As we approach year-end, we look at seven strategies that may help to minimize your 2024 tax liability. Some of these strategies are complex. Consult your financial advisor or qualified tax advisor before implementing them.
1. Have you maximized your TFSA contribution for the year?
The 2024 Tax-Free Savings Account (TFSA) contribution limit is $7,000. You may have unused contribution room if you haven’t maximized your contributions in previous years. If you’ve never contributed to a TFSA, you can contribute up to $95,000 if you:
- attained the age of 18 in 2009, and,
- have been a Canadian resident since that time.
Do you have contribution room available? Speak with your advisor to see if moving some of your investments from an open, non-registered (tax-exposed) account to a TFSA would benefit you. Your advisor can help you weigh the downside of potentially triggering capital gains on the transfer against the benefit of sheltering all future income and growth from taxes. A capital loss on a transfer to a TFSA would be denied based upon our income tax legislation. Talk to your advisor before considering transferring such investments.
Do you want to know whether to invest in a Registered Retirement Savings Plan (RRSP) or a TFSA? It’s important to weigh the enhanced flexibility in a TFSA versus the tax deductibility of an RRSP contribution. Other considerations include your current and anticipated future income levels, age, and marginal tax rate. Also bear in mind that while RRSP/Registered Retirement Income Fund (RRIF) withdrawals are fully taxable, TFSA withdrawals are tax-free.
If you plan to withdraw funds from your TFSA soon, consider doing so before the end of 2024. TFSA withdrawals are added back to your available TFSA contribution room, but not until the year after the withdrawal. For example, withdrawals in 2024 are added back in 2025. If you wait to make the withdrawal until 2025, you don’t get the room back until 2026.
Your advisor can help you make these choices.
2. Tax-loss selling
Tax-loss selling is a popular “silver lining” year-end strategy used to realize tax benefits associated with underperforming investments. Are you holding securities in a non-registered account that are valued at less than their adjusted cost base? Don’t forget that a disposition prior to the end of the calendar year would result in a capital loss. This capital loss can then be used to offset taxes owing on capital gains realized during 2024. If you have any capital losses remaining in 2024, they can be carried back. Then, these losses can be offset against capital gains in any of the three prior taxation years and, in particular, if you had no capital gains in 2024. To realize and use the capital loss in 2024, the transaction must settle before the end of the calendar year.
Talk to your advisor or a qualified tax specialist to understand the tax implications and potential pitfalls of this strategy. For example, the “superficial loss” rules within the Income Tax Act may result in a capital loss being denied. These rules are complex and beyond the scope of this article.
3. Deferring realization of a capital gain
One common year-end tax strategy is to defer realizing capital gains until the next calendar year. For example, by deferring the sale of a security with an unrealized gain until January 1, 2025, the tax associated with the gain isn’t due for payment until April 30, 2026. If you expect your marginal tax rate to be lower in the next calendar year, additional tax savings could be available. For example, a taxpayer going on maternity/paternity leave in 2025 will likely have lower income than in 2024.
However, changing tax rates from year to year and the potential change in your capital gains inclusion rate may make deferral less attractive. Your advisor can help you understand if this strategy can work for you.
4. RRSP contributions – especially if you turn 71 this year
While you have until March 1, 2025, to make RRSP contributions for 2024, you may want to consider contributing earlier to optimize tax-deferred growth. Your RRSP matures at the end of the year you turn 71, with no additional contributions permitted to your RRSP, thereafter. Typically, by December 31 of the year you turn 71, people choose to roll the funds into a RRIF. However, there are other options, such as purchasing an annuity and/or withdrawing cash. All three of these options can be used alone or in combination with any of the others.
If you turn 71 in 2024 and you have earned income, it may be worth your time to make an over-contribution in December of 2024. An over-contribution is one that exceeds your annual contribution limit. There will be penalties associated with the contribution above the $2,000 over-contribution buffer. Once the calendar flips to January 1, 2025, your contribution room will increase based on your 2024 earned income. Then, the overcontribution will likely be absorbed and no longer apply. It will be critical for your advisor to assess your 2024 earned income figure so the over-contribution penalty tax only applies for just December of 2024. The penalty tax is 1% of the excess contribution, per month. For the strategy to work, the additional tax savings from the RRSP deduction for 2024 will have to exceed the assessed penalty. Any contribution would need to take place before converting the RRSP into a RRIF.
If this over-contribution strategy isn’t used, the contribution room created for 2024 income will be lost, unless you have a spouse or common-law partner who has not attained the age of 71. You can contribute to a spousal RRSP until the end of the year they turn 71.
5. RESP contributions
The lifetime contribution limit for Registered Education Savings Plans (RESPs) is $50,000. And the first $2,500 contributed annually will qualify for the maximum $500 annual Canada Education Savings Grant (CESG). If you make the entire $2,500 lump-sum contribution prior to the end of the year, your child can still access the full grant for 2024. The entire contribution plus the grant grows tax-deferred inside the RESP. The vehicle serves as a means for the child to access all of the contributed capital (including grants), plus growth, usually, on a tax-advantaged basis in the future, subject to qualifying education-related parameters.
The maximum lifetime CESG is $7,200 and is available only up to age 18. If you’re late to set up an RESP for a child, you can catch up on contributions, annually, allowing a maximum of $1,000 in grants to be paid in any one year. This is particularly important in attempting to maximize the grants received to the child’s benefit.
If your child or grandchild turned 15 in 2024, and has never been the beneficiary of a RESP, for which at least $100 in annual contributions has been made for any four prior years (and not withdrawn), no CESG may be claimed in the future. If that’s the case, to ensure future CESG claims are possible, there are two options:
- $2,000 must be contributed to their RESP prior to the end of the year that they turned 15; or
- If there have been three prior years with contributions of at least $100, only $100 in RESP contributions will be required in 2024.
Additional benefits are available for lower-income families. As well, some other jurisdictions in Canada offer programs focused on saving for a child’s training or post-secondary education.
6. Charitable contributions
Did you contribute to a registered charity by December 31, 2024? If yes, you can likely receive a donation credit for your 2024 tax year. Be sure to obtain a tax receipt from the qualifying charity. The credit is:
- 15% of the donation for the first $200 in donations each year,
- and 29% thereafter (up to 33% for those in the top tax bracket).
Provincial credit rates vary but generally increase at that threshold as well. Donations made by you and your spouse or common-law partner can be pooled and claimed on one tax return.
A popular strategy is to donate securities with an unrealized capital gain in-kind to a charity. Are you unsure whether to between donate cash or securities in-kind? Donating a security in-kind may be the more tax-efficient option as you may avoid a capital gain on the disposition. You’ll also receive a tax receipt for the fair market value of the security at the time of donation. Talk to your advisor to ensure that you account for the processing time to take advantage of such a strategy prior to year-end. Also, check with the charity to confirm that they accept donations of this nature.
7. Consider timing of investment purchases
Be aware of the distribution date for whatever mutual fund you may have on your radar. This is especially true when purchasing within a non-registered account. Income earned in a non-registered account is exposed to taxes. When it comes to mutual fund trusts or exchange traded funds (ETFs), taxable distributions will occur on distribution dates. And, in many cases, they will arise near the end of the calendar year. Each distribution includes accumulated underlying realized income up to that date on a proportionate basis for investors. So, if you purchase a fund at a given time, you’re buying into the accumulated earnings in that fund up to the purchase date.
For new purchases, ask your advisor if you should consider buying after the distribution date. It may help to minimize your tax bill in the year of purchase. One alternative would be to invest in a segregated fund contract. In that case, the income earned is based upon the period for which you are invested.
This article is meant to provide only high-level insights as an individual Canadian taxpayer approaches the end of the calendar year and does not constitute nor is a substitute for professional tax advice. Please ensure you work with your team of advisors to optimize your year-end tax position while considering all elements of your individual financial plan.
Information contained in this article is provided for information purposes only. It’s not intended to provide or be a substitute for professional, financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard. It also does not constitute a specific offer to buy and/or sell securities. You should always consult your financial advisor or tax specialist before undertaking any of the strategies discussed in this article to ensure that all elements and your personal circumstances are taken into consideration in developing your individual financial plan. Information contained in this article has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy and SLGI Asset Management Inc. disclaims any responsibility for any loss that may arise as a result of the use of the strategies discussed.
