Tax Tip Thursday

Part 3 of our year end tax planning series focuses on Family Taxes.

Families with students

Make RESP contributions

RESPs allow for tax-efficient savings for children’s post-secondary education.

The federal government will pay into an RESP a Canada Education Savings Grant (CESG) equal to 20% of the first $2,500 of annual RESP contributions per child or $500 annually. While unused CESG room is carried forward to the year the beneficiary turns 17, there are a couple of situations in which it may be beneficial to make an RESP contribution by December 31.

Each beneficiary who has unused CESG carry-forward room can have up to $1,000 of CESGs paid into an RESP annually, with a $7,200 lifetime limit, up to and including the year in which the beneficiary turns 17. If enhanced catch-up contributions of $5,000 ($2,500 X 2) are made for just over seven years, the maximum total CESGs of $7,200 will be obtained. If you have less than seven years before your (grand)child turns 17 and haven’t maximized RESP contributions, consider making a contribution by December 31.

Also, if your (grand)child turned 15 this year and has never been a beneficiary of an RESP, no CESG can be obtained in future years unless at least $2,000 is contributed to an RESP by the end of the year. Consider making your contribution by December 31 to receive the current year’s CESG and create CESG eligibility for 2025 and 2026.

Take RESP withdrawals for students

If your (grand)child is an RESP beneficiary and attended a post-secondary educational institution in 2024, consider having Educational Assistance Payments (EAPs) made from the RESPs before the end of the year. Although the amount of the EAP will be included in the income of the student, if the student has sufficient personal tax credits, the EAP income will be effectively tax-free. The maximum EAP that can be taken in the first 13 weeks of post-secondary education is $8,000 for full-time students and $4,000 for part-time students.

If your (grand)child is an RESP beneficiary and stopped attending a post-secondary educational institution in 2024, EAPs can only be paid out for up to six months after the student has left the school. You may, therefore, wish to consider having final EAPs made from RESPs of which the student is a beneficiary.

Family members with disabilities

Contribute to a Registered Disability Savings Plan (RDSP) RDSPs are tax-deferred savings plans available for Canadian residents eligible for the Disability Tax Credit. Up to $200,000 can be contributed to the plan until the beneficiary turns 59, with no annual contribution limits. While RDSP contributions are not tax deductible, all earnings and growth accrue on a tax-deferred basis.

Federal government assistance in the form of Canada Disability Savings Grants (CDSGs), which are based on contributions, and Canada Disability Savings Bonds (CDSBs) may be deposited directly into the plan up until the year the beneficiary turns 49. The government may contribute up to a maximum of $3,500 CDSG and $1,000 CDSB per year of eligibility, depending on the net income of the beneficiary’s family.

Eligible investors may wish to contribute to an RDSP before December 31 to get this year’s assistance. There is a 10-year carryforward of CDSG and CDSB entitlements. RDSP holders with shortened life expectancy can withdraw up to $10,000 annually from their RDSPs without repaying grants and bonds. A special election must be filed with the Canada Revenue Agency (CRA) by December 31 to make a withdrawal in 2024.

Pay family medical expenses

A federal tax credit may be claimed when total eligible medical expenses exceed the lower of 3% of your net income or $2,759 in 2024. Provincial or territorial tax credits are also available. For medical expenses, it may be worthwhile to look for unclaimed expenses prior to 2024 as well. The medical expense tax credit (METC) may be claimed for eligible medical expenses that were paid during any 12-month period that ended within the calendar year (extended to 24 months when an individual died in the year.)

Alternative Minimum Tax

The Alternative Minimum Tax (AMT) system imposes a minimum level of tax on taxpayers who claim certain tax deductions, exemptions or credits to reduce the tax that they owe to very low levels.

Under the AMT system, there is a parallel tax calculation that allows fewer deductions, exemptions, and credits than under the regular income tax calculation. If the amount of tax calculated under the AMT system is more than the amount of tax owing under the regular tax system, the difference owing is payable as AMT for the year.

Generally, this AMT is recoverable over future tax years, but each circumstance is unique.

The AMT system was revised for 2024. The changes include raising the AMT rate, increasing the AMT exemption, and broadening the AMT base by limiting certain exemptions, deductions, and credits that reduce taxes.

Your AMT may be higher in 2024 than it was in 2023 if your taxable income is over $173,205, and you have income taxed at lower rates than ordinary income, or deductions or credits that reduce taxes payable, including:

• Capital gains

• Stock options

• Canadian dividends

• Unused non-capital losses, net capital losses, or limited partnership losses from prior years

• Non-refundable tax credits, including the donation tax credit.

Speak to your tax professional to see how AMT could affect your situation, and, if appropriate, to consider triggering a gain or exercising employee stock options.

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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.