On top of looming winter, Canadians have to deal with tax season this time of year. While taxes and dealing with your finances can be bland, we’re here to make it a little easier and understandable. Since finances are already at the forefront of Canadian’s minds right now, it’s an optimal time to review and adjust your general finances as well. In this year-end financial checklist, we offer a comprehensive list of what to consider on an annual basis.
Table of contents
- The importance of an annual financial check-in
- Year-End Financial Checklist
- When in doubt, reach out
The importance of an annual financial check-in
Most people have financial goals they’re trying to achieve. These could be short-term or long-term. For example, saving for your next vacation is likely a short-term goal. Whereas saving for a down-payment on a home or retirement may be a long-term goal.
Regardless of your specific goals, an annual financial check-up is important for tracking your progress. By revisiting your finances yearly, you can review how you’re doing and reassess your goals. Perhaps you got a raise at work and can contribute more to your savings. Alternatively, you may have incurred an unexpected expense and have to determine how to make up for the loss. It is also a great time to prepare for tax season and make sure there are no serious issues with your money.
FYI: If you need a bit of help with simplifying your financial planning, we have plenty of calculators to help you out!
Year-End Financial Checklist
Near the end of a calendar year, many Canadians begin to prepare for tax season. This time of year is typically referred to as “year-end.” Since taxes are already on the brain, it’s a good time to review the rest of your finances too. Below is a comprehensive list of items to review for your year-end financial checklist.
Take a look at your overall finances
Before deep-diving into specifics of your financial checklist, review your general finances. This overall review can help you later when you get into the particulars of your finances. Be sure to check the following items:
- Budget: How have you been tracking your budget? Are you overspending or underspending? Now is a good time to review your income and expenses. Tweak it where needed.
- Debts: What is your current debt load? Would debt restructuring help you manage payments better? Can you repay any debts in a lump sum?
- Emergency fund: How much is in your emergency fund? Does it need more or less money? A solid emergency fund benchmark is three to six months worth of expenses. If you struggled with unexpected expenses in the past, increasing your emergency fund might be a good idea.
- Automatic payments: Are there any automatic payments (for example, Netflix subscription or your Internet bill) to remove or adjust? ‘Set it and forget it’ is a helpful set-up for many to stay on top of their bills. However, you may end up paying more for a service than you thought. Or, maybe you’re paying for something you don’t use anymore. Eliminate any automatic payments that aren’t working for you anymore. You may also want to set up automatic payments for new vendors.
- Credit score: Do you know if your credit score is good, bad, or somewhere in between? Having a healthy credit history is the best way to make sure that, when the time comes, creditors consider you a reliable borrower. To make sure you are on the right track, it’s important to check your credit score annually.
Optimize your registered accounts and contributions
Canadians have access to registered accounts with special benefits and rules. As the name implies, these savings and investment accounts are registered with the Canadian government. The benefits are primarily tax-sheltering or tax-deferral. However, there are specific rules to consider, mainly related to contributions. The end of the year is a good time to review your registered accounts and contributions to ensure you’re optimizing them. Let’s take a look at the specifics.
Tax-Free Savings Account (TFSA)
Any interest, dividends, or other investment income earned in a TFSA is tax-free. There is a contribution limit on your TFSA. You can confirm your contribution room by calling the Canada Revenue Agency (CRA) or logging into your online CRA My Account. If you have room and want to contribute, the deadline is December 31, 2021. Any contribution made before this date will be taken into account for next year’s contribution room.
Registered Retirement Savings Plan (RRSP)
Like a TFSA, any investment income earned in an RRSP is tax-free. However, when you withdraw from an RRSP, you must claim it as income and pay tax on the amount. The silver lining is RRSP contributions are tax-deductible. This means in the year you make an RRSP contribution, your taxable income will be reduced by the same amount through the RRSP tax deduction. For this reason, there is a big incentive to make an RRSP contribution, reducing taxes payable.
The deadline to contribute is March 1, 2024.
Registered Education Savings Plan (RESP)
The more you contribute to your RESP, the closer you’ll get to saving for your child’s post-secondary education. Another incentive to contribute is to take advantage of the Canada Education Savings Grant (CESG), designed for low to middle-income families. If you are eligible, the government will contribute funds to your RESP as a benefit. The government matches 20% of your contributions to an RESP, up to $500 per beneficiary per year, and up to a lifetime max of $7,200.
The deadline to contribute is December 31, 2023.
Audit your investments and related fees
Once you’ve built savings, you’ll likely acquire some investments. At the end of each year, review how your investments are doing.
You may decide to sell some and claim the capital gain or loss. If you’re considering writing off a bad investment, use tax-loss harvesting to optimize your taxes. Tax-loss harvesting is the process of balancing capital gains and losses so you minimize taxes payable. Alternatively, you may choose to invest more of your savings acquired during the year.
On average, Canadians pay 2.23% in investment fees. In the United States, this amount is only 0.66%. That’s a drastic difference! With high investment fees in Canada, it can be a challenge to reach your investment goals at the timeline you want to. Be sure to review these fees at this time, and consider a change if needed.
Related Reading: What is Financial Planning?
Check your insurance coverage and update where needed
Insurance coverage is important for protecting your assets. After all, you spend hard-earned money on your home, cars, and other assets. If something were to happen to them, adequate insurance coverage can go a long way.
Most insurance providers give notice when your renewal is coming up. This may fall at year-end or another time in the year. Either way, it’s a good habit to review your insurance coverage and determine if you need less or more. Maybe you have some high value items in your home that aren’t insured but should be. Or, there could be a mistake in your insurance you never caught before. Whatever the issue may be, take a moment to review and update as needed.
Review and update your estate plan
An estate plan is the process of forming a detailed plan for how your assets will be distributed upon your death. Part of the process is planning to minimize tax liabilities. While it can seem morbid, estate planning is an important component of personal finance.
If you don’t have an estate plan, now is a good time to make one. This is especially true if you’ve had a big life event like getting married or having a child. It’s definitely better that you take the time now instead of letting others decide it for you! If you wish to create a will, you may also need to get a lawyer involved. There are, however, online services like Willful that help you draw up a simple legal will at a lower cost.
If you already have an estate plan, year-end is a good time to review and adjust where needed. For example, your net worth might’ve gone up or down, meaning distribution and related taxes need to be reconsidered.
Tax preparation and planning
Finally, preparing for tax season and tax planning should be on your year-end financial checklist. For the tax season, the main thing is to collect and organize paperwork, such as receipts, T4s, and bank statements. These documents will help you complete your tax return.
In terms of tax planning, this may be more complex. Tax planning is the process of preparing for upcoming tax liabilities. For example, maybe you earned more money than you expected this year and will have a larger tax burden. This means you need to create a plan for how you will pay your taxes. However, tax planning is also the process of navigating tax benefits and reductions.
Taxes can become complex depending on your individual circumstances. If you’re unsure of anything or need help understanding Canadian tax laws, consider hiring an expert.
When in doubt, reach out
Going over this year-end financial checklist might feel daunting. Even though you know the steps, putting them into practice isn’t always easy. If you’re struggling with your finances or aren’t sure how to achieve your goals, Advisorsavvy can help. We have a whole roster of financial professionals ready to help.