As advisors connect with clients over RRSP contributions, there's an opportunity to sow the seeds of better tax plans
After the mad rush of tax loss selling season and other end of year tax decisions, it’s time for advisors to begin the work of RRSP season. As they work with their clients on what is, in large part, the last major decision of the 2023 tax year, advisors have a chance to review the choices made last year and set themselves and their clients up for a more tax efficient 2024.
Aurèle Courcelles, AVP of tax and estate planning at IG Wealth Management, explained the opportunity for reflection and planning currently before advisors. He highlighted some of the strategies they can use with their clients’ registered accounts, how they might want to use any remaining opportunities for a tax loss sale, and how they can more efficiently use charitable donations for their clients this year. The RRSP conversation can be the starting point for a wider tax plan that advisors can use to demonstrate their value.
“You’re going to look at how much RRSP room they have and work out the right amount of RRSP contributions, but that’s a relatively short conversation in the grand scheme of things,” Courcelles says. “But it’s an opportunity for a touchpoint, to ask what’s new in their lives, what’s changed, what’s happened with any money that isn’t with you as their financial advisor, did they realize any gains or losses. You’re dealing with past history at this point, but it’s an opportunity to talk about that history and prepare for the next tax season.”
While it’s now too late to trigger any tax loss sales for 2023, the rocky performance on markets throughout the last year may still mean there’s an opportunity to lock in some tax loss sales now. Depending on your market outlook, this may be a moment to trigger some tax loss sales for 2024 before any potential rally in fixed income or equities takes place.
Read more: Tax planning not a year-round priority for most Canadians | Wealth Professional
Courcelles notes that if losses exceed gains in a particular year, the excess can be carried back up to three years or forward indefinitely. A loss triggered this year, in excess of any gains, could be applied back to tax bills as recent as 2021. Early in 2024, if losses can still be triggered, Courcelles notes that the excess loss can be a huge advantage. Any losses triggered now, too, could act as a form of credit against the debit of gains triggered later in the year.
Charitable donations are another area that advisors can review with their clients in 2024. In the scramble to end 2023, some strategies and opportunities for revision might have been overlooked. Courcelles notes that in most provinces, the first $200 of donated money is eligible for a much smaller tax credit, while any donations in excess of that $200 can qualify for a far greater credit. If in reviewing tax plans early in 2024, an advisor sees their client donates $300 each year to a charity, Courcelles recommends making a $600 donation one year and not donating the next year, pulling forward a far greater tax benefit.
Donations in kind of securities can be even more beneficial from a tax perspective. If a client was to sell their holding and donate the proceeds, they’d have to pay capital gains tax on 50% of their gains before getting a credit. Donating the security in kind wouldn’t trigger any cap gains, but would deliver the equivalent tax credit.
Read more: What year-end tax planning questions should advisors expect? | Wealth Professional
There is also a new registered account that advisors can raise with their clients during RRSP season and the wider conversations around tax planning: the first home savings account (FHSA). While most advisors’ clients are older and own property already — making them ineligible for the FHSA — there is an opportunity to bring in the next generation of your clients’ families through the FHSA. Setting up the account early, Courcelles says, ensures that your client or their children are at least accruing contribution room. Perhaps more importantly, it opens a conversation with parents and grandparents about how to help the next generation while introducing that next generation to the value an advisor can bring from a tax planning and financial planning standpoint.
RRSP season often feels a bit like cleanup after the final tax decisions of the previous year. In that process, Courcelles believes there’s an opportunity that advisors now have to prepare their clients for a smoother, more efficient tax year in 2024.
“Over the next few weeks or few months, start planting seeds for when tax season comes around,” Courcelles says. “Start mentioning it in January and February, think about opportunities we may have missed and opportunities that may present themselves when tax season rolls around next. Nobody wants to pay tax, let’s see what we can do to make sure you’re set up to minimize taxes next year.”
