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As tax season in Canada approaches, Nicole Ewing, Director of Tax and Estate Planning at TD Wealth, speaks with Greg Bonnell about some of the strategies to keep in mind as you prepare to file.
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There are no shortage of reminders this year that tax season is just around the corner. Joining us now with more on what you should be keeping in mind when it comes to your personal finances, Nicole Ewing, Director of Tax and Estate Planning at TD Wealth. Nicole, a pleasure to have you back on the show.
It's great to be here. So my mind is going this way because, and some more people are probably noticing it too because my T4 just landed from my employer. Oh, of course, yes, RRSP season is coming. It's not tomorrow, but it is coming. So what should we be thinking about? How do we get ourselves ready?
It is imminent at this point. And so, yes, we want to start collecting on those slips. Perhaps make a list of the slips that you're expecting to get, by sharing with you that I forgot one one year and I filed early, not realizing that I had another slip to come. It did not work out well. It was not something I'd recommend. So try to anticipate what slips are going to be coming through. We want to, of course, be paying and filing on time as quickly as possible, because we've seen with the rising rate it's now 8% on overdue taxes that are owing. Of course, we're also coming up against the deadline for RRSP donations, contributions.
We're donating to our future selves right?
Just donating.
I'll be tapped out in my sixties and seventies.
So we need to start thinking about not only our planning for last year, but also our planning for this year as well.
Let's talk a bit about that because it's the end of this calendar month as you hit March 1st, and correct me if I'm wrong, because I probably am, but you've got to get those RRSP contributions in for the last tax year and then you file your taxes later. Is there a benefit in roughing things out to try to figure out where you are in case you want to make some different moves? I'm just thinking the deadline passes and then you finally get to your taxes and say, Oh, wait a minute, I could have made different choices.
Yeah, I think that's important. I think that we don't want perfect to be the enemy of the good when it comes to some of our planning. So having a best guess or a best idea of what you and, if relevant, what your spouse is going to be reporting this year is worthwhile to get a sense so that you can get ahead and make that RRSP contribution and make sure that it's in there and you're not delaying that. So, yes, I think that there's definitely value in that.
You mentioned spouse as well. Obviously, if you're in a family situation, then there can be sort of different strategies to deploy heading into tax season. What are some of the most popular and effective ones that people are trying to figure that out?
Well, there's there's a couple of immediate ones that come to mind. The RRSP spousal contribution to a spousal RSP is just a a very effective way of doing some future income splitting we'll say. So rather than making the contribution to my own RRSP, if I make it to my spouse, I'm still using my contribution room, but I make it to my spouse and they then in retirement are going to be able to pull that money out at their marginal rate at the time. So certainly where we have a big disparity between marginal rates or anticipated income in retirement, it's something to think about, splitting up that eventual income once we're taking that the rift proceeds. The other one is our TFSA. So normally we cannot simply give our spouse money without any income on that being attributed back to us. These are called the attribution rules. And I don't know how aware most people are of these. But the general rule is if I gift or loan for less than the prescribed rate to my spouse, they don't get to claim the income at their marginal rate, I still need to claim it at mine. The TFSA allows you to gift the money to your spouse and they can contribute it to their TFSA. And we don't have those attribution rules applying because there's no tax. There is no there's no tax being triggered that I would need to report on my return. So very effective way of getting money into the hands of the lower income spouse and making sure that we're doing that in the most tax effective way.
You mentioned the prescribed rate there. I hadn't thought about the fact that in a rising rate environment, if you run late with the CRA, it's going to mean a higher rate. But the prescribed rates, they change as well too, right? Does that change the math on that other strategy of gifting or loaning?
Oh, yes. Yes, very much so. And we talked about this for years. We had a the low 1% rate, which is the lowest it can possibly be. And essentially, if you loan an amount to your spouse at the prescribed rate, they they pay you interest, you report it, we're good. We don't have these attribution rules applying. Not very long ago, that was 1%. It's now going to be 5%. And so the benefit of a strategy like that is that it allows your spouse to take that money, invest it, and then the difference between what they're earning as income and the percentage that they need to pay to you as interest, there was a nice opportunity for some savings. It's a bit more difficult when we need to beat 5% in order to make that strategy effective given all the additional compliance. So what I would recommend and hopefully everybody who had a prescribed rate loan in place from earlier years made sure to have that interest payment made by the end of January. Because if you don't do that, you lose the benefit of those rules and the attribution rules will continue to apply. So hopefully we don't have anyone in that situation. But yeah, it's a bit of a different math equation than it was a few years ago.
So that's a significant change of the landscape that people need to keep in mind. Anything else when we think about this tax season that might be different than previous tax seasons?
Well, certainly last year we did see a lot of capital loss harvesting, that type of thing. And so that is going to be new for some people this year, that they're going to need to file and look at whether or not they're going to be claiming those losses, whether they might want to carry them forward or back. And so there's some math that might need to be done. And it's a strategy that we don't want to have to employ very often. We don't want to have to figure it out.
It's not a happy thing when you say tax loss.
So I think that that's a little bit different for many people this year.
When we're thinking about that as well, obviously, depending where your investments are and your time horizon and what kind of vehicle you put them in, maybe someone will say, Oh, I'm looking into my TFSA and I lost some money on a stock, I got it in there. It's not the same thing as losing money just in a cash account.
Oh, no. And it's an unfortunate situation because once it's in the TFSA, you're not taxed on gains, you're not taxed on income. You also don't have the benefit of claiming your losses. So unfortunately, those losses are likely trapped in the TFSA. And yeah, that's not an ideal, but it's a good reminder about what we invest where, what type of investments we're putting into our registered and our non-registered accounts, and making sure that we are thinking about the taxation of that particular type of investment rather than just kind of filling up our RRSP or TFSA without really thinking through what the potential for loss might look like.
There are no shortage of reminders this year that tax season is just around the corner. Joining us now with more on what you should be keeping in mind when it comes to your personal finances, Nicole Ewing, Director of Tax and Estate Planning at TD Wealth. Nicole, a pleasure to have you back on the show.
It's great to be here. So my mind is going this way because, and some more people are probably noticing it too because my T4 just landed from my employer. Oh, of course, yes, RRSP season is coming. It's not tomorrow, but it is coming. So what should we be thinking about? How do we get ourselves ready?
It is imminent at this point. And so, yes, we want to start collecting on those slips. Perhaps make a list of the slips that you're expecting to get, by sharing with you that I forgot one one year and I filed early, not realizing that I had another slip to come. It did not work out well. It was not something I'd recommend. So try to anticipate what slips are going to be coming through. We want to, of course, be paying and filing on time as quickly as possible, because we've seen with the rising rate it's now 8% on overdue taxes that are owing. Of course, we're also coming up against the deadline for RRSP donations, contributions.
We're donating to our future selves right?
Just donating.
I'll be tapped out in my sixties and seventies.
So we need to start thinking about not only our planning for last year, but also our planning for this year as well.
Let's talk a bit about that because it's the end of this calendar month as you hit March 1st, and correct me if I'm wrong, because I probably am, but you've got to get those RRSP contributions in for the last tax year and then you file your taxes later. Is there a benefit in roughing things out to try to figure out where you are in case you want to make some different moves? I'm just thinking the deadline passes and then you finally get to your taxes and say, Oh, wait a minute, I could have made different choices.
Yeah, I think that's important. I think that we don't want perfect to be the enemy of the good when it comes to some of our planning. So having a best guess or a best idea of what you and, if relevant, what your spouse is going to be reporting this year is worthwhile to get a sense so that you can get ahead and make that RRSP contribution and make sure that it's in there and you're not delaying that. So, yes, I think that there's definitely value in that.
You mentioned spouse as well. Obviously, if you're in a family situation, then there can be sort of different strategies to deploy heading into tax season. What are some of the most popular and effective ones that people are trying to figure that out?
Well, there's there's a couple of immediate ones that come to mind. The RRSP spousal contribution to a spousal RSP is just a a very effective way of doing some future income splitting we'll say. So rather than making the contribution to my own RRSP, if I make it to my spouse, I'm still using my contribution room, but I make it to my spouse and they then in retirement are going to be able to pull that money out at their marginal rate at the time. So certainly where we have a big disparity between marginal rates or anticipated income in retirement, it's something to think about, splitting up that eventual income once we're taking that the rift proceeds. The other one is our TFSA. So normally we cannot simply give our spouse money without any income on that being attributed back to us. These are called the attribution rules. And I don't know how aware most people are of these. But the general rule is if I gift or loan for less than the prescribed rate to my spouse, they don't get to claim the income at their marginal rate, I still need to claim it at mine. The TFSA allows you to gift the money to your spouse and they can contribute it to their TFSA. And we don't have those attribution rules applying because there's no tax. There is no there's no tax being triggered that I would need to report on my return. So very effective way of getting money into the hands of the lower income spouse and making sure that we're doing that in the most tax effective way.
You mentioned the prescribed rate there. I hadn't thought about the fact that in a rising rate environment, if you run late with the CRA, it's going to mean a higher rate. But the prescribed rates, they change as well too, right? Does that change the math on that other strategy of gifting or loaning?
Oh, yes. Yes, very much so. And we talked about this for years. We had a the low 1% rate, which is the lowest it can possibly be. And essentially, if you loan an amount to your spouse at the prescribed rate, they they pay you interest, you report it, we're good. We don't have these attribution rules applying. Not very long ago, that was 1%. It's now going to be 5%. And so the benefit of a strategy like that is that it allows your spouse to take that money, invest it, and then the difference between what they're earning as income and the percentage that they need to pay to you as interest, there was a nice opportunity for some savings. It's a bit more difficult when we need to beat 5% in order to make that strategy effective given all the additional compliance. So what I would recommend and hopefully everybody who had a prescribed rate loan in place from earlier years made sure to have that interest payment made by the end of January. Because if you don't do that, you lose the benefit of those rules and the attribution rules will continue to apply. So hopefully we don't have anyone in that situation. But yeah, it's a bit of a different math equation than it was a few years ago.
So that's a significant change of the landscape that people need to keep in mind. Anything else when we think about this tax season that might be different than previous tax seasons?
Well, certainly last year we did see a lot of capital loss harvesting, that type of thing. And so that is going to be new for some people this year, that they're going to need to file and look at whether or not they're going to be claiming those losses, whether they might want to carry them forward or back. And so there's some math that might need to be done. And it's a strategy that we don't want to have to employ very often. We don't want to have to figure it out.
It's not a happy thing when you say tax loss.
So I think that that's a little bit different for many people this year.
When we're thinking about that as well, obviously, depending where your investments are and your time horizon and what kind of vehicle you put them in, maybe someone will say, Oh, I'm looking into my TFSA and I lost some money on a stock, I got it in there. It's not the same thing as losing money just in a cash account.
Oh, no. And it's an unfortunate situation because once it's in the TFSA, you're not taxed on gains, you're not taxed on income. You also don't have the benefit of claiming your losses. So unfortunately, those losses are likely trapped in the TFSA. And yeah, that's not an ideal, but it's a good reminder about what we invest where, what type of investments we're putting into our registered and our non-registered accounts, and making sure that we are thinking about the taxation of that particular type of investment rather than just kind of filling up our RRSP or TFSA without really thinking through what the potential for loss might look like.
