Timely tactics to trim your tax exposure

Year-end is a time when we start thinking about winding down. However, in the field of tax planning, that annual deadline is when we need to take stock, and potentially take action.

We'll look at tax saving opportunities prompted by both time of year and time in your life, to help you keep your finances on track. These tips are high-level, so please inquire further with your financial advisor and tax professional to determine how they may apply in your situation.

Getting a head start for next year

1. Tax refunds and source deductions
Many people receive tax refunds after making their annual personal RRSP contributions, usually because their employer was unaware of these non-workplace contributions when determining payroll deductions.

You may wish to begin 2025 by filing Form T1213 Request to Reduce Tax Deductions at Source to have your employer reduce its withholding (if you qualify), allowing you the use of that money during the year, rather than it being a non-interest-bearing deposit with Canada Revenue Agency while you await your refund.

Saving and retirement

2. Building and accessing retirement savings

RRSP contributions
Contributions to your registered retirement savings plan (RRSP) can be claimed against your current year’s income when you file your tax return next spring. You can deduct contributions made during the year or in the first 60 days of the coming year. Some people wait until that 60-day deadline to make their entire contribution.

• Consider making contributions throughout the year, perhaps by automated weekly or monthly deposits. This can get the tax sheltering growth working for you 12 to 14 months sooner than by lump sum at the deadline.
  

HBP – Home Buyers’ plan
The Home Buyers’ Plan (HBP) can be used to withdraw up to $60,000 (increased from $35,000 in the 2024 Budget) from your RRSP without triggering tax. You have fifteen years to repay this to your RRSP starting the second year after your first withdrawal. Any unrepaid amount is brought into income in the year when it was due to be repaid.

• If you will be a first-time purchaser using the HBP next year, consider delaying your withdrawal until the new year if possible. This will buy you an extra year before your first required repayment in 2027, rather than 2026.

LLP – Lifelong Learning Plan
The Lifelong Learning Plan (LLP) allows you to withdraw/borrow up to $10,000 in a calendar year from your RRSP, and up to $20,000 in total. You have ten years to repay the amount to your RRSP starting the earlier of the second year after you cease to be a student or five years after your first LLP withdrawal. Any unrepaid amount is brought into income in the year when it was due to be repaid.

• If you are beginning a qualifying program next year, considering delaying your withdrawal until the new year if possible, to push the 5-year repayment start year to 2030, rather than 2029.
• Repayment may still be required earlier if you cease to be a student before 2028.

3. Age 71, born in 1953 – Maturing RRSPs
If you turn age 71 this year, you can no longer make contributions to your RRSP after December 31, though you may contribute to a spousal RRSP if your spouse is under age 71. Also by year-end, you must convert any RRSP into a registered retirement income fund (RRIF) or registered annuity, or take the lump sum as income.

• If you turn age 71 this year, be sure to convert or cash-in RRSPs before year-end.
  • If you have earned income this year, your contribution room credit does not arise until after year-end.
  • If you have a spouse under age 71, you may use this room in the new year to contribute to a spousal RRSP.
  • If not, you could intentionally over-contribute the amount in December, incur the 1% over-contribution penalty for one month, but then be back onside in January when the contribution room is credited.

4. Age 65, born in 1959 – Optimizing pension credit
The pension credit saves you at least $350 (varies by province) on the first $2,000 of eligible pension income (EPI) received in a year. Under age 65, EPI is generally limited to registered pension plan (RPP) income. Most RRIF income will only qualify from age 65, and withdrawals directly from an RRSP don’t qualify no matter your age.

• If you turn 65 this year, convert enough of your RRSP holdings to a RRIF before year-end to take advantage of this tax credit. Unused pension credits do not carry forward, so if you don’t use it, you lose it.

5. TFSA for general savings
A tax-free savings account (TFSA) allows tax-free investment growth and tax-free withdrawals. The current annual allotment of TFSA room is $7,000 for Canadian residents who are age 18 or over. Cumulative room since the program’s inception in 2009 is $95,000 in 2024. Unused room carries forward indefinitely, understanding that a given person’s room begins accumulating from the year the person turned 18. A key feature of the TFSA is that withdrawals taken in a year entitle the person to a dollar-for-dollar re-contribution credit the following January 1^st.

• Use some excess cash to make use of your TFSA room, or re-position money currently in a taxable account.
• If you’re planning a TFSA withdrawal for an upcoming purchase early in the new year, consider doing that before year-end so that the re-contribution credit arises this January 1, 2025, and not 365 days later.

Spouses and families

6. Spousal income tax sheltering Strategic spousal RRSPs
Normally, withdrawals from a spousal RRSP are taxable to the plan’s annuitant/owner. However, if the withdrawal occurs in the year of contribution or the following two calendar years, the contributor spouse must include the withdrawn amount in income and pay the tax. Contributions in the first 60 days of a year apply to that calendar year, not the year for which a deduction is taken.

• Consider making spousal RRSP contributions before year-end if you intend to make a strategic early withdrawal. This will allow withdrawals without attribution in 2027, versus 2028 if the contribution is made in the first 60 days of 2025. Either way, the deduction for the contribution can be applied against 2024 income.
  

Gift to spouse for TFSA
If one spouse gives money to the other for TFSA investment, there is no attribution while investments grow, nor when withdrawals are taken.

• As a complement or alternative to spousal RRSPs, a gift from one spouse to the other to make use of their annual TFSA room is a simpler way to share the wealth, and without concern for any year-end issues.

7. Spouses – Prescribed rate loans
On a gift from one spouse to the other, tax on non-registered investment income is attributed (i.e., taxable) to the giver, but that will not occur if a properly documented loan is used. To qualify, interest must be charged by the lending spouse to the borrowing spouse at the rate prescribed quarterly by tax regulations. The rate was 1% for most of the time from 2009 until 2022, but has since risen to 5% for 2024-Q3.

• This loan strategy is most effective when interest rates are low. The current prescribed rate in the mid-single digit percentage range may make it challenging for a newly established loan to be an economically feasible strategy for a couple, given that the interest is income to the higher income lending spouse. A tax professional can provide analysis and recommendations.
• Importantly, a loan can keep the rate set at its inception, as long as all interest payments are paid during the year to which the interest relates, or no later than the following January 30. Thus, while a couple may determine that a new loan is not worth pursuing under present conditions, they should take care that existing loans at lower interest rates are properly serviced, else their interest cost could be elevated to the current, less desirable level.

8. Children’s education

RESP contribution key ages
The Canada education savings grant (CESG) matches up to 20% of what a subscriber contributes to a Registered Education Savings Plan (RESP). Generally, this is maxed at $500 on $2,500 of annual contributions, but if unused contribution room is carried forward, you can get up to $1,000 of CESG for a $5,000 annual contribution. If you want to establish a consistent saving schedule to optimize use of the $7,200 lifetime CESG limit:

• For a 3-year-old (born in 2021), begin contributing $2,500 annually to receive the $500 grant for 14 years, then contribute $1,000 in the year the child turns 17 to get the last $200.
• For a 10-year-old (born in 2014), you still have time to get the lifetime limit by contributing $5,000 annually to receive $1,000 in grants for 7 years, then contribute $1,000 in the year the child turns 17 to get the last $200.

Otherwise, if other financial priorities have limited your RESP participation, still try to preserve grant availability in the last couple of eligible years. Specifically, to obtain CESG for a 16- or 17-year-old child, there must be at least $2,000 total contributions by age 15 or at least $100 contributed in any four (not necessarily consecutive) preceding years.

• For a 12-year-old (born in 2012) for whom no contributions have yet been made, a $100 contribution this year and each of the next three years will keep the window open for CESG at ages 16 and 17.
• For a 15-year-old (born in 2009) for whom no contributions have yet been made, a contribution of $2,000 before year-end may be necessary to be entitled to any further CESG at ages 16 and 17.
• For a 17-year-old (born in 2007), this is the last year for grant eligibility.

Interest on student loans
Interest is deductible to a student-payor on loans under the Canada Student Loans Act, Canada Student Financial Assistance Act, Apprentice Loans Act or equivalent provincial/territorial government programs. If the individual has insufficient income to make use of the deduction in a year interest is paid, the deduction cannot be transferred to a parent (or any other person), but it can be carried forward and claimed up to five years later.

• Your 2024 return is the last opportunity to claim interest you paid on your own student loan in 2019.

Homeowners and house-hunters

9. FHSA – First Home Savings Account
The First Home Savings Account (FHSA) became available in 2023 to allow prospective first-time home buyers to make up to $8,000 in annual tax-deductible contributions, up to a $40,000 lifetime limit. Investments grow taxsheltered, and withdrawals are non-taxable when applied to the purchase of a first home. As originally announced, the FHSA could not be used together with the RRSP HBP (discussed in #2 above), but the final rules do allow both programs to be used for the same home purchase.

• A limited carryforward rule allows up to $8,000 of unused room to be used in a later year, in addition to that later year’s own $8,000 room. For someone who does not have cash presently but expects to have it after year-end, an account could be opened before year-end, which would then allow up to $16,000 of deposits in the new year.
  
• FHSA contributions are credited in the calendar year of contribution, though a taxpayer may defer claiming the deduction to a later year. If you expect to be in a higher tax bracket next year or later but have cash now, you can make a current contribution, to get the tax sheltering working early, and claim the deduction in future.
• Unlike RRSP contributions made in the first 60 days of a year that can be claimed against the preceding year’s income, FHSA contributions cannot be claimed against an earlier year. If you want to claim a deduction against the current year’s income, contributions must be made before year-end.
  
  

10. Working from home

If you are an employee who is required to work from home, you may be able to claim home office expenses if either:

1. The workspace is where you mainly (more than 50% of the time) do your work, or
2. You use the workspace only to earn your employment income, and you also have to use it on a regular and continuous basis for meeting clients, customers, or other people in the course of your employment duties.

• • If you work from home, your employer completes Form T2200 and you complete Form T777 - Statement of Employment Expenses. This latter form provides some guidance on what types of expenses may be claimed. Check with your employer about the T2200 well before year-end to make sure you have it in your hands in plenty of time to complete your tax filing in the new year. You cannot claim any expenses that were or will be reimbursed by your employer

For historical note only – For 2020 through 2022 during the COVID-19 pandemic, two streamlined methods were allowed: 1) Simplified method that allowed a claim of $2 per day working from home, or 2) Completion of the Form T2200S and Form T777S - Statement of Employment Expenses for Working at Home Due to COVID-19. For 2023 on, only the regular Form T2200 and Form T777 can be used, as discussed above.

11. Relocating within Canada

Provincial residence at year-end
Annual income is taxed in the province where you are resident on December 31 of the year. Specifically, there is no apportionment of days between the two provinces based on the date you move.

• If you are moving to a higher-tax province, it may be beneficial to delay your move until the new year. Or if you are moving to a lower-tax province, a move before year-end may better serve your interests.

Moving expenses deduction
You can claim a deduction for moving expenses if you moved to be at least 40 kilometres closer to work, to run a business or to attend post-secondary school full-time. This includes most closing costs of selling a home (including real estate commission), travel, transportation, storage and up to 15 days of temporary lodging.

• If you are moving for work purposes, you can deduct eligible moving expenses from the employment or self employment income you earned at your new work location.
• If you are moving to attend full-time post-secondary school, you can only deduct these expenses from scholarships, fellowships, bursaries, prizes and research grants required to be included in income.
• Unused expenses may be carried forward, but you cannot carry moving expenses back to a prior year.

Principal residence exemption
Under the principal residence exemption (PRE), there is no tax on capital gains for a qualifying property. For decades there was no formal reporting procedure, but since 2016 a disposition must be reported on the income tax return for the year of disposition. Failure to report properly could lead to penalties or even a denial of the PRE.

• If you sold an eligible property this year, obtain your closing file from your real estate lawyer before year-end, including the return of any documents you provided, to be ready to claim the PRE on your income tax return.

Disability Needs

12. Registered disability savings plans
A registered disability savings plan (RDSP) allows tax-sheltered investment growth for a person who is eligible to claim the disability tax credit. The lifetime contribution limit is $200,000, with no annual limit. Government support is available in the form of up to $70,000 of grants at a matching rate as high as 300%, and $20,000 of free bonds.

• For a 59-year-old (born in 1965), this is the last year that a plan may be opened.
  
• For a 49-year-old (born in 1975), this is the last year of government support eligibility

13. Home accessibility tax credit
For persons aged 65 and over who claim the disability tax credit, the federal home accessibility tax credit (HATC) can be claimed on renovations that make your home safer or more accessible/functional for you. It can be claimed
on eligible expenses up to $20,000 annually. This can lower your tax bill by as much as $3,000, and it could be even more as the same expense may qualify and be claimed under both the HATC and the medical expense tax credit.

• Collect and keep receipts to support your claim.
• As it can be claimed each year, a large renovation project might be planned to straddle a year-end to maximize
  the credit value.
• A given payment may concurrently qualify for the HATC and the medical expense tax credit (discussed next), allowing both credits to be legitimately claimed on the same outlay.

14. Medical expense tax credit
The medical expense tax credit (METC) may be claimed on qualifying medical expenses over the lesser of 3% of net income and an indexed annual dollar limit. For 2024, the federal limit is $2,759, with provincial limits ranging between about $1,600 and $2,800. The credit may be claimed for any 12-month period ending in the tax year.

• If you have significant medical expenses, either in the last year or anticipated in the coming year, total them up and take careful note of the dates involved. While keeping your health/medical needs in the forefront, this could help you to decide when to book procedures, or subscribe and pay for qualifying devices and services.

15. Multigenerational home renovation tax credit
Under the multigenerational home renovation tax credit (MHRTC), a homeowner may receive up to $7,500 related to the construction of a secondary unit for a related person who is either an adult 18+ who qualifies for the disability tax credit, or a senior 65+. A “secondary unit” is a self-contained housing unit with a private entrance, kitchen, bathroom facilities and sleeping area. As a refundable credit, it is paid regardless whether the taxpayer owes tax in the year, calculated as 15% of up to $50,000 in eligible renovation and construction costs.

• The credit may be claimed once in the lifetime of a qualifying individual, being the person for whom the secondary unit is constructed.
• The homeowner-taxpayer claims the MHRTC in the taxation year when the renovation is completed, regardless when the project began. It cannot be spread across multiple projects in different tax years.

Investors and markets

16. Capital gain/loss selling
A capital gain arises when an asset is disposed for more than the taxpayer paid for it, or more technically it’s the difference between fair market value (FMV) and adjusted cost base (ACB). Common examples are real estate, an interest in a business or shares of a corporation, and marketable securities held in a non-registered investment account (also known as an open account or cash account).

Our system includes only a portion of capital gains in income, known as the “taxable capital gain”. The capital gains inclusion rate was increased in the 2024 Budget from 1/2 to 2/3 for dispositions after June 24, 2024, though the 1/2 rate remains available for individuals on the first $250,000 of capital gains in any year. For trusts and corporations, the 2/3 rate applies to all capital gains.

Returning to personal non-registered accounts, the sale of an investment can result in either a capital gain or capital loss. When a loss is realized, it must first be applied to reduce capital gains in that year, with the taxpayer then having the option to carry any excess back to apply against capital gains in any of the three preceding years, or carry it forward indefinitely.

• Your 2024 tax return is the last year you can carry capital losses back to apply against 2021 capital gains. You do this by amending that earlier tax return, thereby obtaining a refund when it is refiled.
• The relevant tax date is the settlement date, which is later than when the trade occurs. In the 1970s when trades required physical delivery of securities certificates, the settlement date was set at five days, or T+5. As technology developed, we moved to T+3 in 1995, to T+2 in 2017, and as of May 27, 2024 we are at T+1.
  • • A sale on Monday, December 30 will settle on Tuesday, December 31, the last business day this year.
    • HOWEVER, check with your financial institution on its operational processing cutoff date, as it may need extended time to handle the potentially high volume of year-end transactions, which could require instructions to be received by mid-December or earlier.
• Take care not to re-acquire the identical security 30 days before or 30 days after a capital loss transaction, as this will trigger the superficial loss rule. This applies to you, your spouse, corporations you control, and trusts of
  which you are the main beneficiary (such as your tax-sheltered RRSP, RRIF or TFSA). The loss will be denied and added back to the ACB of the acquired property. Be especially careful if that acquisition is in one of those registered accounts, as the concept of ACB does not apply there, so the loss becomes unusable.

17. Interest and fee expenses
An investor may claim a tax deduction for investment management fees and for interest on debt used to acquire business or investment assets (though not for RRSPs, RESPs or other non-taxable plans).

• To qualify, investment fees and interest must be paid (not just billed) before year-end.

18. Mutual funds at year-end
Mutual funds distribute their annual income to investors as of a record date near year-end, often mid-December. If you purchase late in the year but before the record date, you may be taxed on the full year’s distributed income, despite only being a holder briefly in that year. This is not a concern for non-taxable RRSPs, RRIFs or TFSAs.

• If you wish to purchase a mutual fund in a non-registered account, it may be preferable to delay until the new year. While the early tax bill will eventually be accounted for in the investment’s adjusted cost base when you have a later disposition, you are out of pocket for the cash for the early tax payment in the present.

Business matters

19. TOSI and family dividends
When dividends from a private corporation are paid to family of a principal shareholder, the tax-on-split-income (TOSI) may cause them to be taxed at top bracket rate, undoing the intended income splitting. TOSI has applied to minors since the 1990s, and since 2018 has applied to adult children and spouses, subject to some exceptions. As many of these exceptions hinge on the ages of those involved, more opportunities for family dividends will be available as threshold ages approach.

• You may wish to wait until a minor child reaches the age of 18 to pay dividends. After that age, TOSI will not apply if that recipient is engaged on a regular, continuous and substantial basis in the business, which usually means an average of 20 hours per week during the part of the year that the business operates.
• For an adult child who does not meet the preceding test, you may wish to wait until that child reaches age 25, as TOSI will not apply to a dividend to a child over age 24 who owns shares with at least 10% of the voting rights
  and value of the corporation (though this does not apply to a service business or professional corporation).
• TOSI will not apply on a dividend to a spouse if the principal shareholder is over the age of 65.
• An adult child or spouse may be entitled to a “reasonable return” based on work performed, contributed capital or risk undertaken, or qualifies for “safe harbour capital return”.
• Consult a tax advisor to discuss how to meet these definitions.

20. Acquiring capital assets
Capital cost allowance (CCA) is the part of the tax system that accounts for depreciation when calculating taxable business income. Each capital asset class has a maximum percentage rate that may be claimed as an annual deduction. For most CCA classes, only half of the rate may be claimed in the first/acquisition year, no matter when in the year the asset was purchased.

• Consider making capital purchases close to calendar year-end. While the first-year rule will apply, the actual outlay may be within days of year-end, making the claim of a half year’s CCA a reasonable proposition as a smart way to manage cash flow.

21. Bonuses before year-end
Employee bonuses from a corporation are deductible in the corporation’s tax year when declared, but do not have to be taken into the employee’s income until actually paid. That payment can be as late as 179 days after the corporation’s year-end.

• Have your corporation declare (and deduct) a bonus to you before 2024 year-end to defer income recognition to you as employee into 2025, for which the associated tax is reported and paid when you file your income tax
  return as late as April 30, 2026.

Estate planning and charity

22. Charitable giving

Donations before year-end
The tax credit for charitable donations is one of the most generous tax benefits available. Initially it is at the lowest tax bracket rate, but then jumps to the high bracket rates on annual donation amounts over $200.

• Unlike RRSP deductions which may be deductible when made in the first 60 days of the following year, donations must occur in the calendar year. Make sure the charity receives your donation before December 31 – and that your donation receipt reflects this – if you want to claim the charitable donation credit in 2024.

Donating securities in-kind
Rather than simply making a cash donation, you might consider giving appreciated marketable securities, such as stocks, bonds or mutual funds. If these securities are donated in-kind from a non-registered account to the charity, a special rule allows any as-yet unrealized capital gains to be effectively negated by the donation. With the increase in the inclusion rate on capital gains from 1/2 to 2/3 on annual gains over $250,000 as of June 25, 2024, this will be an especially important consideration for very large donations.

• For in-kind donations, confirm that the charity is willing and able (according to its bylaws) to accept securities inkind, and that it has a brokerage account ready for the purpose.
  
  • Technically, the trade date must be no later than Monday, December 30 this year, for the transaction to meet the T+1 settlement date on Tuesday, December 31, the last business day of the year.
  • HOWEVER, allowance must be made for the charity’s internal approval process before the securities can be received, and for your financial institution to coordinate with the receiving financial institution to complete the transactions in a timely manner. It would be prudent to inquire at least two months before year-end to assure that all deadlines can be met.
    
    

23. Registered plan rollovers on death
On death, RRSPs and RRIFs may be rolled over to a spouse or a financially dependent child or grandchild, without tax applying on the transfer. If the transfer does not happen by December 31 of the year after the year of death, the amount will be taxable to either the estate, or if the estate is insolvent then to the named beneficiaries on the
RRSP/RRIF contract.

• If you are an executor of the estate or named plan beneficiary of someone who died in 2023, make sure that
  steps to transfer the plan proceeds to the appropriate beneficiary are completed before the end of 2024, to assure that the rollover applies, rather than the full value of the plan being immediately taxable in a single year.

24. A good time to review Wills and Powers of Attorney
While not a tax issue, year-end is a good time to think about your estate planning. We tend to see much more of our family during the holiday season, which is a built-in reminder of what estate planning is all about – the people around you, and your relationships with them.

• As you review your tax planning, take time as well to consider whether any changes in your property might cause you to revise when or how you intend to provide for or share with those people.
• Also think about the changes you and others have undergone over the last year and what the next year may have in store, then revisit your estate planning so you’re comfortable that it continues to fit your needs.