a clearer picture, talk to your advisor and read our article on this topic. 

The HBP is still there 

By the way, the FHSA hasn’t replaced the Home Buyer’s Plan (HBP), which offers a no-penalty way to withdraw funds from your registered retirement savings plan (RRSP) to use for a down payment on your first home. If you are about to take advantage of the HBP, consider the possibility of waiting until the beginning of next year rather than opening one right away. This will give you an extra year to buy or build your qualifying home, since this must be done no later than October of the year after you open your HBP. In these uncertain economic times, this bit of leeway could end up being helpful. 

Are you 71? The clock is ticking. 

On the other hand, if this is the year you turn 71, you can’t wait any longer: you have to convert your registered retirement savings plan (RRSP) into a registered retirement income fund (RRIF) or an annuity before December 31. (By the way, you also have until that date to make a final RRSP contribution, if you have enough contribution room.) While the RRSP is a savings accumulation plan, RRIFs and annuities are decumulation vehicles, and they come with minimum annual withdrawals. For example, the following chart provides an overview of the mandatory withdrawals you would have to make if you decided on a RRIF. Note that, similarly, if you have a locked-in retirement account (LIRA), it will also have to be converted into a decumulation vehicle, usually a life income fund (LIF), which also involves minimum annual withdrawals. 

Changes for pensioners 

Staying with the topic of retirement, if you live in Quebec and are age 65 or older, be aware that three major changes to the Quebec Pension Plan (QPP) have been announced for January 1, 2024. First, if you are receiving your pension but still working after age 65, you will now be able to stop contributing to the QPP if you wish. If you do so, you won’t receive the retirement pension supplement in the long term, but your net income will be higher in the short term. (If you live elsewhere in Canada, note that an equivalent measure is already in effect for the Canada Pension Plan).  
 
As well, if your employment earnings are lower after age 65 – for instance, because you are only working part time – you no longer need to worry that these lower-income years will affect the average earnings used to calculate your pension: they will no longer be taken into account. Lastly, note that you will now be able to wait until age 72, instead of 70, before starting to receive your QPP pension, which could increase your benefits by up to approximately $2,600 per year. 

A year-end surprise: distributions 

If you hold mutual funds¹ in a taxable account, it is quite likely that early in the new year you will receive statements reporting taxable income – even if you haven’t made any transactions. How is that possible? What happens is that, at year-end, many mutual funds pay their unitholders interest, dividends and capital gains realized during the year. The logic behind these “distributions” is that it is generally preferable, from a taxation angle, to have this income taxed in the hands of the Investor rather than the fund itself. These payments are prorated based on the number of units held, regardless of when they were purchased. This is why, if you are thinking of investing in a mutual fund between now and the year-end, you might want to talk to your advisor about the advisability of postponing your purchase slightly to avoid paying tax on an investment that you just made.  

Losing to win 

An investment portfolio usually contains some winning securities… and others that have actually lost value. This fact is at the heart of a common year-end tax strategy: tax-loss selling. This consists of selling underperforming investments to realize capital losses, which can be applied against capital gains realized in the same year or the three previous years. In this way, investment losses can be used to reduce your tax bill. Be careful, though: if you think it might be a good idea to sell an investment, realize the loss, and then immediately buy the same security back again because of its potential, be aware that the government has thought of that, too: this would qualify as a “superficial loss”, which is prohibited by law. Ask your advisor about the rules that apply to tax-loss selling. Note, too, that this strategy is only relevant in a taxable account, so it excludes any Investments held In registered accounts, such as an RRSP, TFSA, FHSA or a registered education savings plan (RESP). A final detail: in Canada, the last securities trading date for settlement in 2023 is December 27. 

Entrepreneurs, calculate your passive income  

For small business owners, year-end is often the time to make some very important tax decisions. One of these concerns the rules surrounding the “passive income” earned by the entrepreneur’s companies, which is basically income earned from investments rather than operations. These rules establish a connection between the passive income of all these companies and eligibility for the small business tax rate, officially known as the Small Business Deduction (SBD). In effect, each dollar of passive income above the $50,000 threshold reduces the operating income eligible for the SBD by five dollars: an entrepreneur with over $150,000 in passive income is no longer eligible for the lower tax rate. This provision is of particular concern to business owners who keep substantial investments within any of their companies (for example, in a holding company), and even consider this to be a kind of retirement fund. 

To demonstrate the importance of this point, the following example gives a simplified illustration of the effect that $100,000 of passive income could have on the tax rate at the federal level alone for a small business with income from operations of $500,000. 

So the passive income rules could prompt you to make decisions about your investments, salaries, dividends and business expenses in order to minimize your passive income or your taxable earnings. A good chat with your accountant and your advisor could clarify this issue. 

Give wisely 

Finally, as the year-end festivities approach, all kinds of charitable organizations remind us – and rightly so – that many people and many groups within our society rely on charitable donations. Keep in mind that a donation in 2023 to a charitable organization that will issue you an official receipt will allow you to claim a deduction on your next income tax return. At the federal level, the tax credit is 15% for amounts under $200 and 29% above that (some conditions apply). In addition, there are provincial tax credits that could bring the tax saving generated by a donation to at least 40% of the amount, with the actual total varying, depending on the province. But if you would really like to make a difference and have substantial funds at your disposal, why stop there? You could adopt a true planned giving strategy that could optimize the impact of your donations by making use of additional tax levers. Set up with professional help, it could take advantage of donations in the form of eligible securities or insurance policies. 

These few reminders provide just a sampling of the financial and tax decisions that an individual may wish to consider at year-end. For a more in-depth look at those appropriate for your situation, talk to your advisor. 

¹ Only mutual fund representatives associated with Desjardins Financial Security Investments Inc. have access to mutual funds.