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Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth.
December is the month to do year-end tax planning, and while we have pretty much the same tips every year, what’s a little bit different about 2022 is that some of the markets are in negative territory, and that means this could be the ideal opportunity for some tax-loss selling.
Now, yes, we talk about it every year. Tax-loss selling involves the selling of securities or funds to realize a loss. You take that loss, you then apply that against any capital gains, and then you reduce the amount of tax payable this year.
Now, if you have excess losses that you’re not using this year, then you can carry those losses back three calendar years. So this is your opportunity to take a loss and actually use it to get back capital gains tax that you paid maybe back in 2019, 2020, or 2021. But 2019 is the year that’s going to fall off the table by the end of the month. So this is an opportunity to take a look at the portfolio, see if there’s some losses, and then maybe get back some capital gains tax that you reported on your 2019 tax return.
Now, one thing to keep in mind is if you own U.S. securities, you may want to just pay attention to the foreign exchange gain or loss. So if you bought a security 10 years ago and it’s in a loss position, just be careful when you convert to Canadian dollars because in the end, that loss could be a gain. Ten years ago, Canada-U.S. dollar was at par, and now we’re trading at over 1.38. So you could have a significant currency gain that outweighs any loss that you think you had.
Of course, we’re always mindful of superficial loss rules, the 30-day rule. Make sure you don’t buy back within that 30-day period, you, your spouse, your partner, RRSP, TFSA, even RESP. So those are some of the things to be careful about.
In terms of other year-end considerations, of course, anyone turning 71 must convert the RRSP to a RRIF. Just remember that the final RRSP contribution must be done by December 31st. You don’t have till the normal March 1st deadline of the following year.
The prescribed rate is going up from 3 to 4% on January 1st, so maybe one last chance to think about setting up a prescribed rate loan income spending strategy between the end of the year. It’s 3% right now, which means that you have an opportunity to lock in a spousal loan or a loan to a family trust at 3%. And we’ve seen some clients take advantage of that because they know they can get a GIC at 5% and they lock it in for five years versus a prescribed rate of three, that’s a guaranteed 2% split. So that might work really well between now and the end of the year.
There’s no deadline for RESP contributions. You can always catch up on prior years. That being said, if a child or grandchild turned 15 this year, this is their final chance if they don’t have an RESP to put in at least 2,000 this year and get grants for this year and make them eligible for the next couple of years.
On the reverse side with RESPs, something to keep in mind, of course, is the Educational Assistance Payments. Those are taxable when they come out of the RESP by the student. December is a great time to look at the student’s income. You want to check out if they have any part-time income or maybe they have summer job income. And then look at their total situation. Have they taken out enough EAPs, Educational Assistance Payments, from the RESP to use up their basic personal amount? Again, that is use it or lose it each year, and that is something that students might want to take advantage of.
And one final thought, December is the time for charitable giving. Just a reminder that if you do have gains in the portfolio somewhere, then this is a great opportunity to donate those appreciated securities to a registered charity. Get your tax receipt equal to up to 50% of the value, but then also pay no capital gains tax on the value of that charitable gift. Those are my top tips for 2022.