Introduction: As the year comes to a close, it’s essential to explore tax-saving opportunities that can benefit your financial situation. Here are seven strategies to consider before the year-end to optimize your tax planning.
1. Open a First Home Savings Account (FHSA): If you’re a Canadian resident aged 18 or older and a first-time homebuyer, consider opening an FHSA, similar to an RRSP. You can contribute up to $8,000 annually, with a lifetime maximum of $40,000, and deduct these contributions from your taxes. Unlike an RRSP, you must contribute before year-end for deductions this year. Don’t wait; open an FHSA today.
2. Invest in Home Renovations: Seniors or their supporters should think about funding home renovation expenses before 2023 ends. Qualifying renovations aimed at creating a secondary unit for living with a relative could make you eligible for the Multigenerational Home Renovation Tax Credit (MHRTC), offering up to $7,500 in tax relief on up to $50,000 in costs. Additionally, consider the Home Accessibility Tax Credit (HATC) for renovations enhancing mobility within your home, which can save up to $3,000 in taxes on up to $20,000 in costs.
3. Explore Tax Shelters: Certain investments, such as limited partnerships and flow-through share investments, can provide tax savings through special deductions. However, it’s crucial to understand the underlying investment risk. Some of these opportunities have limited availability and specific investment windows, so begin your search now if you’re interested.
4. Purchase Capital Assets: If you’re an employee providing assets for work or a business owner, consider accelerating the purchase of depreciable assets like office furniture, computers, or vehicles before year-end. The Accelerated Investment Incentive offers increased first-year capital cost allowance (CCA) deductions for most depreciable assets acquired and ready for use before 2028. Furthermore, the Immediate Expensing Incentive allows deductions, up to $1.5 million annually, for certain asset types acquired after December 31, 2021, and available for use before 2025. Delaying the sale of depreciable assets until after year-end might also be advantageous.
5. Consider Incorporation: Incorporating your business can yield significant tax benefits, with a low average tax rate of approximately 11% on the first $500,000 of active business income (varies by province or territory). Incorporation can also provide personal liability protection and simplify estate planning. To reap these tax and other benefits, contemplate incorporating your business before the year-end.
6. Make Interest Deductible: To reduce the burden of high interest costs, ensure that borrowed money is used for income-producing purposes. You can pay down non-deductible debt with savings or investments and then reborrow to replace them. If the newly borrowed money is invested to earn interest, dividends, rents, or royalties, you should be eligible to deduct the interest. There’s still time in 2023 to create interest deductions through this strategy.
7. Undertake Bill C-208 Planning: New tax rules introduced in June 2021 under Bill C-208 aimed to facilitate intergenerational business transfers. However, they inadvertently allowed owners to withdraw funds from a corporation at capital gains tax rates instead of dividend rates, known as “surplus stripping.” These rules will be amended starting January 1, 2024, but there’s still time before year-end to take advantage of the current rules. Consult a tax professional to explore this opportunity.
In conclusion, proactive tax planning can make a significant difference in your financial outlook. Before the year ends, consider these seven strategies to optimize your tax situation and secure a more prosperous financial future. Speak to us if you need assistance.