Tax Tip Thursday

Part 2 of our year end get things done list!

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.

Take TFSA withdrawals

If you withdraw funds from a TFSA, an equivalent amount of TFSA contribution room will be reinstated in the following calendar year, assuming the withdrawal was not made to correct an over-contribution.  So if you are considering withdrawing funds from your TFSA, do it at the end of the year and you will get the room back in the following room.

Be careful, however, because if you withdraw funds from a TFSA and then re-contribute in the same year without having the necessary contribution room, overcontribution penalties can result.

If you wish to transfer funds or securities from one TFSA to another, you should do so by way of a direct transfer, rather than a withdrawal and recontribution, to avoid an overcontribution problem.

Pay investment expenses

Certain expenses must be paid by year end to claim a tax deduction or credit in 2024. This includes investment-related expenses, such as interest paid on money borrowed for investing and investment counseling fees, for non-registered accounts.

You can’t claim a tax deduction for fees related to investments in a registered plan but it may still be worthwhile to pay fees for TFSA investments from outside the plan. For RRSPs and RRIFs, the decision is more complex.

Fees for registered plans.

Convert a portion of your RRSP to a RRIF once you turn age 65 If you’re at least 65 years of age but don’t have any pension income, consider moving $14,000 ($2,000 per year X 7 years) of your RRSP to a RRIF in the year you turn 65. You can withdraw $2,000 annually from age 65 through age 71 to take advantage of the annual pension income credit, so you’ll pay no tax on the income.

Convert your RRSP to a RRIF by age 71

If you turned age 71 in 2024, you have until December 31 to make any final contributions to your RRSP before converting it into a RRIF or registered annuity. It may be beneficial to make a one-time overcontribution to your RRSP in December before conversion if you have earned income in 2024 that will generate RRSP contribution room for 2025.

While you will pay a penalty tax of 1% on the overcontribution (above the $2,000 permitted overcontribution limit) for December 2024, new RRSP room will open up on January 1, 2025 so the penalty tax will cease in January 2025. You can then choose to deduct the overcontributed amount on your 2025 (or a future year’s) return. This may not be necessary, however, if you have a younger spouse or partner, since you can still use your contribution room after 2024 to make contributions to a spousal RRSP until the end of the year your spouse or partner turns 71.

Home buyers and owners First Home Savings Account

If you are a first-time home buyer who is resident of Canada and at least 18 years of age, the First Home Savings Account (FHSA) allows you to save on a tax-free basis towards the purchase of a home in Canada.

Starting in the year that you open an FHSA, you can contribute (or transfer from RRSPs) a total of $8,000 plus any carryforward available from the previous year (for a maximum of $16,000 in any year), and up to $40,000 during your lifetime. If you opened an FHSA in 2023 but did not yet make any contributions to the FHSA, you can contribute a total of $16,000 in 2024. You can claim a tax deduction for contributions within this limit, in the year the contribution was made (or a future year if not claimed previously).

Unlike RRSPs, contributions you make within the first 60 days of 2025 cannot be deducted in 2024.

Withdrawals to purchase a qualifying home, including withdrawals of any investment income or growth earned in the account, are non-taxable, just like a TFSA. You can also withdraw up to $60,000 from your RRSP using the HBP for the same home purchase. If you choose not to use the FHSA to buy a first home, you always have the option (until age 71 or 15 years after opening an FHSA, whichever comes first) of transferring funds from an FHSA to your RRSP or RRIF on a tax-free basis.

These transfers won’t affect your RRSP contribution room or the annual FHSA limit. Funds in your RRSP or RRIF will only be taxed upon ultimate withdrawal.

Make renovations for home accessibility

The non-refundable Home Accessibility Tax Credit (HATC) assists seniors and those eligible for the disability tax credit with certain home renovations.

The tax credit is equal to 15% of expenses towards renovations that permit these individuals to gain access to, or to be more mobile or functional within, their home, or reduce their risk of harm within their home or from entering their home.

The amount of eligible expenses is $20,000, so this credit could be worth up to $3,000. The HATC will apply in respect of payments made by December 31st for work performed or goods acquired in 2024. A single expenditure may qualify for both the HATC and the medical expense tax credit, and both may be claimed.

Make renovations to allow relatives to live with you

If you are a homeowner

The Multigenerational Home Renovation Tax Credit (MHRTC) can help you with the cost of creating a secondary unit in your home that will be occupied by a relative. The refundable credit is worth 15% of the value of your qualifying expenditures, up to a maximum spend of $50,000. So, if you spend $50,000 (or more) on the renovation, your credit is worth $7,500. A qualifying relative includes your (or your spouse’s common-law partner’s) parent, grandparent, child or grandchild, brother, sister, aunt, uncle, niece or nephew.

Renovations, alterations or additions to your home must be for a self-contained housing unit with a private entrance, kitchen, bathroom facilities and sleeping area. Expenses can only be claimed in the tax year in which the renovations are completed. The cost of pretty much all renovation materials and services, along with the cost of permits and the rental of equipment used in the qualifying renovation will qualify.

Unfortunately, if either (or both) of the medical expense tax credit (METC) and the home accessibility tax credit (HATC) were claimed for any expenses, you can’t double-dip and also claim the MHRTC for those expenses.

Speak to your tax adviser before undertaking renovations, as claiming the MHRTC may affect your ability to claim the principal residence exemption that could eliminate tax on capital gains when you eventually sell, or otherwise dispose of, your home.

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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.