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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, tax and estate planning with CIBC Private Wealth. 

Each year, towards the end of the year, we talk to clients about year-end tax planning.  

And we talk about the normal stuff, like tax-loss selling and donations, and we certainly can talk about that today, but what’s new and unique for the first time in 2024 is tax-gain selling.  

That’s right. And that’s because as of June 25, the capital gains inclusion rate was increased to two-thirds for individuals with more than $250,000 of gains annually. 

So, the question that we’re talking about with many of our clients is whether or not it makes sense to crystallize $250,000 of capital gains before the end of the year to take advantage of the fact that the first $250,000 of gains are taxed at the lower 50% inclusion rate.  

Now, crystallization for publicly traded shares is simply as easy as selling the position on the open market and immediately buying it back. So, you know, as opposed to tax-loss selling, where you have to wait 30 days to buy it back, there’s no equivalent superficial gain rule, and therefore you can literally buy back that stock immediately and be able to recognize that gain.  

Now, the question is, Is this actually a good idea?  

And to decide whether this is a good move, you really need to consider your expected rate of return and your time horizon. So, for example, if, for example, you don’t pay the tax in 2024, and you had invested that to earn a 6% rate of return in capital gains, it would take about eight years, after-tax, to be able to beat the tax savings attributable to that lower inclusion rate. So in other words, there is a break-even number based on your expected rate of return and hold period to determine whether it makes sense to crystallize that gain in 2024, as opposed to just recognizing that gain in a later year, when perhaps you would be in the higher inclusion rate because your gains are over 250.  

Common scenarios for that would be if you’re planning to sell a vacation property or perhaps an income property in a future year with a significant capital gain, then that might put you in a higher bracket. Similarly, on death, the deemed disposition at fair market value could put someone with gains easily over $250,000. 

Then we get into the stuff that we talk about every year.  

We do talk about tax-loss selling. The big difference for 2024 is that we have now moved to a T+1 settlement date, meaning that for 2024 you can actually trade as late as December 30, 2024, to complete the settlement of that trade by December 31. Take that capital loss; it must be applied against capital gains of the current year, and any excess can go back three years or carried forward indefinitely. So that’s tax-loss selling. Of course, we’re mindful of that 30-day rule, which says that if you buy it back within 30 days after the date of sale, then ultimately, either you or your spouse or partner, corporation, your RRSP or TFSA buys it back, that’s a superficial loss. And therefore, that loss is denied and added to the ACB of the repurchased securities. So again, keep that in mind.  

In terms of other things to think about, if you’re going to take money out of your TFSA, sometime in 2025, maybe you take that withdrawal out in late 2024. The reason is that any TFSA withdrawals will be added to your contribution room, beginning the following calendar year. So, for individuals that are looking to take out a TFSA withdrawal — maybe for a wedding reception, to buy a home, to buy a car, for renovations — anytime in sort of 2025, at least in the early part, maybe you take it out in December, which means that you can start repaying it as soon as January 1 should you come into some money, inheritance, severance, things like that.  

In terms of other strategies, we’re talking about, you know, clients who turn 71 should convert the RRSP to a RRIF before December 31. You’ve got only till December 31 to make that final RRSP contribution unless, of course, you’ve got a younger spouse and you want to do a, you know, a spousal RRSP. 

And then, I would also suggest that for anyone who is a first-time homebuyer, which means they haven’t owned a home in the current year and the previous four calendar years, as long as you’re a resident of Canada and 18 years of age, don’t forget to open up the FHSA before December 31, 2024, if you’ve never done so. And the reason you would do that is opening up the FHSA immediately entitles you to contribute $8,000. If you don’t open up the FHSA, you cannot have any carryforward. So again, even if you don’t put any money in, you open up the FHSA, you get $8,000 of room, and then next year, you get another $8,000 of room. So again, for anyone who’s a first-time homebuyer, we have clients that are giving money now to their children, once they reach age of majority, to open up their own FHSAs. This can be a good strategy.  

Before the end of the year is also a good time to finalize any home renovations that might be eligible either for the Home Accessibility Tax Credit, which can assist seniors and people with disabilities for certain home renovations. That’s 15% of $20,000 — that’s $3,000 of value. And similarly, the Multigenerational Home Renovation Credit for $50,000 of home renovations to effectively create a self-contained dwelling, a secondary unit in your home to be occupied by a qualifying relative, typically a parent or grandparent, and to live with you. And so again, if you spend those dollars before the end of the year, you’ll be able to claim that credit this year in 2024. 

RESPs, education savings plans, we want to get that $2,500 a year as a minimum to get the government grant. That’s worth doing before the end of the year. Similarly, if there’s someone in the family with a disability, a long-term disability, they qualify for the Disability Tax Credit. Don’t forget about the Registered Disability Savings Plans. You want to get those grants and bonds before the end of the year.  

And in terms of charitable giving, we always say those charitable gifts have to be done by December the 31st to get your credit and receipt for 2024. The big opportunity on charitable giving, as many of us would have experienced significant gains on various stock positions in a non-registered account, is to make a gift in-kind to a registered charity. Because if you do that, not only do you get a receipt for the fair market value but you also pay zero capital gains tax. That’s even more important if you’ve got gains over $250,000 now, where you have a significantly higher capital gains tax, which now could be completely sheltered by making a gift in-kind to a registered charity.  

If you’re not sure what registered charity, but you still want to get your tax deduction this year, you might consider something called the donor-advised fund. And a donor-advised fund is an account that you have with a public foundation where you make that gift, either of cash or of securities in-kind, you get your receipt for 2024, but the money is now invested inside the donor-advised fund. And then you can decide in the future which charities you wish to support.  

And then finally, I would say for business owners, it becomes a little bit more complicated to think about rules of thumb in terms of compensation. Do I pay salary or bonus, or do I pay dividends? Again, lots of material has been written on this. I would say, as a general rule, for a business owner that needs to withdraw funds from their corporation, probably worthwhile taking out at least enough money to create your RRSP maximum. So, for 2024 you want a salary or bonus of $180,500. At 18% that will give you the maximum RRSP contribution for next year, which is $32,490.

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Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth. Well, I think the biggest news item in this year’s budget is an increase in the capital gains inclusion rate. Under current tax rules, if you sell capital property other than your principal residence and you have a profit, only 50% of that gain is taxable. The budget is proposing to increase the capital gains inclusion rate from 50% to two-thirds, and ultimately, this will only take place on June 25th, 2024. 

The good news is that for individuals, there’ll be a $250,000 exemption. That exemption does not apply to corporations or trusts. Effectively what this means is that if you sell a property before June 25th, 2024, your inclusion rate is 50%. If you sell a property after that, the first $250,000 will still at be at 50%, but anything above that will be taxable at a two-thirds inclusion rate. This has a number of implications. Well, first of all, for 2024 we’re going to have two inclusion rates. They’re going to be period one, which will be gains up ’til June 25th. Then we have period two, which are gains from June 25th onwards. 

Effectively, individuals will need to track these gains. I assume that, with the help of your investment advisor and your brokerage statements, you’ll be able to see which gains were earned in which period. It also means that now will be the time to consider some serious tax planning. In other words, does it make sense to realize a whole bunch of gains prior to June 25th if you have significant gains in a particular year, to be able to take advantage of the 50% inclusion rate? 

It also has other types of more complex planning. For example, imagine you have investments inside of a holding company because holding companies will be subject to a two-thirds inclusion rate as of June 25th. For future realization of gains, you’re going to actually face a higher tax rate in some cases in a corporation than you would personally. Because with the personal changes, the first $250,000 a year of capital gains will only be subject to a 50% inclusion rate, whereas the capital gains from dollar one in a corporation after June 25th will be subject to a two-thirds inclusion rate. 

What is the future of investment holdcos in Canada? Should they be disbanded? What would be the cost to get rid of or wind up a personal holding company? These are all really important decisions. In addition, any individuals who own a vacation property or perhaps an income or rental property, or a business owner who’s potentially contemplating a sale of those particular properties or shares, really have to think about the timing of that disposition, given that post June 25th, we could be in a situation where you’re looking at a capital gains inclusion rate of two-thirds. Ultimately, this is a very important discussion that investors want to have with their tax advisors, over the 10 weeks leading up to the June 25th deadline. 

Another important change in the budget announced today was a tweak to the alternative minimum tax for charitable donations. AMT is a parallel system that imposes a minimum level of tax on taxpayers who claim various tax deductions, exemptions and credits that reduces the tax that they owe to very low levels. Changes to the AMT were brought down in last year’s budget, and also came out and dropped legislation over the summer in August of 2023. 

One of the changes that was opposed by much of the charitable sector was a limitation on charitable donations, in which only 50% of the donation credit was available to offset your AMT under the AMT calculation. The government has responded positively to the request of the charitable sector, and will now permit 80% of the donation credit to be claimed when calculating AMT. I think this is a positive change. 

A couple of other notable changes. Number one, as announced last week, change to the Home Buyers’ Plan, which allows Canadians to come up with a down payment by borrowing money from their RSP. The amount that you could borrow has now gone up from $35,000 to $60,000. In addition, you don’t have to start paying that back for five years after you buy your home, in a new temporary rule for any withdrawals from Jan. 1st, 2022 to December 31st, 2025, so that’s a positive change. 

Then I would say for business owners, there’s a couple of really interesting changes. Number one, the lifetime capital gains exemption currently exempts the first million dollars or so of capital gains from tax on the sale of qualifying small business company shares, farming or fishing property. The budget today announced an increase of the lifetime capital gains exemption to $1.25 million of eligible gains for any dispositions on or after June 25th, 2024, with a full indexation of the lifetime exemption to resume starting thereafter. 

The other additional change for business owners is the Canadian Entrepreneurs’ Incentive, which would reduce the tax rate on capital gains on the sale of qualifying shares by providing a 50% of the prevailing inclusion rate. The new inclusion rate, as we know, will be two-thirds of capital gains. This will be reduced to one-third of capital gains, and that’s on up to $2 million of gains on the sale of qualifying shares per individual over their lifetime. Now, this is being phased in over 10 years, starting with $200,000 on Jan. 1st, 2025, before ultimately reaching $2 million by 2034. 

Then finally, there is a change to the funding of the CRA. One of the concerns that many investors have had over the years is that it’s impossible to reach the CRA by phone or if they reach the CRA by phone, they experience extremely long wait times. The government has announced today $336 million over two years starting in the 2024-2025 fiscal period to the CRA, to be able to maintain its call center resources and hopefully improve the overall efficiency of these call centers, to be able to respond accurately to taxpayers’ questions in a more timely manner. 

The most important takeaway for advisors to speak about with clients, of course, is the increase in the capital gains inclusion rate. Now, for the majority of Canadians this is inconsequential, because a typical Canadian doesn’t realize more than $250,000 a year of capital gains. For our higher net worth clients, this is a very important discussion in terms of tax planning. 

What should be done going forward with significant capital gains that are accrued? Do we make some sales? Do we rebalance a portfolio by June 25th to ensure a 50% inclusion rate? Are we more strategic in future years to be able to time those capital gains dispositions so that we are subject to the lower rate on the first $250,000 a year of capital gains? Lots of important discussions, particularly for clients that may also own investments inside of a corporation, because corporations will not get the $250,000 exception for gains after June 25th, 2024. 

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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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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.

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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.

Text transcript

Jamie Golombek. I’m the managing director of tax and estate planning with CIBC Private Wealth.

Today’s budget contained a variety of tax measures for both individuals and corporations, and even something in there that will affect charities. So, let’s start on the individual side.

So no big changes in terms of tax rates. Tax rates are staying the same. However, they did note that some high-income Canadians are still paying relatively little in personal income tax as a share of their income. For example, 28% of filers that had a gross income above 400,000 — that’s the top 0.5% — paid an average federal tax rate of 15% or less by using a variety of deductions. Things like 50% taxable gains and the dividend tax credit.

So although we already do have an AMT, an alternative minimum tax, that’s been around since 1986, it hasn’t been updated in years. So the government is now going to update and explore a new minimum tax, and they’re going to unveil the details of that in the fall 2022 economic update.

But institutions will now have to start reporting the fair market value of RRSPs and RRIFs, at the end of the year. That will allow the CRA to focus its risk assessment activities on these large RRSPs and RRIFS that they might be worried about. They already get that information for TFSAs; so they’re just catching up now for RRSPs and RRIFS.

For homeowners, lots of stuff there. The big one, of course, is the introduction of the new tax-free First Home Savings Account (FHSA): a new registered account to help people save for a first home. Anyone over the age of 18 and who is a resident of Canada can participate if they haven’t owned a home in the current year or the previous four calendar years. You can put in $40,000 a lifetime, for an annual contribution limit of $8,000. That starts next year, at some point in 2023, once the financial institutions set it up. Now, what you can do is you get to deduct the amount that you put into the FHSA. And when you take the money out to buy a home, the amount comes out tax-free as well as all the income and the growth in the plan.

So, the nice thing is that you’ll be able to either use existing funds that you have or existing RRSPs. You can transfer funds, specifically from an RRSP to an FHSA, subject to the 8,000 annual and 40,000 lifetime limits. If you don’t buy a home within 15 years, you’ve got to close the account. And then you can actually transfer what’s left into an RRSP or RRIF, or pay tax on it if you choose.

So this will really be substantial to help people get that down payment for a home instead of relying solely on either the Home Buyers’ Plan, which will still exist, but you can’t do both. In other words, you can’t do the Home Buyers’ Plan and the new First Home Savings Account for the same home. So, expect it to launch sometime in 2023.

In addition, on the home front, they’ve also introduced the anti-flipping tax, which was expected. If you sell your home or rental property within one year, within 12 months, the deemed sale is deemed to be business income, not even 50% capital gains — and certainly not principal residence exemption on your home. So this is starting next year, January 2023. Of course, there’s exceptions for things like death, separation, disability, illness, employment change, and solvency.

They’ve doubled the home buyers’ amount credit. That’s gone up. Usually, it was worth $750. Now, it’s going to be worth $1,500 for a first-time home. They’ve now also bumped up the Home Accessibility Tax Credit for individuals over 65 or entitled to disability tax credit. That’s going from $10,000 to $20,000. And they’re introducing that multi-generational home renovation credit, with up to $50,000 of renovations being eligible for credit to allow a relative to live with you. So that’s certainly starting in 2023. On the medical expense front; you know you get a medical expense credit on 15% of eligible medical expenses. They’re expanding the definition of expenses to include a variety of expenses that individuals can incur when they’re trying to become parents, like in the areas of surrogacy or sperm or embryo donations. So that’ll be very helpful for many people.

On the corporate front, for small business owners, good news. There’s currently a small business rate of 9% on the first $500,000 of small business rate income, up to $500,000 per year. That is, however, reduced on a straight-line basis if the capital of the corporation’s over $10 million, and it’s reduced completely once it’s $15 million. They’re going to bump up that range; so now your capital will reduce at a much slower rate from $10 million to $50 million. And that starts for any tax years that begin after today. So good news.

On Bill C-208, that’s the intergenerational share transfer rule that, really, the Income Tax Act tries to block surplus stripping, or stripping out retained earnings and capital gains rates — with an exception for a legitimate intergenerational business transfer. There is some concern that it might unintentionally permit some surplus stripping, and therefore the budget is asking for submissions and consultations on how to fix the law so that Bill C-208 continues in spirit, but doesn’t allow people to get away with inappropriate surplus-strip planning.

And then finally, on the corporate side, they are now officially doing away with this non-CCPC planning where certain taxpayers have, quote on quote, manipulated the CCPC status of the corporations to avoid paying refundable tax by continuing that corporation in a low-tax jurisdiction offshore, even though central money management is in Canada. That’s gone as of April 7th; as of today. And then finally, on the charity side, they’re bumping up the disbursement quota 3.5% up to 5% of a required, what a charity must distribute in a particular year based on a fair market value with an exception for the first million dollars. For smaller charities, that’s going to 5%, and that is effective in 2023.

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Jamie Golombek, managing director with CIBC Private Wealth in Toronto.

Once again, we talk every year about year-end tax tips. The question I would ask is what’s different in 2021 that we haven’t already talked about in 2020 and 2019 et cetera. So let me suggest a couple of things and I’ll go over, of course, some of the more traditional planning ideas. The good news is that if you’re invested in equity markets, you’ve done very, very well, not just this year but over the past five or 10 years with really all-time highs in most equity markets. So pretty much you’ve got massive gains in the portfolio, which begs the question is now a time to do some year-end portfolio rebalancing.

And I’m suggesting that primarily because of the uncertainty that we still have on whether or not a government would increase the capital gains inclusion rate. That’s something that we know was promised not in the Liberal government but, of course, in the NDP platform, which of course could have some sway over the minority government. So if you fear an increase in the capital gains inclusion rate, which is currently at 50% and going up perhaps to 75% at some future date. Maybe now is the time to rebalance a portfolio sooner rather than later, taking those gains and then getting back on track with your investment policy statement and what investors really plan to do in their portfolios.

Of course, capital loss planning, year-end tax loss selling is always an opportunity because if you are rebalancing that portfolio in 2021, maybe you also want to realize some potential capital losses and then offset those against those capital gains on the portfolio rebalancing. Of course, the other consideration is, if you do have those massive gains in the portfolio, consider some year-end donation gain planning whereby you donate the biggest winners in your portfolio, or at least some of them, to a registered charity. Or even set up perhaps a donor advised fund, which is really an alternative to setting up a private foundation, which allows you to contribute in kind, pay no capital gains tax on the accrued gain of the stocks or mutual funds in your portfolio, and still get a receipt for the fair market value of the amounts being donated. So I think that’s some considerations that are unique to 2021.

Then of course, we get into the standard stuff that we remind people every single year. So things like making sure in various scenarios that you’re paying certain expenses by the end of the year. So investment-related expenses like interest on money borrowed for investment purposes, investment counseling fees that are deductible for non-registered accounts, you really want to make sure those are paid by December 31st to be able to get that deduction in 2021 tax year. But we’re getting into the more standard stuff like, of course, if you’re turning 71, converting that RRSP to the RRIF by the end of the year, that’s certainly an opportunity.

We still have the prescribed rate loan planning idea where a spouse or partner could loan money to the other spouse or partner using the prescribed rate. That’s been fixed to 1%, at least till the end of the year, RESPs, certainly registered education savings plans. There may be limited opportunities now, depending on the age of the child, if they’re turning perhaps 16 or 17, there are certain limitations. You want to make sure that they have contributed to the RESP by the end of the year they turn 15, otherwise they may lose that on grants for their foreseeable future or forever in that particular regard.

And then just the normal stuff, if you think your tax rate’s going to be higher this year than it will be next year, maybe you want to defer income to the following year and vice versa. If perhaps you’ve been on a maternity leave scenario this year, your income is low, but your income is going to be higher next year, maybe this is the year to realize income, realize capital gains.

And then, finally for business owners, I think it’s a good idea towards the end of the year to look at your total compensation, salary versus dividends. What are you paying yourself? Make sure that you’re paying yourself enough salary to be able to make the maximum RRSP contribution the following year, reminder that there’s an 18% contribution limit on RRSPs so effectively 2021 means you have to pay yourself a salary of at least $162,000 to be able to get the maximum RRSP contribution next year of $29,210. You want to do that by December 31st and, again, the opportunity to leave money in the corporation, enjoy tax deferrals, these are all things that we think about as we come up to December 31st, the end of the year.

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Jamie Golombek, managing director with CIBC Private Wealth in Toronto.

Probably the first thing Canadians will be looking for in terms of a new government is will there be any tax changes and specifically, tax hikes? We have an unusual situation right now where we have a minority government, which means that it’s a bit uncertain as to whether or not the Liberal minority will be able to enact everything that they had promised in their pre-election platform, while at the same to time, would they feel some pressure to go along with some of the other suggestions from the other parties, specifically the NDP, to increase taxes? So two things that we’re watching for. First of all, there’s every year, a lot of speculation about the capital gains inclusion rates, which currently of course is at 50% of taxable gains, and ultimately, could that go back up to 75%? That was something that was in the NDP pre-election platform. It was not in the Liberal platform, but could the NDP use their power and the minority government situation to influence the Liberals to perhaps increase the inclusion rate?

And of course, the other thing that we are worried about from a tax rate perspective is, again, the NDP platform had an increase in the top bracket, which currently federally is 33%, to go up another two points to 35%. Again, could the NDP somehow persuade the Liberal government, which has hiked taxes on the wealthy in the past to bump up that top marginal rate federally to 35%. That would put top marginal rates in Canada in some provinces as high as 56%. So we’ll wait to see what happens on the tax front.

The other interesting proposal that the Liberals had, which will be interesting to see if they go forward with, which I have no reason to doubt that they will, is the plan to introduce a new Tax-Free First Home Savings Account. And this account is meant to help younger Canadians afford a down payment faster on a first home.

It really features the best of the RRSP and the TFSA, as the Liberal platform described it, tax-free in and tax-free out. And the idea would be that any Canadian under the age of 40 would be able to set aside $40,000, or up to $40,000, towards their first home. Just like an RRSP contribution, the amount that you contribute to the plan gives you a tax deduction. So effectively you can contribute up to $40,000 of pre-tax income to the plan. And then when you take the money out, it grows, of course, tax-free inside the plan. You can take out money tax-free as well with no requirement to repay it, unlike the amounts that you’d have to repay under the current Home Buyers’ Plan.

So again, a very interesting idea. If you don’t use the money to buy a home by the time you reach age 40, then of course this account just converts back to regular RRSP savings. It’ll be interesting to see how this is integrated with the RRSP deduction limit on an annual basis. But this is certainly an innovative way. Will it ultimately help first time home buyers buy a home? I think that all depends on what market they’re looking to buy in. I’m not sure that $40,000 in a market like Toronto or Vancouver is really going to help too many people in terms of a down payment.