As you consider your financial priorities for the coming year, here are some financial resolutions that could help you save taxes, protect your portfolio, and position you for financial success in 2023.
1. Pay off holiday credit card debt
If you’re like many Canadians who overspend during the holiday season, focus on paying off your credit card debt as quickly as
possible, concentrating on paying off the highest interest rate credit cards first. Once you’ve paid off your holiday purchases, consider setting aside a certain amount of money each month in a separate account so you have money available to enjoy the 2023 holiday season without going into debt again next year. For more information, speak with your BMO financial professional.
2. Start tax planning for 2023
Many investors wait until year end before thinking about how to reduce their annual tax bill; often missing out on available tax planning opportunities. Tax planning should be a year round activity in order to maximize the savings opportunities available to you. Ask your BMO financial professional for a copy of our publication, 2023 Personal Tax Calendar, which summarizes important tax deadlines and provides tax planning tips for you to consider throughout the coming year.
3. Meet with your financial professional to review your financial plan and investment portfolio
Ongoing conversations with your BMO financial professional are important to ensure your financial plan remains on track and your investment portfolio is properly positioned to meet your financial goals and objectives.
A discussion with your BMO financial professional will help identify areas of your financial plan that may require updating due to changes in your personal situation that either happened in 2022 or will take place in 2023.
A regular review of key planning areas such as retirement, estate and insurance will ensure your financial plan continues to address your personal priorities.
It’s also important to review your investment portfolio regularly to determine whether your risk tolerance has changed, reconfirm your investment objectives and discuss rebalancing your asset mix, if needed.
4. Make your RRSP and TFSA contributions
Making regular Registered Retirement Savings Plan (“RRSP”) contributions is one of the best ways to ensure you save enough for your retirement. The deadline for making your 2022 RRSP contribution is March 1, 2023. If you’ve already made your 2022 RRSP contribution, consider making your 2023 RRSP contribution early, instead of waiting until 2024, in order to maximize the tax deferred compounding inside your RRSP. The maximum RRSP contribution available for 2022 is $29,210, and $30,780 for 2023.
The benefits and flexibility provided by a Tax-Free Savings Account (“TFSA”) make it ideal for saving for multiple financial goals. The TFSA contribution limit for 2023 is $6,500. Unused contribution room from previous years carries forward and can be used in any future year.
You may want to consider gifting funds to your spouse/ common-law partner or adult child to allow them to contribute to their own TFSA (subject to their personal TFSA contribution limit). Income earned while the gifted funds remain within their TFSA will not be attributed back to you.1
5. Reduce tax with income-splitting
Under our tax system, the more you earn, the more you pay in income taxes on incremental dollars earned. The 2023 personal Federal income tax brackets and rates are reflected in the table on the following page. With this in mind, it may make sense to spread income among family members who are taxed at lower marginal rates in order to lower your family’s overall tax burden, subject to the income attribution rules. Some of the more common income-splitting strategies include2 :
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Pension income-splitting between spouses (or common-law partners);
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Gifts to adult children or other adult family members (other than a spouse or common-law partner); and
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Gifts to a minor child – directly or through a trust structure – to acquire investments that generate only capital gains
6. Protect your credit score
Building and maintaining a good credit history is important as lenders will view your credit report and credit score when deciding whether to grant a loan or credit card, as well as determining the interest rate you’ll be charged. In addition, a potential employer or landlord may use your credit report to help determine your dependability.
7. Make your portfolio tax-efficient
When evaluating an investment for your portfolio you should consider the impact of income taxes, since not all investment income is taxed in the same manner. Despite the wide range of investments available there are only three basic types of investment income:
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Interest income is fully taxable at your marginal tax rate;
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Capital gains receive preferential tax treatment as only 50 per cent of the capital gain is taxed; and
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Canadian dividends also receive special tax treatment through Federal and provincial dividend gross-up and tax credit mechanisms.
Because each type of investment income is taxed differently, it’s important to look at the after-tax rate of return and not only the stated interest rate, yield or projected growth rate. The following table illustrates the approximate rate of return, by province or territory, for eligible dividends and capital gains that will result in the same after-tax return as an investment that pays interest income at 5 per cent. For example, a B.C. resident in the top marginal tax bracket who earns a return of 5 per cent in interest income will keep 2.33 per cent after-tax. The same investor will only need to earn a return of 3.67 per cent in eligible dividends, and 3.18 per cent from capital gains in order to net the same 2.33 per cent after-tax return as the 5 per cent interest-paying investment.
8. Reduce the amount of withholding tax from your paycheque
While many consider an income tax refund to be a windfall of sorts, a refund means you’ve given the government a tax-free loan during the year. A tax refund usually occurs because the income taxes that are withheld by your employer exceed your actual tax liability. Income tax withholding rates are an estimate of the taxes you will owe for the year if your only income source is the one upon which the taxes are being calculated. Withholding rates do not take into consideration all income tax deductions and credits such as RRSP contributions, deductible support payments or charitable donations. This can result in an overpayment of tax during the year and provide a refund when you file your tax return.
If you would like your employer to reduce the amount of withholding taxes from your earnings, you can make a request, in writing, to your Regional Taxation Services Office of the CRA and/ or Revenu Québec (“RQ”). You will need to include documentation to support your request, such as RRSP contribution receipts or a written court order for support payments. If approved by the CRA and/or RQ, your employer will receive a letter of authorization to reduce the withholding taxes on your employment income. The reduced withholding taxes mean you will improve your cash flow during the year by increasing your net take home pay, instead of receiving a lump-sum tax refund the following year when you file your tax return.
9. Build an emergency fund
If you’re not prepared, an unexpected expense can have a significant impact on your finances. By setting money aside in an emergency fund, you’ll have funds available to meet life’s unanticipated expenses – and reduce the need to rely on credit cards, loans or personal savings; all of which could jeopardize your financial future. While insurance can be helpful for certain emergencies, it’s important to have a dedicated source of funding to weather a financial storm.
Consider keeping at least three to six months’ worth of living expenses in your emergency fund. It may seem like a daunting goal, especially if you have accumulated debt, such as a mortgage; however, by budgeting a certain amount monthly to emergency fund savings you can work towards your goal over time.
10. Keep your personal and account information safe
Consider these tips to help protect your personal and account information online:
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Get into the habit of changing your passwords regularly – for your computer, Wi-Fi, and all online accounts and websites. Today, hackers need less time and resources to crack passwords. What may have previously been considered a “complex” password can often be deciphered in minutes, if not seconds by cyber criminals;
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Do not access your financial accounts while connected to public Wi-Fi, as these hotspots offer only minimal security and may leave you vulnerable to cyber threats;
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Make sure that your computer is free of viruses and malware by using antivirus software, and ensure that your network connection is secure; and
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As phishing schemes become increasingly sophisticated, be cautious if you receive an email from a source or person with whom you have not previouslycommunicated via email, or an email includes attachments, contains spelling or grammatical errors, uses threatening language, invokes a sense of urgency, or lacks details about the sender.
For more information about protecting yourself online, ask your BMO financial professional for a copy of our publication, Digital
Security – Keeping Your Personal and Account Information Safe.
11. Make your charitable giving tax efficient
The benefits of making a charitable donation are countless, from helping those in need to the personal satisfaction you feel when giving back to a cause you feel passionate about. However, with proper planning, you can also reduce your income tax liability and maximize the value of your donation.
A donation of qualifying publicly-traded securities may be preferred over a cash donation of equal value, particularly in cases where you have already decided to dispose of the securities. A charitable tax receipt equal to the fair market value of securities donated to a charity will reduce your taxes through a donation tax credit. For donations made after 2015 that exceed $200, calculation of the Federal charitable donation tax credit allows higher income donors to claim a Federal tax credit at a rate of 33% (versus 29%), but only on the portion of donations made from income that is subject to the 33% top marginal tax rate that came into effect on January 1, 2016. When combined with the provincial donation tax credit, the tax savings can approximate 50 per cent of the value of the donation (depending on your province of residence).
In addition, a donation of securities is considered a disposition for tax purposes. However, because of the tax incentives provided on a donation of qualifying appreciated publiclytraded securities to charity, the capital gain inclusion rate is nil instead of the normal 50 per cent that would otherwise apply.
As a final point, consider combining all charitable donations for you and your spouse and claim these on one income tax return for maximum tax savings.
If you’d like to be more strategic with your charitable giving, consider establishing a donor advised fund through the BMO Charitable Giving Program. You can make a charitable contribution to your donor advised fund and obtain the tax savings benefits today, while having the flexibility to make disbursements to your designated charitable beneficiaries over time; ensuring a legacy of giving long into the future. A variety of investments are accepted for contribution in order to establish your donor advised fund, or when making additional contributions, including publicly-traded securities
For more information, please speak with your BMO financial professional.
1 However, the Canada Revenue Agency takes the position that the attribution rules could apply when the funds gifted to contribute to a TFSA are subsequently withdrawn, i.e., where future income and/or capital gains are realized on funds withdrawn that are subsequently re-invested (outside of the TFSA).
2 Please note that new tax rules which took effect in 2018 seek to limit income-splitting with certain adult family members involving private companies. For more information, please ask your BMO financial professional for a copy of our publication, Tax Changes Affecting Private Corporations: Tax On Split Income (“TOSI”).
BMO Private Wealth provides this publication for informational purposes only and it is not and should not be construed as professional advice to any individual. The information contained in this publication is based on material believed to be reliable at the time of publication, but BMO Private Wealth cannot guarantee the information is accurate or complete. Individuals should contact their BMO representative for professional advice regarding their personal circumstances and/or financial position. The comments included in this publication are not intended to be a definitive analysis of tax applicability or trust and estates law. The comments are general in nature and professional advice regarding an individual’s particular tax position should be obtained in respect of any person’s specific circumstances.
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