My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, January 16, 2023

2022 Financial Clean-up and 2023 Tune-up

In January, we are keen to tackle our New Year’s resolutions. Yet most of us abandon our goals by March. Researchers have stated one of the main reasons we do not keep our resolutions is that we do not make our resolutions actionable and achievable.

So, if one of your financial resolutions is to clean-up your 2022 financial affairs and tune them up for 2023, I today provide a roadmap to make these goals actionable and achievable.

For each financial topic or issue below, I will discuss what you should do to clean-up for 2022 and what you should consider doing in 2023 to tune-up your finances.
Yearly Spending Summary  
2022 Clean-up

In 2022, the rapid increase in inflation and interest rates caused a significant increase in almost every Canadians spending. While you will have felt the impact of rising prices at the cashier, the pump and on your monthly credit card statement, many of us do not have a grasp of the details and/or quantum of these increased costs.

I use Quicken to reconcile my bank and track my spending. A couple weeks ago I printed out a summary of my 2022 spending by category for the year. This exercise provided some eye-opening data. This information is invaluable. It provides the basis for yearly budgeting, income tax information (see below), and among other uses, it provides a starting point for determining your cash requirements in retirement. If you do not use Quicken or some other tracking software or personally developed spreadsheet, it would likely require significant work to re-create your 2022 expenses. So practically, you may just want to start tracking your expenses in 2023.
2023 Tune-up
During my career, I often discussed financial, retirement and estate planning with my clients. One of the questions I typically asked for these planning exercises (especially for those whose spending was excessive), was what was the breakdown of their monthly costs? I would say in at least 60%-75% of the cases, people had little idea of their actual spending and when they undertook the exercise they were surprised at the quantum of their actual spending. If you are one of those people, I strongly suggest you buy a personal finance software program that lets you download your bank data (so it limits your time tracking your spending) or create a detailed excel spreadsheet with expense categories down the vertical axis and the month across the horizontal axis. Then fill in the spreadsheet at each month end.

By undertaking this expense tracking for 2023, you will be able to budget, plan short-term and project your retirement spending.

Income Tax Items

2022 Clean-up
I print out from Quicken the details of donations and medical receipts (acts as checklist of the receipts I should have or will receive) and summaries of expenses that may be deductible for tax purposes, such as auto expenses. If you use your home office for business or employment purposes (remember, you need a T2200 from your employer if you are not using the temporary flat method), you should print out a summary of your home-related expenses.

Where you claim auto expenses you should get in the habit of checking your odometer reading on the first day of January each year. This allows you to quantify how many kilometers you drive in any given year, which is often helpful in determining the percentage of employment or business use of your car (since, if you are like most people, you probably do not keep the detailed daily mileage log the CRA requires). Keep in mind if you are audited, you will probably have to go back and complete a log; using an estimated percentage of business use based on your odometer reading will typically not cut-it with a CRA auditor.
As I have a health insurance plan, in January I start to assemble the receipts for my final insurance claim for the 2022 calendar year. I find if I don’t deal with this early in the year, I tend to get busy and forget about it.

To facilitate the claim and lessen my administrative burden, I ask certain health care providers to issue yearly payment summaries. This ensures I have not missed any receipts and assists in claiming my medical expenses on my income tax return. You can do this for among others: physiotherapists, massage therapists, chiropractors, and orthodontists—even some drug stores provide yearly prescription summaries. This can depending upon your personal health care costs, condenses a file of 50 receipts into four or five summary receipts. 
If you are an Ontario resident, don’t forget to assemble your Staycation receipts. Ontario residents can claim 20% of their eligible 2022 accommodation expenses. For example, for a 2022 stay at a hotel, cottage or campground you can claim eligible expenses of up to $1,000 as an individual or $2,000 if you have a spouse, common-law partner or eligible children, to get back up to $200 as an individual or $400 as a family. For Staycation information, see this link.
2023 Tune-up
January or February is the perfect time to sit back and consider your income tax situation. 

On a personal basis, if you are married or common-law, review your 2022 income and estimated 2023 incomes to see determine if there is a significant difference in taxable income and marginal tax rates between you and your spouse/partner. In prior years, I would often suggest if the higher earning spouse has significant assets, that you consider a prescribed rate loan. However, with the rapid rise in interest rates, the 1% prescribed rate of early 2022 has risen to 4% for the first quarter of 2023. It is therefore no longer a slam-dunk decision to utilize a prescribed rate loan and you should discuss the merits with your accountant and/or investment advisor.

Where spouses have significant differences in marginal rates, you should review whether the higher earning spouse has any ability to pay a reasonable salary based on actual work undertaken by your lower income spouse. This is typically applicable where the higher earning spouse is self-employed or has a corporation. Where the higher income spouse is an employee, it can be problematic to pay a salary to your spouse unless an assistant is required by your employer and your T2200 from your employer reflects the requirement for an assistant. If you are considering paying a salary to your spouse, you should review this with your accountant.

Where a spouse has lost their job or has low taxable income and has their own RRSP, consideration should be given to whether they should draw down on their RRSP at a low marginal tax rate in 2023. You will have to navigate certain rules (if a spousal contribution was made in the last two years, the withdrawal will be taxed in the higher income spouse's income, so it is likely a non-starter). Also keep in mind the statutory tax withheld on the RRSP withdrawal may be lower than the actual tax your spouse may owe on their tax return.  

If you own a corporation, you should touch base with your accountant to discuss if your corporation has a tax-free capital dividend account available, if the company has refundable tax on hand, is the company going to be subject to the small business claw-back etc. or if there are any tax reorganizations or planning that can be undertaken to minimize current or future corporate and personal taxes.

Estate Affairs

2022 Clean-up
When discussing your estate, the terms clean-up and tune-up are often synonymous with initiate or update. Various reports suggest a considerable number of younger Canadians have no will -somewhere between 60-75% for the 18–45-year-old age group. This number improves dramatically for those over 55-year-old, yet depending upon the report, 20-30% of this cluster still do not have a will. So, it is as good a time as any to get your will drafted. In addition, most people who do not have wills also do not have powers of attorney (“POA”) for property and personal care in place. These vital documents should be drafted at the same time as your will.

If you have a will and POA’s already in place, then January is the perfect time to review whether your will reflects your current circumstances and/or current wishes. POA’s for personal care now may contain clauses for medical issues such as extraordinary measures or assisted death. You may want to consider whether your POA needs to be updated.

Where you have family obligations (spouse and/or children) whom you would wish to support if you died unexpectedly, then it is also time to investigate purchasing insurance (likely term or convertible term insurance if you want the lowest cost insurance).

If you already have insurance in place, you should review your policy to determine if the death benefit is still sufficient to support your family based on their current and expected lifestyle needs (including funding tuition for post-secondary school etc.).
2023 Tune-up

As noted above, for your estate affairs, your tune-up likely means initiating the drafting of wills and POA or updating these documents.

The reality of drafting a will or POA is that it usually takes many months to arrange appointments, fill out questionnaires and finalize these documents. So, making an appointment to start the process is a great first step for 2023. The same holds for insurance, the process usually takes several months, so contact your insurance advisor if you need insurance or want to increase your death benefit.

Year-end financial clean-ups are not much fun and are time consuming. But they can be extremely helpful in understanding your cash-flow, budgeting and retirement & estate planning. 

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

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