With February (and the winter, it seems) drawing to a close, our minds once more shift into tax mode.  Accountants take cover behind their desks as a deluge of bags full of tax slips start to get dropped off by clients eager to get their filing done ahead of time. This week’s conference call didn’t leave much time to go into tax season issues, so I thought we would cover them off in the newsletter (playback details for the call can be found at the end of the commentary). Indeed, a week from today will be the RRSP deadline for the 2023 tax year. Just as a reminder, the maximum contribution limit for 2023 is $30,780 and rises to $31,560 for the 2024 tax year. The RRSP deadline can be somewhat stressful, either because some find they have little in the way of excess savings to move into their RRSP, or because they are uncertain about whether it’s a good time to invest.

 

Let’s deal with the first issue. For many, the two months after the holiday season are spent gazing over credit card statements and other bills and, following the past few years of higher inflation, the numbers popping off the page aren’t too pretty. After paying off the balances there may not be enough money to make a contribution to their RRSP, let alone maximize. The issue is that they forgot to pay the most important bill first and that is their savings account. To avoid this trap, we advise individuals to make monthly contributions to their RRSP over the course of the year – what we refer to as Pre-authorized Contributions, or PACs. This not only reduces the stress of coming up with a lump-sum amount in February, but enhances the tax deferment effectiveness of the RRSP as contributions are going in sooner to generate investment income and returns.

 

While we are on the topic of investments, let’s also deal with the other reason Canadians wait until now to contribute to their RRSPs, and that is timing anxiety. If financial markets are volatile, some will talk themselves out of contributing on the basis that any new money put into the RRSP is only just going to drop in value. Conversely, and this applies to today, what if markets have been moving higher for an extended period of time and could suddenly correct right after the contribution is made? In either case, individuals are treating the RRSP as an automatic investment in securities when, in actual fact, it is simply a basket that we put money in, to be invested at some point according to the individual’s unique risk parameters and asset allocation strategy.

 

Money contributed to an RRSP, or existing money for that matter, doesn’t have to be invested at all if there is a good reason not to. What is important is that the contribution is made before the deadline, such that a tax benefit is realized. If markets are chaotic, or you think it may be too expensive, place the new money in a high interest rate savings vehicle inside the RRSP until it is more appropriate to move the funds into an investment mix. That being said, remember that the RRSP is a long-term savings vehicle, where movements in the market in February of any year likely won’t even appear on a chart by the time you start drawing out. Remember, it’s time in the market and not timing the market that matters.

 

What other issues should Canadians be thinking about as we head into March? First, as much as individuals want to get their tax filing done as soon as possible, don’t rush it. By this, I mean don’t assume you have all the necessary slips, especially at this point. Most institutions are only now starting to get T3 and T5 slips out to households. Some are routinely late in doing so, as is the case with many exchange traded funds (ETFs), mutual funds, real estate investment trusts (REITs) and limited partnerships. I have seen too many individuals file their taxes without all of their slips in hand, only to find out later that they have to re-file as some income had not been reported. Your tax professional will guide you in this, but if you do it yourself, just wait at least until after the end of March to make sure you have everything.

 

Now, some people can’t wait until after March and that would include those that are preparing taxes for trusts, where the deadline is the end of March. Given the delays by some corporations and fund companies in generating and distributing tax slips, this can present challenges. To make things even more arduous for Canadians, the federal government implemented changes to its trust reporting rules this year. We talked briefly about “bare trusts” at the start of the year, when these changes came into effect, and how T3s now have to be prepared, even for assets like bank or investment accounts when say an individual is a joint owner. An example would be where an adult child is on the account with their parent for the purposes of conducting day-to-day banking or in minimizing probate fees. It would also apply to a situation where a parent opens an account in trust for a minor child. Under the new rules, even if no income (interest, dividends or capital gains) is generated, a T3 now needs to be filed with the CRA. The T3 must also detail the identities of the settlor, trustees and beneficiaries of the bare trust. Our Tax & Estate Planning Group has put together a summary of these new rules, which can be found here: Enhanced Trust Reporting Rules

 

On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.   

 

Andrew Pyle

 

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Expiry date: 19-Mar-2024 23:59

 

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Andrew Pyle is an Investment Advisor with CIBC Wood Gundy in Peterborough. The views of Andrew Pyle do not necessarily reflect those of CIBC World Markets Inc.

 

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