It’s not too late to take advantage of these year-end investment tax tips – Yahoo Finance

Posted: December 12, 2022 at 12:28 am


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It's important to prioritize the investment merits over any potential tax benefits when making portfolio adjustments, Fidelity's Munro said.

For many Canadians, taxes might not be top of mind until March or April when the income tax filing deadline approaches.

But there are a number of investment tax credits and breaks that need to be executed before the end of the year in order to take advantage of them when the April 30tax-filing deadline rolls around.

"An ounce of prevention is worth a pound of cure. Because in April, there's no opportunity to take advantage of these. It's too late," Michelle Munro, director of tax and retirement research at Fidelity Investments, told Yahoo Finance Canada in a phone interview.

"I know December is already a busy time, it's the end of year, holidays, what have you, but thinking about it can potentially save you thousands in taxes come April, depending on your situation."

Here are Munro's top three tax tips to take advantage over the next few weeks.

Tax-loss selling is one of the best ways investors can save on their tax bill, Munro says.

After a volatile year in the markets, it's time to balance out gains and losses to maximize tax efficiency.

"Think about how that fits into the whole picture and think about your portfolio, as well. Do you want to be hanging on to this investment for the long term? And if it doesn't really fit into your portfolio, think about how you can take advantage of this loss," she said.

She emphasized, however, that the investment merits of selling any holdings should take priority over any potential tax benefits.

Tax-loss selling is when an investor sells a security at a loss to offset capital gains and reduce the taxes owed. The trade must be settled before the end of the calendar year for it to count towards the 2022 tax year, so investors need to execute any such trades by Dec. 28 where there is a trade plus two-day settlement period.

Once losses have been applied to the current tax year, any excess losses can be carried back for up to three taxation years or carried forward indefinitely to offset future capital gains.

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Munro says it's relatively straight-forward to carry back losses for those that use electronic tax filing systems.

The one crucial aspect about tax-loss selling to remember is the superficial rule. It dictates that the investor must not have purchased the same or identical security within 30 days before or after triggering the loss. This rule applies across all of the investor's accounts, any corporations they control, or their spouse, otherwise Canada Revenue Agency will deny the loss.

She notes, on the contrary, if the investor is looking to re-balance and trigger a capital gain, it might be worth selling the security in 2023 to delay the tax bill to 2024.

It's the season of giving and any investor considering donating to a charity might want to donate securities in-kind rather than cash, Munro says.

To reap any tax benefits for security in-kind donations, they need to be made to a registered charity (the CRA has a list of eligible organizations on its website), and a donation receipt needs to be issued.

The tax benefits of donating securities in-kind are a "double bonus," she says.

"The gain associated with those donated units is eliminated on your tax return. And the individual gets a donation receipt for the fair market value of those donated securities."

On the first $200 worth of donations, there's a federal tax credit of 15 per cent. Any donations above that threshold are subject to a tax credit of 29 per cent, or 33 per cent in certain situations.

Despite the word "savings" being in the name, Canadians should maximize the use of their Tax-Free Savings Accounts as investment accounts, Munro says.

"Longevity is increasing, which means that the time in retirement is also increasing. And having a long-term investment focus for your TFSA. Think of your TFSA as a complement to your RRSP," she said.

Contributions to a TFSA are not tax-deductible unlike RRSP contributions, but any capital gains and investment income earned are not subject to tax when withdrawn.

One extra tip to consider: If an investor thinks they will need to take money out of their TFSA next year, it's better to withdraw the money in Dec. 2022 so the contribution room will be added back to their limit come Jan. 1, 2023, Munro says.

Otherwise, any contribution room from withdrawals in 2023 won't be added back until 2024.

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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It's not too late to take advantage of these year-end investment tax tips - Yahoo Finance

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December 12th, 2022 at 12:28 am

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