Your “financial” new year’s resolution: Tax planning tips for 2023

Don't forget to put your financial wellness on your to do list for 2023!

We are almost a month into 2023 now, and for those who are ahead of the game with their finances are probably more focused on financial matters related to last year, instead of planning for the year(s) ahead. After all, the RRSP contribution deadline is a month away and, soon after, it will be time to file your 2022 income tax return.

Effective planning takes place throughout the year, not just during RRSP and tax season. There are some things you can action now to make a positive impact on your overall finances and help you save when you file your 2023 tax return a year from now, to get the most of your hard-earned money.

Here are some tips to help you to start the year off properly for financial success:

  • Where to invest your savings: TFSA vs RRSP
  • Tips for the First Home Savings Account
  • Automate your savings plan
  • Make income-splitting a family affair
  • Considerations for business owners

Where to invest your savings: TFSA vs RRSP

While there are relatively few tax shelters available, most people do have access to two valuable ones: the registered retirement savings plan (RRSP) and tax-free saving account (TFSA). With the RRSP deadline coming up March 1st, many are debating whether to put extra cash into an RRSP for the tax deduction, or to have the funds more accessible and compounding tax-free in a TFSA.

Here is a breakdown of the key differences between an RRSP and a TFSA:


While RRSPs are beneficial in helping to reduce your taxes, TFSA accounts can’t be overlooked to put yourself in a position to optimize your net worth and make the most of your savings in a tax-free environment — which compounds over time tax-free.

If you are currently in a high income–tax bracket and you don’t foresee needing the funds in the short term, then contributing to your RRSP may be more appropriate. If you are in a reasonable tax bracket and expect to have a large pension or other sources of income in retirement excluding an RRSP, contributing to your TFSA is likely the answer.

Given the recent stock market decline, this is now an excellent opportunity to utilize your Tax-Free Savings Account. And given data from the CRA, many Canadians are not taking advantage of this tax-free account — which I find very surprising!

Tips for the First Home Savings Account

This upcoming tax-free account offers a high degree of flexibility for new homebuyers, so be sure to take advantage when the new registered account launches in April 2023.

In short, the FHSA provides first-time homebuyers the ability to save up to $40,000 on a tax-free basis, with an annual contribution limit of $8,000 (contributions are also tax-deductible). The annual contribution is carried forward if the account was opened, even if no contributions were made.

Here are a couple strategies to keep in mind:

  • Since carry-forward amounts begin accumulating only after an FHSA is opened, prospective homebuyers could open an account in 2023 even if they don’t have money to contribute. That would mean they could contribute up to $16,000 ($8,000 annual contribution plus $8,000 carried forward) in 2024 rather than waiting until 2025 for more room.

  • While spousal FHSAs aren’t allowed, a person can give their spouse money to contribute to an FHSA, without triggering income attribution on that amount — that would give each spouse a total lifetime contribution limit of $40,000. 

The below image does a great job explaining some key differences between a FHSA, TFSA, and RRSP account:

Source: Protect Your Wealth, December 2022

You can combine a FHSA withdrawal with an RRSP homebuyers plan withdrawal if needed, which provides an additional $35,000 from an RRSP for a down payment. Stay tuned for the new account launch in a couple months!

Automate your savings plan

Once you have decided where to invest your savings, consider setting up automatic contributions as a way of “forced savings” to ensure you are making your contributions regularly. Even a small amount set aside on a regular basis will compound significantly over time, while taking advantage of dollar-cost averaging during down-periods of the market.

Ideally, you want to have the recurring contribution synced with your paycheque — this way you are paying yourself first before the money is gone for other needs or expenses.

Make income-splitting a family affair

Income-splitting can provide substantial tax savings. Assuming there is a significant difference between spouses’ incomes, arrange to have more income received by the lower-income spouse (at a lower tax rate) that otherwise would be earned by the higher-income spouse.

The most basic form of income splitting is for mortgage payments and other household bills to be paid by the higher-income spouse, which allows new investments to be made by the lower income spouse and subsequently pay less tax on income and capital gains. If you have a family business, salaries can be paid to your spouse and children, as long as they are for legitimate work and the amounts are reasonable.

This can be done in addition to Spousal RRSP contributions, which provides the higher-earner tax deductions for the contributions, while having the account taxed under the lower-earning spouse during retirement. 

If you are looking at opportunities to reduce your tax bill, income splitting — the ability to use the lower tax rates of other family members to decrease the personal tax bills of you and your family — may meet your needs. Learn more about income splitting strategies to help mitigate taxes here

Considerations for business owners

If you are an incorporated business owner, here are a few key items to consider:

  • The salary and dividend mix for the year to yourself and family members. Salaries paid must be reasonable in the circumstances to be allowed.

  • Planning for investments held within your corporation, particularly if it benefits from the “small business deduction” on active business income. Tax rules phase out the small business deduction limit of corporation once its passive investment income from the prior year exceeds $50,000.

  • Declaration of “capital dividends” from your corporation’s “capital dividend account.” Capital dividends are favourable because they are tax-free distributions to shareholders.

  • Repaying shareholder loans to your corporation to avoid potential inclusion of a taxable benefit.

Thanks for reading!

If you enjoyed the newsletter and found it helpful, don’t forget to subscribe for future updates, and feel free to share with a friend who would benefit from this information. If you want additional information or resources on this topic, please reach out to me directly.

All the best until next time!

Nathan Biren, Associate Investment Advisor