2023 year end tax considerations
2023 year end tax considerations
As 2023 draws to a close, MNP’s Tax advisors review the tax deadlines, planning considerations, and legislative changes of which you need to be aware. This year’s overview includes:
- Five considerations to manage your business's tax liability
- Nine tips for managing your personal tax liability
- A review of five legislative changes that either became effective this year or are expected to come into effect in 2024
As we approach the end of the calendar year, now is a good time to evaluate the options available to manage your income tax liability and prepare for the upcoming tax filing season.
Business
Invest in equipment and other capital assets
Consider accelerating purchases of depreciable assets to utilize temporary tax incentives that will be eliminated or reduced starting in 2024.
Provided they are available for use before January 1, 2024, certain assets may be eligible for a full immediate tax deduction by Canadian-controlled private corporations (CCPCs) to a limit of $1.5 million in the taxation year for an associated group (including corporations, individuals, and partnerships). This is also known as immediate expensing.
For individuals and Canadian partnerships where all partners are individuals, the immediate expensing measures will apply to assets acquired and available for use before January 1, 2025.
The accelerated investment incentive (AII), which provides an enhanced first-year capital cost allowance (CCA) deduction for certain eligible property acquired, will be phased out starting in 2024. Eligible property that is acquired and becomes available for use before 2024 can benefit from up to three times the normal first-year CCA deduction (for property subject to the half-year rule).
A lower incentive applies for eligible property that becomes available for use between 2024 and 2027 (equal to twice the normal first-year CCA amount for property subject to the half-year rule).
Other enhanced tax deductions for manufacturing and processing machinery and equipment, as well as clean energy equipment are also available.
Salaries or dividends?
Your MNP advisor can help determine the ideal blend of salary or dividend remuneration for you and your family members.
We will look at a range of factors, including cash needs, federal and provincial tax rates, and corporate attributes, to determine which type of dividends can be paid while managing the Tax on Split Income rules. If opting for salaries, be aware that any accrued amounts — including bonuses — are paid within 179 days of year-end.
Shareholder loans
Do you have an outstanding loan from your corporation? Consider repaying it within 12 months from the end of the corporation’s tax year in which the debt occurred. Otherwise, it may become income to you personally.
Tax payments
Avoid interest changes by remitting final corporate income tax balances to the Canada Revenue Agency (CRA) and applicable provincial tax authorities within two months following year-end (three months for certain CCPCs).
CRA interest rates have increased considerably over the last year (nine percent for overdue taxes at the time of writing). Making tax payments on time can help prevent costly non-tax-deductible interest charges.
Plan ahead
Year-end discussions are a good time to take stock of what has happened in the current year. They’re also a great opportunity to discuss what may be ahead.
- Contemplating a sale of your business? Taking the appropriate steps to maintain your Qualified Small Business Corporation (QSBC) status will ensure you can utilize the capital gains exemption on a future sale of shares or consider an employee ownership trust to facilitate the sale to an employee.
- If thinking about transitioning your business to one or more family members, consider implementing the transition in 2023. Proposed tax rules on intergenerational business transfers are expected to take effect in 2024. These rules are more restrictive and can impact your ability to access the lifetime capital gains exemption on the sale of the business.
- A reorganization may be ideal to accommodate changing business and/or family dynamics. It can also help to safeguard business assets as well as minimize taxes.
- Excessive passive income can reduce the small business deduction available to the corporation. If your corporation holds passive investments, assess whether the passive income generated in the current year will impact your ability to claim the small business deduction next year.
Personal
Important payments dates
You may be aware of the payments that must be made by December 31 to qualify for 2023 tax deductions or credits (e.g., charitable donations, federal or provincial political contributions). Consider also the following deadlines which can impact your 2023 tax year:
- December 15, 2023 — Final 2023 instalment due date.
- January 30, 2024 — Payment of any interest on loans from your employer (to reduce your taxable benefit) and interest owed on loans from family members.
- February 14, 2024 — Reimbursement of any personal motor vehicle expenses to your employer to reduce your taxable benefit from an employer-provided vehicle.
- February 29, 2024 — Repay RRSPs withdrawn under a Home Buyers’ Plan or Lifelong Learning Plan; make RRSP contributions for yourself or a spouse / common-law partner.
- April 30, 2024 — Final personal tax payments for 2023 are due.
Make all instalment and final tax payments by the deadlines above to prevent incurring interest charges.
Self-employment expenses
Ensure you document all self-employment expenses with receipts and maintain a logbook to support all motor vehicle expenses and taxable benefit calculations.
Automobile Log
Employment expenses
Track and retain receipts for annual union, professional, or other dues not paid/reimbursed by your employer.
In the last two years, those who worked from home more than 50 percent of the time for at least four consecutive weeks in the year could claim home office expenses based either on a flat rate or actual expenses. At the time of writing, CRA has not confirmed if the same will apply for 2023.
RRSPs
Make contributions to your Registered Retirement Savings Plan (RRSP) to reduce taxable income for the year. Contributions made to a spouse or common-law partner’s RRSP are also deductible. The 2023 contribution limit is 18 percent of your 2022 earned income to a maximum of $30,780. Check your 2022 Notice of Assessment for your available contribution room for 2023. Contributions must be made on or before February 29, 2024, to be deductible for 2023.
RESPs
Contributions to a Registered Education Savings Plan (RESP) will not impact your 2023 income tax liability. However, it will allow you to save for your child’s future education and utilize the Canada Education Savings Grant (up to $500 annually and a lifetime maximum of $7,200 per child).
TFSAs
Income earned in a Tax-Free Savings Account (TFSA) will not be subject to future income tax. The 2023 limit is $6,500. Check with CRA and your financial institutions to confirm your TFSA contribution room.
FHSAs
A First Home Saving Account (FHSA) allows you to save for the purchase of a first home while reducing taxable income for the year through tax-deductible contributions. Additionally, qualifying withdrawals (including investment income earned) to purchase a first home are non-taxable.
The 2023 limit is $8,000. Unlike the TFSA, the FHSA contribution room does not automatically accrue. This means you should open an FHSA account now to start accruing contribution room, even if you are not quite ready to make the contributions this year.
Charitable donations
The federal and provincial governments offer donation tax credits, resulting in tax savings of up to 50 percent of the value of the gift. The right donation strategy can help minimize income taxes while meeting your philanthropic goals. Given the proposed Alternative Minimum Tax Changes for 2024 (discussed below), consider whether a 2023 donation would be more effective in meeting your philanthropic goals.
Multigenerational home renovation
Effective 2023, the Multigenerational Home Renovation Tax Credit is a refundable tax credit that provides up to $7,500 for certain costs incurred to construct a secondary dwelling unit for a senior or a person with a disability.
Business insights that make an impact
Recent and upcoming changes to consider
Residential property flipping rule
Starting in 2023, profits arising from dispositions (i.e., sale) of residential property (including rental property) owned for less than 12 months or from an assignment sale will be fully taxed as business income instead of as a capital gain.
Alternative minimum tax
Proposed alternative minimum tax (AMT) rules that are expected to take effect in 2024 will limit tax preferences (i.e., exemptions, deductions, and credits) in the AMT calculation.
These changes will broaden the AMT impact on high-income individuals. It will particularly impact those for whom a significant component of their income is represented by taxable capital gains and those claiming significant tax credits, such as donations.
Speak to an MNP Tax advisor to discuss alternatives to help minimize the impact of the new AMT rules.
Trust reporting rules
UPDATE: March 28, 2024 — The CRA updated its T3 Guidance at 2:30pm ET today to provide all bare trusts with an exemption from the requirement to file a T3 return for the 2023 tax year, unless the CRA makes a direct request for these filings. If you have a trust it will be important to determine if it is a bare trust or express trust — we recommend that you connect with your MNP Advisor to confirm your filing requirements and to clarify any impacts to your 2023 T3 filing.
Effective for tax years ending December 31, 2023, or later, most trusts that previously did not have to file an annual T3 income tax return will no longer be exempt. This change is significant, as many more trusts (including bare trust arrangements) will have to start filing a T3 annually going forward.
Trusts must also disclose additional information in the T3 for tax years ending December 31 and later. Connect with an MNP advisor to discuss whether these rules may impact you and to understand your potential T3 filing obligations.
Underused housing tax
Starting in 2022, a one percent annual tax will apply to certain underused or vacant residential properties owned by non-Canadian citizens or non-Canadian permanent residents. The tax will continue to impact such property owners on record on December 31, 2023.
It’s important to note that even though an owner may be exempt from the tax, an underused housing tax (UHT) return must be filed annually to claim the exemption. Many Canadian corporations, partnerships, and trusts holding residential property — including those with no foreign ownership or foreign beneficiaries — must file a return for each property annually, even where no tax is payable.
Significant penalties apply if the UHT return is not filed on time. The due date for 2023 UHT returns will be April 30, 2024.
Excessive interest and financing expenses limitation
Proposed rules introduced by the federal government aim to restrict the deduction of interest and financing expenses by certain taxpayers to a proportion of their earnings before interest, taxes, depreciation, and amortization for income tax purposes.
Excluded entities will not be subject to the limitation and generally include any of the following:
- CCPCs that, along with any associated corporations, have taxable capital employed in Canada of less than $50 million
- Groups of corporations and trusts whose aggregate net interest expense among their Canadian members is $1 million or less
- Certain standalone Canadian-resident corporations and trusts and groups that consist exclusively of Canadian-resident corporations and trusts that carry on substantially all of their business in Canada.
If enacted, these excessive interest and financing expenses limitation (EIFEL) rules will apply to tax years beginning on or after October 1, 2023.
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