Tax Planning Opportunities for your 2022 Year End

What a year 2022 has been, and it is already coming to an end! It’s not too late to consider your personal and corporate tax planning, sneak in some tax savings, and be prepared for the upcoming tax season.

Below are some considerations to help manage your tax costs. Metrics CPA can assist you with your tax planning needs by helping you review longer-term objectives and opportunities to enhance tax efficiency to bring about greater overall protection.

Withdrawing Money

You may have taken funds out of your corporation for living expenses or plan on extracting a large sum for other expenses (vacation, home renovations, or anything else). How you withdraw your funds has tax consequences which may not be as straightforward as some might perceive, and the details matter.

It is essential to discuss compensation strategies with your tax advisors. We would be happy to have that discussion with you to determine what’s best for you and how to avoid any pitfalls.

Incorporating your Business

There are many reasons to incorporate. In addition to reducing your tax bill, here are some reasons to incorporate:

Those that are mining cryptocurrency, high-frequency traders, or are actively margin trading consistently
Those who earn more in their business than they need personally to live
Those looking to segregate their personal assets and business
Those looking for creditor proofing and limited personal liability
High-income earners or high-net-worth individuals that also have investment income

Speak with one of our advisors to see if incorporating is right for your situation.

Realizing The Losses on Investments

The tax-loss harvesting strategy is a tool that can help reduce your overall tax and may even help recuperate prior year taxes paid. If you had capital gains in 2022, 2021, 2020, or even 2019, you can consider selling assets in a loss position to offset these gains.

Should you choose to undertake the tax-loss strategy you should be aware that rules (known as the superficial loss rules) may apply to deny losses on certain dispositions of property. Essentially, the loss will be denied if you (or your spouse/common-law partner or a company you or your spouse/common-law partner control) repurchase the same or similar asset within 30 days of the disposition.

While tax-loss harvesting may not restore an investment to its previous position, it can lessen the severity of the loss if the strategy is applied correctly and in appropriate situations.

Immediate Expensing for Depreciable Property

Is your company considering acquiring assets in the near future? In that case, you may qualify for immediate expensing for tax purposes up to a maximum of $1.5 million per year if the eligible assets are available for use before January 1, 2024.

Eligible assets available for immediate expensing would be capital property that is subject to the capital cost allowance (CCA) rules, other than property included in CCA classes 1 to 6, 14.1, 17, 47, 49 and 51, which are generally long-lived assets.

Using Your Personal Deductions

Remember your other registered accounts, such as registered retirement savings plan (RRSP) and tax free savings account (TFSA).

If you have room in your RRSP, contributions must be made on or before March 1, 2023 to qualify for a deduction for your 2022 tax return.
Contributions to a TFSA are not deductible for income tax purposes. However, any capital gains and/or income earned in a TFSA are generally tax-free, even when it is withdrawn.

If you are interested in learning more about any of these strategies or have any questions in regard to optimize your tax planning, contact us to book a meeting with our team.

Disclaimer: Any tax information published on this blog is based on the facts provided to us and on current tax law (including judicial and administrative interpretation) during the time of publication. This does not constitute legal advice. Tax law can change (at times on a retroactive basis) and these changes may result in additional taxes, interest, or penalties. Practice due diligence and if in doubt, speak with a member of our team.

Tax Loss Selling (updated for 2023)

‘Tis the season for tax loss selling

To ensure you are efficiently planning for the 2023 year end, we recommend reviewing your investment positions before the end of the year. If you have realized any capital gains from the sale of securities in non-registered accounts or from the sale of cryptocurrencies on account of capital, you might want to consider the strategy of tax loss selling (or selling your ‘losing’ positions to offset some of the gains).

The gist

Selling loss positions allows you to realize that loss in your portfolio. This is called a capital loss. These losses are tax assets as they offset capital gains in your portfolio (capital gains can only be reduced by capital losses).

If you have realized gains in the last three years (the limit on carrying back capital losses to apply against capital gains), selling losing positions before the end of 2023 will allow you to carry back the loss to one of the previous three years, resulting in a refund on the tax paid relative to the losses carried back. If you have capital gains realized in 2020, this is the last year to carry back losses and get refunded some of the tax you paid on those gains. You can carry forward capital losses from prior years indefinitely.

If you have a portfolio with gains in any of the past three years, it may be beneficial to dump some of your ‘loser’ assets to reduce your taxes owing.

Examples of tax loss selling

EXAMPLE 1: Current year gains and current year losses:

You have realized gains on the sale of some ETH of $50,000 in the current year. You also hold a position in a crypto project DOG that dropped in value during the year from $60,000 at cost down to $10,000, its current fair market value. Selling the DOG position at a $50,000 loss will fully offset the $50,000 gain realized earlier in the year from ETH.

This is a simple example that would be advisable if you felt the losing position was a lost cause and wanted to exit the position regardless. Other considerations here would be gas fees to exit the losing position. If the offsetting loss were much less and the benefit would be lost to gas fees, it would not be worth it to exit the position.

EXAMPLE 2: Prior year gains and current year losses:

You sold some shares of AAPL at a gain of $30,000 in 2021. Your investment advisor recommends “balancing” your portfolio according to your risk tolerance and long-term plan, and exiting certain positions. Any losses from the rebalancing can be carried back to 2021 to offset the gains from AAPL in that year, resulting in a refund of some of the tax paid in 2021.

Traps to avoid

Superficial loss rules

If you were to attempt to crystallize losses by selling a security or cryptocurrency, but then want to reenter the position, you must wait 30 days from the sale to the next purchase, otherwise you will be caught by the superficial loss rules. If a superficial loss is reported, the loss will be denied for tax purposes and will be added to the cost basis of the new position, effectively negating any tax benefit until you exit the new position. These rules apply to assets repurchased within 30 days be any “affiliated person” (spouses/common law partners, corporations controlled by you or a spouse, or trusts in which you or your spouse are a beneficiary).

EXAMPLE 3: Superficial losses:

On December 19th, 2023 you sold all your position in ETH which had a cost of $10,000 for $6,000 triggering a capital loss of $4,000. On Jan 2, 2024, you repurchased the same amount of ETH back for $6,000. As you repurchased the ETH back within 30 day, the superficial losses rules will deem your loss in 2023 to be NIL and the cost base of the repurchased back to $10,000 ($6,000 cost + $4,000 of superficial losses).

Identical Property

The superficial losses apply even if you buy an identical property. Generally, properties are identical if they are the same in material respects, and general buyers would not prefer one property to the other. A common example is buying shares of a corporation vs units of a mutual fund trust are viewed as identical properties.

Registered accounts

Losses from transferring securities to a registered account (RRSP, TFSA, etc) are denied under the Tax Act. If you wish to transfer an asset from a non-registered account to a registered one, it is best to sell the security and realize the loss in the non-registered account (allowing for the loss to be applied against gains), then waiting the 30 days to repurchase the asset in your registered account to avoid the superficial loss rules.

Foreign exchange

A position in a US security may be in a loss relative to the USD cost basis and the current USD fair market value, however depending on the exchange rate, the position could potentially be flipped into a gain position. Be sure to translate both the cost basis in CAD, and the expected proceeds in CAD to determine whether a US denominated security is truly in a loss position.

The Skinny

If you have losers in your portfolio and gains that have been realized, the settlement date of the sale of the losers must be before December 31, 2023 to fully realize the losses for tax purposes. If you have a portfolio with gains in any of the past three years, it may be beneficial to dump some of your ‘loser’ assets to reduce your taxes owing. It literally turns a loser into a tax asset. Something from nothing- that feels more like the holiday spirit.