Tax Tip Thursday

This week we are going to talk about some year end tips – this will be a 4 part series.  There will be some great ideas so be sure to tune in for all 4 weeks!

Tax planning should be a year-round affair. But as year-end approaches, now is a particularly good time to review your personal finances and take advantage of any tax planning opportunities that may be available to you before the December 31st deadline.

As we enter the final weeks of 2024, here are some tax tips you may wish to consider for:

1. Investors
2. Home buyers and owners
3. Families with students
4. Family members with disabilities
5. Individuals making gifts
6. Individuals expecting changes to tax rates; and
7. Business owners and employers.

Investors

Tax-gain selling to minimize the 2/3rds inclusion rate

As of June 25, 2024, the capital gains inclusion rate was increased to 66.67%.

Individuals and certain trusts (specifically, graduated rate estates and qualified disability trusts) are still entitled to the former 50% inclusion rate on the first $250,000 of capital gains annually.

The increase in the tax rate on capital gains over $250,000 is approximately 9 percentage points, depending on your province or territory of residence. You may, therefore wish to crystalize up to $250,000 of capital gains before year end, to take advantage of the lower 50% inclusion rate.

Crystallization for publicly traded shares is as easy as selling the position on the open market and immediately buying it back.

This is a key difference compared to tax loss selling (discussed below), generally done at year-end to realize capital losses that can then be applied against capital gains.

There’s no equivalent superficial gain rule that applies with tax-loss selling, meaning you don’t need to wait 30 days to buy back the stock on which you crystalized a capital gain.

When deciding whether to make this move, consider your expected rate of return and time horizon.

For example, if the tax that you don’t pay for 2024 was invested to earn 6% capital gains, compounded annually, it would take about eight years of tax-deferred growth, after-tax, to beat the tax savings attributable to the lower inclusion rate.

You should speak to your tax adviser for a full analysis before undertaking this strategy.

Tax-loss selling

Tax-loss selling involves selling investments in non-registered accounts with accrued losses at year end to offset capital gains realized elsewhere in your portfolio.

Any net capital losses that cannot be used currently may either be carried back three years or carried forward indefinitely to offset net capital gains in other years. In order for your loss to be immediately available for 2024 (or one of the prior three years), the settlement must take place in 2024. In 2024, settlement dates moved to T+1, meaning that for 2024, the trade date can be as late as December 30, 2024 to complete settlement by the Dec 31st year end.

If you purchased securities in a foreign currency, the gain or loss may be larger or smaller than you anticipated once you take the foreign exchange component into account.

If you plan to repurchase a security you sold at a loss, beware of the “superficial loss” rules that apply when you sell property for a loss and buy it back within 30 days before or after the sale date.  Be very careful of the exchange rates.  They can cause you a very large problem with the superficial losses.

The rules apply if property is repurchased within 30 days and is still held on the 30th day by you or an “affiliated person”, including your spouse or partner, a corporation controlled by you or your spouse or partner, or a trust of which you or your spouse or partner are a majority beneficiary (such as your RRSP or TFSA).

Under the rules, your capital loss will be denied and added to the adjusted cost base (tax cost) of the repurchased security.

That means any benefit of the capital loss could only be obtained when the repurchased security is ultimately sold. Transfers and swaps While it may be tempting to transfer an investment with an accrued loss to your RRSP or TFSA to realize the loss without actually disposing of the investment, the loss is specifically denied under our tax rules.

There are also harsh penalties for “swapping” an investment from a non-registered account to a registered account for cash or other consideration.

To avoid these problems, consider selling the investment with the accrued loss and, if you have the contribution room, contributing the cash from the sale into your RRSP or TFSA. If you want, your RRSP or TFSA can then “buy back” the investment after the 30-day superficial loss period.

Make RRSP contributions

Although you have until March 3, 20252, to make RRSP contributions for the 2024 tax year, contributions made as early as possible will maximize tax-deferred growth.

Your 2024 RRSP deduction is limited to 18% of income earned in 2023, to a maximum of $31,560, less any pension adjustment plus any previous unused RRSP contribution room and any pension adjustment reversal.

Delay RRSP withdrawals under the HBP or LLP

You can withdraw funds from an RRSP without immediate tax under the Home Buyer’s Plan (HBP) or the Lifelong Learning Plan (LLP). For the HBP, the 2024 Federal Budget increased the withdrawal limit to $60,000 (previously $35,000) as of April 16, 2024.

Under a temporary measure, for HBP withdrawals taken from January 1, 2022 through December 31, 2025, the first instalment will now be due the fifth calendar year following the year in which you withdrew the money. For other HBP withdrawals, the first instalment will continue to be due in the second calendar year after the withdrawal.

For the LLP, you and your spouse or partner can each withdraw up to $20,000 for your or your spouse’s or partner’s post-secondary education. With each plan, you must repay the funds in future annual instalments, based on the year in which funds were withdrawn.

If you are contemplating withdrawing RRSP funds under one of these plans, you can delay repayment by one year if you withdraw funds early in 2025, rather than late in 2024.

Make TFSA contributions

The TFSA dollar limit for 2024 is $7,000 but there is no deadline for making a TFSA contribution. If you have been at least 18 years old and resident in Canada since 2009, you can contribute up to $95,000 in 2024 if you haven’t previously contributed to a TFSA.   Unlike RRSPs, TFSA contributions need to be made by December 31.

Have questions about year-end tax planning?

Let us help make your year-end experience as easy and painless as possible.  Make An Appointment today!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.