Spring is just around the corner, which means income tax season is upon us.
If you live and worked in Canada, chances are you will need to file a personal income tax return for the 2022 tax year on or before May 1, 2023 (consult the Canada Revenue Agency site for exceptions).
Many Canadians know that when they report their income to the CRA they must include the money earned from employment income, but you may not know that you also need to report any investment income you may have earned in 2022, including interest, dividends and capital gains.
If you're new to investing, and you haven't had to report investment income before, it makes sense to double-check that you've covered all your bases before you file your tax return.
Tannis Dawson, Vice President of High Net Worth Planning at TD Wealth, shares a few common mistakes many new investors make when it comes to filing a personal income tax return, and how to avoid these pitfalls.
Missing the potential of tax-advantaged accounts, such as TFSAs and RRSPs
Tax-free savings accounts (TFSA) and registered retirement savings plans (RRSP) are two types of registered plans Canadians can use to save and invest their money, and each offer different tax incentives.
Both can hold cash and investments such as stocks, bonds, mutual funds, exchange traded funds (ETFs), and guaranteed investment certificates (GICs). Each account works a little differently, but both have their place as part of long-term tax planning.
"Contributing to an RRSP provides a tax deduction so that the amount you contribute lowers your taxable income," said Dawson.
"For example, if you contribute $800 to an RRSP, you reduce your taxable income by $800. Interest, dividends and capital gains grow tax deferred within RRSPs, and you're only taxed when you withdraw money. The idea is to save for retirement while reducing income tax during your prime earning years and make withdrawals in retirement when your tax rate is lower."
TFSAs, on the other hand, allow you to grow your money tax-free within the account, meaning you are never taxed on interest earned, dividends or capital gains. Any money you contribute to a TFSA is considered "after-tax income." Because the money has already been taxed, all interest, dividends and capital gains grow tax-exempt within a TFSA, and no taxes are charged on withdrawals.
But it's not a tax-free free-for-all.
"There's a cap on how much you can contribute to a TFSA or RRSP each calendar year, and it's important to take note of the annual limit," said Dawson. "Some of the easiest mistakes people make early on is over-contributing to their tax-advantaged accounts."
, The annual TFSA contribution limit for the 2022 tax year is $6,000. TFSA contribution room starts accruing the year you turn 18, and any unused contribution room carries over to the next year. If you were 18 or older in 2009 (the year TFSAs were created), your contribution room started accruing that year. For someone who has never contributed to a TFSA and has been eligible since 2009, the total lifetime contribution limit for the 2022 tax year was $81,500, with that number increasing to $88,000 for 2023.
There's no minimum age to open an RRSP – if you earn employment income and pay taxes every year, you're eligible, and any unused deduction room is carried forward. There is also an annual RRSP deduction limit, which is the lesser of:
- 18% of your earned income in the previous year, or
- The annual RRSP deduction limit. For the 2022 tax year, the limit is $29,210.
Forgetting to invest your tax refund
You can use your tax refund any way you want. Some Canadians opt to use their tax return for prudent purposes, such as paying down debt or building an emergency fund. While others use their returns for more indulgent purchases, such as buying a completely new wardrobe for theirdog.
"If you can afford to do so, investing your tax refund is a way of paying it forward to your future self and allows you to save for short- and long-term goals, such as a down payment on a house, a new car, home renovations or saving for retirement," said Dawson.
And don't forget about the tax benefits when you hold your investments in a TFSA or RRSP – remember, TFSAs offer tax-free growth and withdrawals, while RRSPs allow you to save for the future while reducing your taxable income today.
Not knowing how to calculate your adjusted cost base (ACB)
"Adjusted Cost Base (ACB) is the cost of an investment plus any expenses you paid to buy it, such as commissions and legal fees," explains Dawson.
ACB is used to calculate the capital gain or loss when you sell an investment outside of a registered account like a TFSA or RRSP.
"For example, if you buy 100 shares of X Corp. at $20 each ($2,000) and paid a commission of $10, the ACB for you to acquire those shares would be $2,010,"
You'll need to track your ACB for tax time, but only for investments held in non-registered accounts. Investments held in registered accounts such as TFSA or RRSPs aren't subject to capital gains taxes and can't be claimed as capital losses.
Not claiming your losses
Investments go up, investments go down – but if you sell your investments at a loss, you can claim a portion of your capital loss on your income tax return.
"Calculating your capital loss is fairly straightforward," explained Dawson.
"Take the proceeds of the amount you received from the sale of your investment and subtract the ACB, as well as any expenses incurred in selling it. Then, multiply that number by the inclusion rate for that year, which is 0.5 for the 2022 tax year. This amount is your allowable capital loss."
Let's say you purchased 100 shares of X Corp. at $20 each ($2,000) and paid a commission of $10. Your ACB would be $2,010.
If you later sell all 100 shares for $15 each ($1,500) and pay a $10 commission, your proceeds from the sale would be $1,490.
When you subtract the ACB from the amount you received from the sale ($1,490 - $2,010), your capital loss is $520. Multiplied by the inclusion rate of 0.5, your allowable capital loss is $260.
"Your allowable capital loss can be claimed on your income tax return to offset any capital gains. If your capital losses are higher than your gains, the difference between the two is called a net capital loss. Net capital loss can be used to reduce your taxable income and can be carried back up to three years to apply to past gains or carried forward indefinitely in anticipation of future gains," added Dawson.
Be careful if you want to repurchase the shares that you claimed a loss on. There are superficial loss rules and you have to wait 30 days to repurchase the shares to avoid the denial of the loss.
For more information on tax filing, visit the Canada Revenue Agency website or speak to a tax professional.
Want to connect with a TD Wealth advisor to discuss how you can implement tax-efficient strategies? Visit the TD Wealth website.
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