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Welcome to Advisor To Go, brought to you by CIBC Asset Management. A podcast bringing advisors the latest financial insights and developments from our subject matter experts themselves.

Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth.

Every year around this time, we sort of talk about year-end tax tips, and while the tips don’t really change much from year to year, there are a few things that we’re going to focus on in 2023 that may be a little bit different than in prior years.

So let’s begin, of course, with tax-loss selling. That’s, of course, the art of selling investments in a non-registered portfolio that have accrued losses before the year-end to offset other capital gains you’ve realized in the portfolio. And then any net losses that you don’t have in the current year can be carried back up to three years and then forward indefinitely to offset gains in those years.

So first thing to remember for this year is that to be able to use your loss for this year, you’ve got to settle the trade in 2023, and that basically means that your trade date, because we’re in a T+2 still for now, must be no later than December 27 to complete the settlement because December 30 and 31 fall on the weekend in 2023.

The other thing to keep in mind, of course, is that if you have purchased securities in a foreign currency like the U.S. dollar, if you go back like a decade ago, the U.S. dollar was trading about 1.05 Canadian, and then today it’s around 1.39 Canadian. So what might look like a loss could actually be a gain when you include foreign currency. So that’s really something that’s important to keep in mind.

We always tell people to be mindful, of course, of superficial loss rules, if you buy it back within 30 days, there may be alternatives. So if you’re in one particular ETF, you can get a slightly different ETF as long as it’s not identical to switch out of and take your loss. And there may be other stocks that are very similar that you may want to reposition. And again, this is something that clients may be very interested in doing.

Other things, of course, to remember are things like if you’re looking at paying expenses like investment expenses and you want to claim a deduction. So, for example, if you have interest expense that you paid on money that you borrowed for investing or investment counseling fees, things like that for non-registered accounts, you want to pay that by the end of the year to make sure you claim your deduction in 2023.

And then, of course, anyone who turns 71, you have to convert your RRSP to a RRIF by the end of the year. And there is that opportunity that we’ve talked about in the past where one could make a one-time over-contribution to your RRSP in December. If you think you’re going to have earned income this year, that will generate RRSP contribution room for next year. And what you do is you pay your penalty tax of 1%, let’s say, for the month of December, and the new room opens up on Jan 1, 2024, and the penalty tax stops. So again, this can be an interesting idea for 2023.

One of the things that investors should really prepare for is the proposed new alternative minimum tax rules that are set to come into force on Jan 1, 2024. So the AMT is a parallel tax system that imposes a minimum level tax on taxpayers who claim various deductions, exemptions, and credits to reduce the amount of tax that they owe to very low levels. And so effectively, what’s happening is changes to the AMT system that begin on Jan 1, 2024, include raising the AMT rate, increasing the exemption, broadening the base by limiting various exemptions, deductions, and credits. So, for example, someone who has a capital gain, capital gains are normally, ordinarily, taxable about 50%. When you calculate AMT, they’re going to be taxable about 100%.

Similarly, for the exercise of employee stock options from 50 to 100% in dividends are taxable on a cash basis with no gross-up in dividend tax credit. And any losses that are carried forward from prior years are only 50% allowable, while the gains are 100% taxable for the purposes of AMT.

And then specifically on the credit side, non-refundable credits will be only allowed at 50%. So, for example, the donation tax credit will only be 50% allowable. So a couple of things to think about.

If you feel that you could be in an AMT scenario in 2024, maybe there’s things you can do in 2023 to be able to not face AMT next year. So for example, if you have the opportunity to realize gains this year instead of next year, if you’re selling a business, selling a property, an income property, you’re selling up a residential piece of real estate that doesn’t qualify for the principal residence exemption. Maybe you want to sell it this year so you don’t have AMT. Exercise employee stock options, those are all opportunities.

And then on the charitable giving side, a couple of changes that could affect you if you’re a high-income earner because the exemption is $173,000, then if you are giving a large amounts to charity, there could be a problem next year, particularly if you’re giving appreciated securities. So starting Jan 1, 2024, only 50% of the donation credit will be allowable. And in addition to that, currently under the ordinary tax system, if you donate appreciated securities to registered charities, there is no capital gains tax. Starting next year, if you donate them in kind to a registered charity, there’s a 30% inclusion rate, and that starts for AMT purposes starting Jan 1, 2024.

So some clients would be very interested in maybe making donations before the end of this year, 2023, so they’re not subject to the AMT implications of a reduced donation credit and a tax inclusion rate of 30% on the appreciated securities.

If you’re not sure what charity to give to, many investors are interested in perhaps considering a donor-advised fund as an alternative to a private foundation, effectively allows you to get your own account as part of a public charity, as a public foundation, and you get to effectively make your donation this year, and then you get your receipt for 2023. You don’t have the AMT issue, and then you can then choose to redirect those funds in future years or decades going forward to any of the 86,000 registered charities in Canada. So a donor-advised fund can be a great solution for charitable giving if you potentially could be subject to the AMT rules that kicking on Jan 1, 2024.

Finally, we have to keep in mind that 2023 is also the first year for a first home savings account to be open. So if you’re a first-time buyer who’s a resident of Canada, at least 18 years of age, opening up an FHSA allows you to save tax-free for the purchase of a first home in Canada. So this is the first year it’s been available, and the room, the FHSA room, it’s $8,000 per year up to $40,000. That room only begins accumulating when you open the account. So our advice is that if you do qualify as a first-time home buyer, which is defined as no home in the current year or the previous four calendar years, then at least open up an account in 2023, that will then allow you to carry forward any unused room up to $8,000 to next year, and so that you can maybe make that contribution in a subsequent year.

It’s important to remember that you don’t have to claim a deduction in the year you make the contribution. So, for example, if you’re in a lower tax bracket, you’re going to be a higher tax bracket later on. Maybe you open up your FHSA in 2023, you put in your 8,000, but you don’t claim that deduction for many years until you’re a higher tax bracket. Keep in mind that, unlike the RRSPs, contributions that you make within first 60 days of 2024 cannot be deducted in 2023. So it’s really, really important to try to get that FHSA contribution in there if you can by December 31, 2023.

And again, if you don’t have the full amount to make the full 8,000, put in what you can, and then that carry-forward room will be available to you starting in 2024.

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Welcome to Advisor ToGo, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject matter experts themselves.

Wincy Wong, executive director, wealth solutions at CIBC.

In thinking about positioning our portfolios in this current environment, in a word, I would say defensive for the last four months of this year.

Our partners on the technical side would remind us September is always historically very poor-performing month for equity markets. But also on the fundamental side, what we’re seeing is a few things. So while the generative AI theme is one that I do believe is structural in nature, so likely to have legs, there are some concerning signs that we’re starting to see coming from China. Signs that I don’t think we can ignore.

So let’s recall China’s COVID recovery, which was lagged, its economy really watching as the rest of the world moved towards normalcy. And in our view, China really was a catalyst for growth. Really, as economies, developing economies, started to weaken, we could see China really starting to get its gears in order and contribute to demand.

But what we’ve seen recently suggests signs that China’s in fact struggling. So we’re having property developers defaulting on debt payments and filing for bankruptcy. We’re seeing shadow banking companies also struggling with bond payments. A key policy rate has been cut twice in the last three months, and more is likely to come, in my opinion. And weak economic data, which suggests that their GDP targets may need to be revised down further. And that could have some ripple effects globally.

While I acknowledge that the data from China can be opaque at times, we are really focused on the downside here. And so from a positioning standpoint for portfolios, we are going to be defensive in nature.

Both interest rates and inflation have been very topical for quite some time now. We know that investors have been very focused since both the Fed and the Bank of Canada began its rate hike cycle in March of last year. And inflation really stoked higher, in part by Covid conditions and the Russian-Ukraine conflict, which also put tremendous pressure on supply chains and demand in some cases.

So what we’re thinking about in light of higher interest rates, from an allocation standpoint in portfolios, is we’ve been adding to our fixed income sovereign holdings, really at the short end for a yield pickup. We have modestly increased duration as well in the fixed income portfolios.

What we’ve seen is weakness on the equity market side in the interest rate sensitive sectors. So think communication services, real estate, utilities over the past year. And over that period of time, we have reduced some of our weights in some of these sectors, but we’ve also been tactical, right? So adding back when we felt that the market was overly punitive in some cases for some of our holdings, which we think still have the ability to grow in a more challenging macro environment.

From a positioning standpoint, as I mentioned, we are defensive in the near term with a focus on downside risks. So an example of downside risks that we think about is wage pressure. What we’re seeing in North America is really tight labour markets. And so we have been seeing continued pressure on wage growth, which is a pressure that will be sticky. And so one thing that we are watching fundamentally is margin pressure on companies and pressure on profitability, which in turn actually leads to potential increased demand on the technology side, as companies look to look for more sources for productivity growth. So I think that’s an interesting dynamic that we think, ultimately, is a positive catalyst for growth that we’re looking at in the markets today.

We do believe that it may be appropriate to consider higher fixed income weights relative to equities in this current environment. Raising a bit more of your cash levels may be prudent in the near term. It really obviously does depend on your mandate. As I mentioned previously, generative AI is something I believe is structural. Now, things just don’t go from A to B in a direction, but we do think that it has legs. One of the things we’re watching is on the consumer side, we do believe consumer could really start to feel the pressure, and we do think that spending could ease. We’re hearing this from management teams, broadly, for the back half of this calendar year. And so we remain cautious on the consumer side.

And really, just remembering that from a Canadian consumer perspective, they are more interest rate sensitive than U.S. consumers. And so there is a preference for us for U.S. markets over Canadian markets. So that said, I do want to remind everybody that it’s often easy to see the negative risks in the near term, but upside surprises do occur. And they are, in fact, surprises, so to really think about a balanced approach. And that’s the way we sort of think about positioning for our portfolios broadly, is to have a broadly diversified portfolio because we do acknowledge that pendulums swing both ways, up and down.

From a regional perspective, we manage both Canadian portfolios, U.S. portfolios, and then North American portfolios. I would say there is a preference for the U.S. in the near term over Canada. As mentioned, the sensitivity to interest rates for consumers in Canada is much higher. Just think about the mortgage market as an example and how our mortgages function with a reset every five years. That’s something that doesn’t happen in the U.S. So the increase in surprising rate hikes that we’ve seen would have more of a negative impact on the consumer in Canada versus the U.S.

And the other factor I would think about is just the China impact. If the Chinese economy continues to decelerate, as we’ve been seeing in the near term, we think that Canada’s more commodity-sensitive sectors could feel some pressure from a demand perspective. And so there’s some near-term risks on the commodity side for Canadian markets.

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Susan Wood, director of wealth strategies with CIBC Private Wealth.

Parents can help their children buy houses in a number of different ways. They can do so by gifting them the money or lending them the money, or they may choose to help their children get financing by co-signing their mortgage. Each of these have their own tax considerations, and I’ll just run through them quickly.

If we first look at gifting them money to help with the purchase, with the initial gift itself there generally are no tax implications to the children or the parents from the gift. There may however be tax implications to the parents depending on where they source the funds to make the gift in the first place. For instance, if they have to sell in investments. In some cases for wealthier, more affluent parents, if the funds are being gifted to the children from a family trust, for instance, that the parents may control, there may be tax implications to the children. But these are very special circumstances that should be considered in discussion with your tax advisor.

If we look at lending them the money, like with gifting, there are no tax implications to the children or the parents from the extension of the loan itself. However, there may again be tax implications to the parents depending on where they get the funds from to make the loan in the first place. If parents lend money to their children from funds that they hold personally, the parents can decide whether to charge interest or not on the loan. If interest is charged, the interest will be taxable income to the parents and that will be taxed at their highest marginal tax rate. Because the loan is being used to purchase a home for the children’s personal use as opposed to if they were buying a rental property, the interest that the children pay on the loan will not be tax deductible to them. It’s taxable income to the parents, but it would not be tax deductible to the kids.

Then finally, if parents choose to lend the money to the children from their private holding company or a business, if that happens to be where they hold their investments, the holding company will need to charge interest at the prescribed rate loan that CRA prescribes on a quarterly basis, because we don’t want CRA to consider this as a shareholder loan. There are all kinds of negative punitive benefits there. Parents would have to consult with their tax advisors who understand the particulars of their situation. They may also want to consult, if they’re considering a loan, they may also want to consult with a lawyer and consider whether formalizing the loan with documentation and even registering a charge against the home is advisable. Each situation is different.

Then the last kind of way that you can help your kids buy a house is by co-signing a mortgage. By cosigning a mortgage, parents are basically allowing their kids to leverage the parents’ stronger credit rating, meaning they may get a lower interest rate and they may get access to a higher amount of credit.

Many parents like this approach. It’s not for everybody, but some do. One, it doesn’t require them to give away or lend out their capital, which they may not be able to give or they may have need of. Even if they do have the capital, they may not want to free it up by means of cashing out investments if they’re concerned about there being tax implications and whatnot. They may also like this approach because the expectation with this approach is that the child still pays for their own home. They may like the discipline that this approach instills and the underlying lessons that their children can learn from paying off their own debt.

Parents should keep in mind that if they do co-sign a mortgage, they are on the hook for the full amount should their children not meet the mortgage payment commitments. Further, if the child defaults on payments and parents aren’t aware, the parents’ own credit rating could be at risk. Then finally, co-signing for a mortgage may limit the parent’s own ability to borrow additional funds should they need to do that down the road, say, to purchase a recreational property or for another private investment down the road.

Where should parents draw funds from? Parents will want to consider carefully where they draw funds from because there may be different tax implications depending on the source. If they have cash or near cash sitting around, there may be little to no tax implications to the parents on drawing down these funds. If the parents are drawing down from their TFSA, there will be no tax implications as funds can be drawn tax-free. However, there will be a loss of tax-free growth on those funds going forward unless the parents can re-contribute the capital to their TFSA in the following year, let’s say.

If the parents have to sell investments, there may be tax implications to the extent that the sale of the investments triggers gains. For parents that hold investments in a private holding company or corporation, there will be a tax implication depending on how they take out the capital from the company. If they have to take it out by way of a dividend, it will be taxed unless they’re able to take it as a tax-free capital dividend. Or they may be able to draw down on a shareholder loan balance on a tax-free basis if they do have one. Parents will want to consult with their investment advisors and their tax advisors depending on the complexity of their structure so that they can be sure to minimize the tax implications of freeing up the capital to make the gift or the loan.

In short, they will want to prioritize tax resources of capital. Draw down on your cash, near cash balances, and then focus on non-registered funds with little or no gains or gains that can be offset with other tax losses. Then consider taking funds from your private corporation to the extent that they have shareholder loan balances that can be drawn or positive capital dividend balances that will allow for a tax-free dividend.

Then consider tax-free savings account. Finally, non-registered funds with capital gains are still relatively tax efficient, and then you can consider taxable dividends from your private corporation.

Final thing I’d say on this is that you should think carefully before drawing down on RRSPs or RRIFs since these withdrawals will be fully taxable at the parent’s highest marginal tax rates, so quite punitive, and at the end of the day, they are likely needed to support parents in retirement.

In terms of incorporating planned giving to your children as part of your financial plan, if parents are considering gifts or even lending funds to their children, they should be doing so with the full knowledge that they can afford to do it. Understanding the tax implications of how the gift or loan will be funded is a first step, and then incorporating this into a full cashflow plan will be key so that you can ensure that making this gift or loan or even cosigning a loan along with any potential tax implications, will not compromise your retirement plans and your ability to maintain your desired lifestyle, as well as deal with any unforeseen or unexpected expenditures that may arise down the road.

Also included in this cashflow plan should be the possibility that parents will want to extend the same gift or loan arrangement to their other children if they have more than one, and if their objective is to gift each child with the same advantage.

Another planning consideration that parents may want to think about is thinking about what they can do to add some protection around the gifted funds, whether that be to shelter the funds from potential creditor claims if their kids happen to be employed as a contractor or as a lawyer for instance, or more typically from potential family law claims. We never want to think about it, but the statistics show that there’s always a risk of marital or common law relationship breakdown. You can add some protection around the funds that you are gifting by documenting it as a loan to your child so that if there is a marital breakdown, you can demand repayment of the loan rather than losing half of it or potentially losing half of it to your child’s ex-spouse or partner. This of course, is a very tricky area to navigate for many reasons, and you should absolutely consult a lawyer to discuss the merits of this strategy as it relates to your particular situation.

Another tact may also be to require your child to enter into a form of family law agreement with their partner prior to extending the gift or the loan, particularly if it’s a significant amount. Whether that be a pre or post-nuptial agreement or a cohabitation agreement, I have seen instances where parents require that such a family law agreement be entered into prior to a significant gift being made. Again, consulting with a lawyer with specialty in this area is key.

Then finally, from a planning perspective, this gift or loan may impact your estate planning. Parents may want to give some thought as to whether the gift they make to their child during their lifetime will be considered as an adjustment to their child’s share of their estate and whether that should be reflected in their wills. For instance, if you’ve made a gift to one of your children but not to others, will you want to adjust your child’s share of your estate as an equalization measure?

The First-Home Savings Account is an excellent savings vehicle for your children who plan to eventually purchase a home. It can be a smart investment tool even if the child is not sure of purchasing a home down the road. If as a parent you know that you want to help your child with a gift to purchase a home, a First-Home Savings Account can allow you to start gifting sooner, potentially as soon as your child turns 18. The maximum lifetime contribution to a person’s First-Home Savings Account is $40,000 with 8,000 of annual contribution room starting in the year the First-Home Savings Account is first opened. First opportunity to do so is in 2023, given the recent budget announcement.

Rather than gifting 40,000 in the year that your child purchases a home, you can potentially start gifting your child 8,000 annually for five years once they turn 18, to fund their First-Home Savings Account contributions. The tax benefits include the funds growing tax free as soon as they are in the First-Home Savings Account, whereas if as a parent you held onto them personally until your child purchased a home, the investment income on the funds would be taxed at the parent’s high marginal tax rate, resulting in the funds potentially not growing as quickly or growing as tax efficiently.

Next, your child gets a tax deduction for the $8,000 contribution. If they cannot use all or any of the tax deduction in the year that the contribution is made, because they happen to be in a very low tax bracket, they can carry forward the deduction to future years when they are paying higher taxes and can better utilize the deduction. In fact, they can carry forward the deduction to years even after the First-Home Savings Account has been closed, perhaps because they’ve made the purchase of their first home, so efficient use of that tax deduction spread out over potentially a long period of time. Because the parent is giving $8,000 per year, it may be easier for the parent to fund the gift from cashflow rather than having to sell investments, for instance, if they were to make a larger one-time gift down the road. That can be very appealing to parents.

Then finally, your child has up to 15 years to use the funds to purchase a home. The 15 years starts from when the First-Home Savings Account is actually opened. If in 15 years time they still have not purchased a home, they can contribute the balance that’s in the First-Home Savings Account to their RRSP. Either way, the parent has the comfort of knowing that their gift will be used for the long-term benefit that they’d hoped for.

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Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth.

So today’s 2023 federal budget had a number of changes for individuals, for the general population, but also for high-net-worth individuals, and as well as some changes for small business owners, which I think will be very, very important. So what I’d like to do is highlight some of these changes that might affect many of our Canadian investors.

So let’s begin with the easy stuff. The grocery rebate. People know that inflation has been a big issue, and in particular the cost of food. The government has responded by increasing the GST credit, which helps offset the cost of paying GST on the purchases of various goods and services.

Now, of course, GST doesn’t typically apply to groceries because those are typically zero-rated. That being said, the government is introducing something called the grocery rebate, and when it’s done, effectively it is going to pay out an amount as soon as the budget passes and becomes law, depending on your particular family situation, that is tied to the GST credit. In other words, only those with lower incomes get the full GST credit currently. In other words, that would kick in with family income under about $40,000. And above that, it is reduced, and ultimately there’s a complete phase out.

So the bottom line is the grocery rebate will be basically based on the amount of the GST credit that you would have gotten in January 2023, and it will be equal to twice that amount. So effectively, the maximum additional grocery rebate would be $153 per adult, $81 per child, and an additional $81 if you qualify for the single supplement.

Going on to the big news for higher-income Canadians, of course, is the tweaking of the alternative minimum tax. Now, the government followed through on its promise in last year’s federal budget to update the AMT. Now, for those who are not familiar, the AMT is a parallel tax calculation that effectively allows fewer deductions, exemption, and credit than the ordinarily tax rules, and also applies an exemption as well as a flat rate of tax.

Under the current AMT system, it applies a flat 15% tax rate with a $40,000 exemption. And effectively what’s happening now is starting next year, a new AMT regime will be taking over, and this is in response to the fact that the government’s concerned that despite raising taxes on the highest-income Canadians, they found that, at least in last year’s budget material, they concluded that 28% of filers who had gross income of more than $400,000 paid an average federal rate of only 15% or less by using a variety of deductions and credits. Having analyzed that personally, a lot of that relates to things like the capital gains inclusion rate, the Canadian dividend tax credit, charitable donations, and employee stock options.

So what are they doing? They’re broadening the AMT base. So starting next year, the capital gains inclusion rate for the purpose of AMT will jump up to 100% from 80%. Now remember, under the normal system, only 50% are taxable. That’s going into 100% under the AMT system.

Similarly, if you currently donate publicly listed securities, mutual funds, or seg funds to a charity, we know the tax rate is zero. Under the AMT system, that inclusion rate will jump from zero to 30%. In terms of deductions and expenses, they’re going to broaden the AMT base by disallowing 50% of various deductions, including things like employment expenses other than those incurred during commission income, moving expenses, childcare expenses, deductible interest in carrying charges, and carryforward of limited partnership losses and non-capital losses from prior years.

In addition, while under the current system, most non-refundable federal credits can be used against AMT, under the new 2024 system, only 50% of the non-refundable credits will be allowed to reduce AMT subject to a number of exceptions. Most notably, the dividend tax credit will not be allowed at all. In other words, people would continue to use the cash method, the non-grossed-up method to include Canadian dividends for AMT purposes.

On top of all this, what they’re doing is they’re actually tweaking the system itself. What the government is doing is raising the AMT exemption for 2024 to approximately 173,000, which is the start of the fourth federal tax bracket based on projected inflation for next year. That’s a jump from $40,000 under the current AMT system. And it will also increase the AMT rate from the current rate of 15% to the second tax bracket of 20.5%.

Now, these amendments to the AMT are expected to generate $3 billion of additional revenue over five years starting in 2024. And with these changes, almost 99% of the AMT will be paid by those making over $300,000 a year, and in fact, 80% of the AMT will be paid by those earning over $1 million annually.

A few other quick changes, automatic tax filing. So 12% of Canadians currently don’t file tax returns. The government wants to expand its simple File my Return service, allowing certain eligible Canadians to file their return on the telephone.

In addition, some changes to registered plans, positive on the RESP side. Education savings plans, you’re now going to be able to take out $8,000 of EAPs, Educational Assistance Payments, in the first semester of education. That’s up from 5,000, which is very helpful. In addition, under the current rules, there are restrictions on who can open up an RESP. In order to open up an RESP as a joint subscriber, you’ve got to be married or common law. Under the new changes in the budget, the budget will propose to allow a divorced or separated parent to open up a joint RESP with their ex-spouse or partner for one or more of their children, which is a positive change.

On the RDSP side, the Registered Disability Savings Plan, what they’ve done is they’ve expanded the number of years which allow a qualifying family member, could defined as a parent, a spouse, or a common law partner, to be able to open up an RDSP for an adult child who doesn’t have the capacity to enter into their own RDSP contract. That’s now been extended by three more years to December 31, 2026. In addition to also expanding the definition of qualifying family member to include a sibling of the beneficiary who’s at least 18 years of age or older.

On the corporate side, a couple of positive changes there. Certainly, when we look at the ability to transfer shares to the next generation, they’re going to introduce employee ownership trusts starting next year, which is a way to effectively facilitate an intergenerational transfer by having a business owner being able to transfer it to employees with very relaxed tax rules on that. They’ve also confirmed their intention to continue to allow intergenerational share transfers as a result of the Private Members Bill, Bill C-208, which passed in 2021, but clamping down a little bit to make sure that it’s not used inappropriately by people who aren’t doing a genuine transfer to affect a surplus strip.

There are more strict rules and tightening the GAAR, the General Anti-Avoidance Rule, including a new GAAR penalty equal to 25% of the amount of the tax benefit, as well as extending the normal reassessment period by three years for GAAR assessments.

All of this information is contained in our latest report, Budget 2023.

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Jamie Golombek, Managing Director of Tax and Estate Planning with CIBC Private Wealth.

So 2023 is going to be an interesting year in terms of tax changes. While we never know exactly what’s on the horizon, we do know a few things.

First of all, the introduction of a brand new plan, a new register plan. The First Home Savings Account, the FHSA, provides an opportunity for individuals to save $8,000 a year for five years. That’s $40,000. Those are tax deductible contributions that an individual will make to the new account to save for a first home. So to qualify, an individual has to be a first time home buyer. And the opportunity there is to save up to $40,000, tax deductible, let it grow up to 15 years inside the FHSA completely tax deferred. And then, when the money comes out of the FHSA, the entire amount is used to buy that first home within a 15-year period and it comes out tax free.

So you’re really getting the benefits of the RRSP, the tax growth, the tax deferral, and ultimately, the benefits of the TFSA as well, as the money does come out tax free. In fact, for our clients and individuals that do not have enough money to make an FHSA contribution, you’re actually allowed to take existing RSP money and move it from the RSP into the FHSA. You won’t get another deduction, but you’d be able to then take the money out tax free to buy that first home. Lots of details coming out in 2023. The earliest available date we’re told is April 1, 2023. That will, of course, depend on when financial institutions are ready to launch that particular product.

What else is new for 2023?

Well, the second thing we know about, for sure, is the new anti-flipping tax for real estate. Starting Jan 1, 2023, there is a new rule that says that you can no longer claim the principal residence exemption if you sell your principal residence within a 12-month period other than with certain exceptions, things like death, disability, employment, relocation, et cetera. So in other words, the government is concerned that people have been flipping a principal residence for under 12 months and realizing a tax-free principal gain, principal residence gain, not reporting any tax on that. The government now says, “Nope. Not only can you not claim the principal residence exemption, it’s not even a capital gain. It will be taxable as 100% business income.”

So that’s effective Jan 1, 2023. So people should pay attention if they do have to sell their home within a year and they don’t meet one of the specific exceptions.

And the third thing that we are looking to find more information about will probably be in the upcoming spring of 2023 budget, is a new regime for high income earners on the alternative minimum tax. Now, we already have an AMT. It’s been around for a while, but in the last budget, the 2022 budget, the government’s concerned that high income gains are not paying enough tax, and they produce some research to show that the effective tax rate on some of these high income people is actually quite low. Now, we did some research into that and we tried to figure out why that would be. And primarily, it’s because of things like Canadian dividends, which have a preferred rate because the dividend tax credit to avoid double taxation, capital gains, which are 50% taxable, and even charitable gifts in which people get a 50% effective donation receipt combined federal provincial.

So what is the government getting at?

We’re not sure, but we are told that even though details were supposed to come out in the November economic statement, that they have delayed that. And now we’re going to have all these details coming out in a 2023 federal budget. So for high income earners, you want to be on the lookout. You want to see what does the government have in store in terms of a redevised, perhaps a reimagined, AMT, alternative minimum tax, for high income earners.

That being said, lots of other things on the horizon. People are predicting the end of surplus stripping. In other words, the opportunity to take money out of a corporation at capital gains rates through reorganization instead of doing it through a dividend rate, that might certainly be on the chopping block. And again, we don’t know what else could be in store, but we’re going to follow those developments very, very closely as we start 2023.

Text transcript

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.