Year-end is usually a time for reflection and an opportunity to review your financial situation and make any adjustments that could put you in a stronger position next year. For many, it could also mean taking advantage of various tax and investing strategies that can keep more money in your pocket.
“Ideally, financial planning should happen year-round, but life happens, which is why revisiting it at least once a year, at the end of the year, is always a good idea,” says Mark Chan, vice-president of wealth planning at Gluskin Sheff. “It’s a good time to step back and reassess what’s changed and what changes lie ahead that can impact your finances.”
Below are five considerations for year-end wealth planning for individuals and business owners.
A change in personal or business circumstances
For many, major life changes can impact their finances, such as a new job, changes in relationship status, the birth of a new child or grandchild or the passing of a loved one. For business owners, the change could be buying a new business, expanding current operations or selling the company to start a new chapter. When life changes, there are tax and investing strategies that individuals and business owners may want to take advantage of before the end of a tax year.
For instance, someone with a new child may want to start contributing to a registered education savings plan (RESP) to save for their education. Many people also purchase disability or life insurance to ensure their loved ones are looked after if they become disabled or pass away. “Insurance provides both protection and peace of mind,” Chan says.
Individuals who have group insurance through their employer should review their coverage to ensure it is enough to meet their needs. A qualified insurance advisor or financial planner can assist in determining if additional insurance is required.
“With a lot of people changing jobs in recent years, or pursuing entrepreneurship, it’s a good idea to make sure that you have the right insurance coverage to meet your needs,” says Jonah Mayles, Vice-President, Insurance and Estate Planning Specialist, at Gluskin Sheff Financial Services Inc. Mayles encourages individuals to ensure they are properly covered, and also that their family and businesses are properly protected by utilizing professionals for an annual insurance review.
As part of year-end planning, consider how you are contributing to your own retirement. In some cases, you may participate in an employer-sponsored defined benefit plan or defined contribution plan. In other cases, it may be RRSP matching programs, deferred profit-sharing plans or any combination of plans which may not be limited to those above. They key is to ensure that you’re taking advantage of programs that will maximize your ability to save towards retirement.
Someone who starts or buys a business may also need to consider how they will be compensated, either through a salary, dividends, or both. More information for business owners is below.
Year-end is also a good time to review the various income-splitting strategies available to married or common-law couples.
Some income-splitting strategies for individuals include spousal loans, spousal RRSPs, pension income-splitting and prescribed-rate loans
. For example, with a spousal loan, the high-income earning spouse lends money to the lower-income earning spouse, taking advantage of the lower-earning spouse’s lower marginal tax rate.
RESPs and registered disability savings plans (RDSPs) are not only beneficial because they’re eligible for government grants, but the income generated in these tax-deferred plans is taxed in the hands of the recipient, who, in most cases, is in a lower tax bracket. With the spousal RRSP, the higher income earning spouse with more RRSP room and in a higher tax bracket contributes to the RRSP receives the tax deduction against their income, which reduces the family’s taxes overall. With pension income-splitting, the higher-income spouse transfers up to 50 per cent of their eligible pension income to the lower-income-earning spouse.
Chan says year-end is a good time to plan income-splitting for families with varying income streams. “At year-end, you have a much better idea of your income and any tax strategies that can be effective with relation to the family’s overall tax bill,” he says. Generally, it is more tax-efficient for the higher-income spouse to use their income to pay for household expenses and for the lower-income spouse to use their income for saving and investing.
In some cases, business owners may be able to split income with family members by paying them salary or dividends. It is important to note that when paying salaries or wages, the amounts paid must be reasonable given the employee’s contributions to the company. Since January 1, 2018, the ability to pay dividends to family members has been significantly limited. It is important to speak to a qualified tax accountant to determine what income splitting options are available to business owners and shareholders of a corporation.
2022 was a volatile year for markets, which is a good time for investors to review their holdings and how their assets may have changed. Chan recommends that investors talk to their advisors about some options, including tax-loss selling, which is a method of selling investments that have dropped in value to create a loss, which can then be used to offset capital gains in other areas.
“You want to make sure that your investment strategy aligns with your cash flow requirements, and so speaking to your advisor is an important part of that conversation,” Chan says.
Given the changing markets, investors may also wish to review their asset allocation to ensure they are still on track with their financial goals. Investors will also want to ensure their risk tolerance is still the same, given the market downturn in recent months.
Investors who sell at a loss need to be aware of superficial loss rules, says Jonathan McMurrich, senior wealth planner with Gluskin Sheff, which is when you or a person affiliated with you, such as a spouse, sells property for a loss and buys the same or identical property within 30calendar days, resulting in a denial of the loss on the original sale.
Charitable giving options
The end of the year is a popular time for people to increase their charitable giving, either by writing a cheque, making an online donation, or donating securities.
For people interested in giving back, Chan notes that the deadline for the contribution is December 31 to receive the tax receipt for the current calendar year. For those donating securities, Chan cautions that it could take one or two business days for the transaction to settle.
“It’s not instant like making a cash donation on a website where you get an immediate receipt,” he says.
So just make sure you leave enough time for a securities transaction so that it’s completed in the current calendar year.
McMurrich says individuals and corporations who have philanthropy on the radar should consider making a donation in the same calendar or fiscal year where they’ve had a significant “taxable event”. Generally, donations are limited to 75% of net income and in those years where there’s been a significant taxable event, it allows the individual or corporation to shift some of the proceeds to those causes or organizations that they care about while also generating a tax saving from the charitable contribution.
More Canadians are opening donor-advised funds (DAFs) to distribute large amounts of wealth in a tax-efficiency way. A DAF is a giving vehicle sponsored by a charity and provides many benefits for a donor, including the ability to make a gift and qualify for a charitable income tax credit immediately.
Considerations for business owners
Year-end is a good time for business owners to figure out the right mix of salary and/or dividends they want to pay themselves. The decision will usually depend on their net income and how much money they need as personal income in any given year.
Chan says the mix could be different one year versus the next, depending on life events. For instance, a business owner might want to take out more in a year they make a major personal purchase such as buying a car or funding a child’s education. Business owners looking to purchase a home may also want to increase their salary and/or dividend payments over a few years for greater tax efficiency.
“With a salary, you are taking more income out of the corporation but creating more personal income and, in turn, more RRSP contribution room,” he says. “On the other hand, the more funds you have in the corporation, you can benefit from the deferral of taxes and have a larger pool of capital to invest in over a long period.”
Chan strongly recommends business owners discuss their options with an advisor each year to ensure the greatest tax efficiency when taking money out of a corporation.