In January, we’re eager to tackle our New Year’s resolutions. Yet most of us give up on our goals by March. Researchers say one of the main reasons we don’t stick to our resolutions is that we don’t make our resolutions actionable and achievable.
So, if one of your financial resolutions is to clean up your 2022 financial affairs and transition to 2023, today I’m offering a blueprint for making these goals actionable and achievable.
For each financial topic or issue below, I’ll discuss what you need to do to clean up for 2022 and what you need to do in 2023 to get your finances in order.
Annual Expense Summary
In 2022, rapid increases in inflation and interest rates will cause a significant increase in spending for almost every Canadian. While you may feel the impact of price increases at the cashier, the pump, and on your monthly credit card statement, many of us have no understanding of the details and/or magnitude of these increased costs.
I use Quicken to reconcile my bank and track my expenses. A couple of weeks ago I printed out a summary of my 2022 expenses by category for that year. This exercise yielded some eye-opening data. This information is invaluable. It provides the basis for annual budgeting, income tax information (see below) and, among other uses, a starting point for determining your cash needs in retirement. Unless you’re using Quicken or some other tracking software or a custom-made spreadsheet, recreating your 2022 expenses will require significant work. So practically, you can start tracking your expenses in 2023.
During my professional career, I often discussed financial, retirement and estate planning with my clients. One of the most common questions I’m asked for these planning exercises (especially for those who have a lot of spending money), is what’s the breakdown of their monthly expenses? I would say that in at least 60%-75% of cases, people are not very aware of their actual expenses. If you are one of those people, I strongly recommend purchasing a personal finance software program that allows you to download your bank data (so it limits the time you spend tracking your expenses) or create a detailed Excel spreadsheet with vertical axes and expense categories. Month on horizontal axis. Fill out the spreadsheet at the end of each month.
By doing this spending tracker for 2023, you can budget, short-term plan, and plan your retirement spending.
Income tax items
I print from Quicken summaries of donations and medical receipts (which serve as a checklist of receipts I have or will receive) and summaries of expenses that are deductible for tax purposes, such as vehicle expenses. If you use your home office for business or work purposes (remember, if you’re not using the temporary flat system, you’ll need a T2200 from your employer), you’ll need to print out a summary of your home-related expenses.
If you claim vehicle expenses, you should get into the habit of checking your odometer reading on the first day of January every year. This allows you to calculate 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 (if you’re like most people, you can’t keep detailed daily mileage. Record the CRA requirement). Note that if you are censored, you may need to go back and complete an entry; Using an estimated percentage of business use based on your odometer reading usually won’t cut it with a CRA auditor.
Since I have a health insurance plan, I will start collecting receipts for my final insurance claim for the 2022 calendar year in January. If I don’t tackle this at the beginning of the year, I get busy and forget about it.
To simplify claims and reduce my administrative burden, I request that certain health care providers provide annual payment summaries. This ensures that I don’t miss any receipts and helps in claiming my medical expenses in my income tax return. You can do this for others: physical therapists, massage therapists, chiropractors and orthodontists—even some drugstores offer annual prescription summaries. This can reduce a file of 50 receipts to four or five summary receipts, depending on your personal healthcare expenses.
January or February is a good time to consider your income tax situation.
On an individual basis, if you are married or common-law, review your 2022 returns and estimated 2023 returns to determine whether there is a significant difference in taxable income and marginal tax rates between you and your spouse/partner. If the higher-earning spouse had significant assets in earlier years, I often recommend that you consider them Fixed rate loan. However, with the rapid increase in interest rates, the fixed rate of 1% in early 2022 has risen to 4% in the first quarter of 2023. Therefore, using a fixed-rate loan is no longer a slam-dunk decision, and you should discuss the qualifications of your accountant and/or investment advisor.
If the spouses have significant differences in marginal rates, you should review whether the higher-earning spouse has the ability to pay a reasonable salary based on the actual work performed by your lower-earning spouse. This is usually the case if the higher-earning spouse is self-employed or owns a company. If the higher-earning spouse is an employee, it may be problematic to pay your spouse unless your employer requires the aide and your T2200 reflects the need for the aide from your employer. If you are considering paying your spouse a salary, you should review this with your accountant.
If a spouse loses their job or earns a lower taxable income and owns an RRSP, consider whether to draw down the RRSP at a lower tax rate in 2023. You have to go through some rules (perhaps the husband’s contribution was made in the last two years, the withdrawal is taxed on the income of the higher-income spouse, so it may be a non-starter). Note that the statutory tax withheld on RRSP withdrawals may be less than the actual tax your spouse owes on their tax return.
If you own a corporation, you should contact your accountant to discuss whether your corporation has a tax-free capital dividend account and whether the corporation is subject to the small business clawback if the corporation holds a refundable tax credit. Then etc
When discussing your estate, the terms clean-up and tune-up are often synonymous with launch or renovation. Various reports suggest that a significant number of younger Canadians do not have the option – between 60-75% of those aged 18-45. This number improves dramatically for those over 55, but according to the report, 20-30% of this cluster still lacks the option. So, now is a good time to get your wish. Additionally, most people without a will do not have Powers of Attorney (“POA”) for property and personal care. These important documents should be drafted at the same time as your choice.If you already have a Will and POA, January is a good time to review whether your Will reflects current circumstances and/or current wishes. POAs for personal care can now contain clauses for medical issues such as extraordinary measures or assisted dying. You may want to consider whether your POA needs to be renewed.
If you have family obligations (spouse and/or children) you want to support in the event of your unexpected death, now is the time to look into purchasing insurance (term or convertible term insurance if you want less expensive insurance).
If you already have insurance, you should review your policy to determine if the death benefit is still adequate based on your family’s current and anticipated lifestyle needs (including funding for post-high school).
As mentioned above, you can start drafting a Will and POA or updating these documents for your estate affairs.
The reality of drafting a Will or POA is that it usually takes months to arrange meetings, fill out questionnaires and finalize these documents. So, it is a great first step to start meeting for 2023. The same goes 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 cleanses are not very fun and can be time-consuming. But they can be very helpful in understanding your cash flow, budgeting, and retirement and estate planning.
This site provides general information on various tax issues and other matters. This information is not intended to constitute professional advice and may not be tailored to a particular individual or situation. It is written by the author in their personal capacity only and cannot be attributed to the accountancy firm with which they are affiliated. It is not intended to constitute professional advice and neither the author nor any organization associated with the author accepts any responsibility for any reliance on the information contained herein. Readers should always consult their own professional advisors regarding their particular situation. Please note that blog posts are time sensitive and subject to changes in law or legislation.