It’s That Time of Year Again: December Tax Planning

Tax season is just around the corner and there are some key deadlines to be aware of. The new, higher capital gains inclusion rate could mean a bigger tax bill. Tax loss selling can help but any trades to do that must be settled by the end of December. Contact your advisor as soon as possible to discuss whether tax-loss selling makes sense for you.

Some Other December Deadlines

• December 30 is the last day to make a trade that will settle in 2024. Canada shifted from a two day settlement cycle to one day on May 27, 2024 and to realize a capital loss for your 2024 tax return the trade must settle this year.
• December 15 is the deadline for the final quarterly payment of 2024 if you pay personal income tax in installments.
• December 31 is the deadline for both First Home Savings Account (FHSA) contributions and charitable donations to generate 2024 tax deductions. RESP contributions must be made by
• December 31 to qualify for the 2024 government grant.
  If you turned 71 in 2024 December 31 is the final day you can both contribute to your RRSP and convert your RRSP to a RRIF.

Capital Gains and Losses

If you or your business realized capital gains in 2024 from non-registered investments, selling other holdings at a loss can help reduce your taxes. If you’re considering selling a specific investment to crystalize a capital loss but want to maintain exposure to the sector ask your advisor about buying a similar security at the same time.

Losses can be carried back to any of the three previous years (so 2021, 2022 and 2023) to adjust net capital gains and taxes you paid then. Alternatively, losses can be carried forward and used in future years. The last day to sell securities to generate a capital loss this year is Monday, Dec. 30th for publicly traded securities with one day settlements (Tuesday, Dec. 31st). Be sure to check with your advisor about superficial loss rules.

The New Inclusion Rate for Capital Gains

The higher inclusion rate is not yet law as of late November 2024 but it’s prudent to plan for it because the federal government has given no indication it will withdraw the proposal.

To recap:

• Under the proposed federal legislation, the portion of capital gains above $250,000 annually subject to tax increased from 50% to 66.67% for individuals and certain trusts on or after June 25, 2024, and for all capital gains realized in a corporation or trust.
• For individuals, the $250,000 threshold applies to 2024 gains minus losses and any unused losses from past years applied in 2024.
• Capital gains realized before June 25, 2024 and on or after that date will be treated differently. Gains prior to that date are subject to the 50% inclusion rate and those on or after that to the 66.67% inclusion rate.

A point to discuss with your advisor or tax specialist is when to apply unused capital losses from previous years. Losses carried forward may be worth more if applied against gains realized on or after June 25, 2024. A further consideration is whether you expect to realize capital gains in the next few years. They will be subject to the higher inclusion rate so holding back losses from previous years for use then could be beneficial.

Another factor could be an expectation of higher income next year. If you’re on leave, didn’t work for part of 2024 or expect to start a higher paying job in the future, crystallizing some capital gains now when you’re in a lower tax bracket could be a tax-efficient tactic.

The Alternative Minimum Tax (AMT)

The AMT levies a minimum level of tax on individuals whose 2024 taxable income is more than $173,205 and whose deductions, exemptions or credits bring their tax payable down to very low levels. The AMT system is a parallel tax calculation that allows fewer deductions, exemptions, and credits. If the AMT is higher than your “regular” tax calculation you may owe the difference. If you think the AMT applies to you ask your tax specialist to clarify if you have available deductions for lowering your taxable income below the threshold.

RRSPs

The RRSP contribution limit for 2024 is $31,560, or 18% of your earned income from 2023, whichever is less. Unused contribution room carries forward, so you may be able to contribute more. Check your 2023 CRA assessment notice or your online CRA account to confirm your available room. If you haven’t already done so, you can make 2024 RRSP contributions up to 60 days after the end of the calendar year. Because that date (March 1, 2025) falls on a Saturday, the contribution deadline for including in your 2024 tax return is Monday, March 3, 2025.

You can also contribute to a spousal (or common law partner) RRSP. A benefit of doing so is the tax efficiency of income splitting in the future when you and your spouse draw income from your RRIFs. Your contributions to a spousal RRSP are tax deductible but note that they use your contribution room.

First Home Savings Account (FHSA)

The FHSA is a new (2023) registered account for first-time homebuyers to save money for buying or building a house. The contribution room rises by $8,000 per year, with a lifetime contribution cap of $40,000. Contribution room starts in the year you open an FHSA account. Contributions are tax deductible, and, like an RRSP, unused room carries forward to the next year. A key difference from RRSPs is that the FHSA contribution deadline is the end of the calendar year.

FHSAs can be an effective way for parents or grandparents to help children aged 18 or older start saving for homeownership with a cash gift. There are no taxes on cash gifts in Canada. Opening an FHSA by December 31, 2024 immediately creates $8,000 contribution room. A few days later it will be 2025 and an additional $8,000 room is created. Note however that the tax deduction can only be used by the FHSA holder (so the child or grandchild).

The tax deduction can be carried forward, so if the younger family member does not have significant income yet those deductions can be applied in the future as income, and taxes, rise. A further benefit is that if a house is not purchased within 15 years from when the FHSA was opened the accumulated investments can be transferred, tax free, to the holder’s RRSP. The transfer does not use RRSP contribution room.

Some Other Tax Deductions and Credits

The following is a short selection of other tax deductions and credits you or your family members may qualify for. It is not a complete list. Consult your tax specialist or the CRA website for more detailed information on these and other tax savings opportunities.

Home office expenses: If you work from home, either as an employee or self-employed, you can deduct certain expenses, such as internet, phone and a portion of your utilities. If claiming expenses as an employee your employer will also have to compete a form.

First-Time Home Buyers’ Tax Credit: This tax credit could be worth up to $1,500 if you bought your first home in 2024.

Multigenerational Home Renovation Tax Credit: If you renovated your home to build a secondary living unit for a person aged 65 or older or someone between 18 and 64 with a disability you may qualify for tax credits on eligible costs up to $50,000.

Digital News Subscription Tax Credit: This tax credit of up to $500 is for subscriptions to Canadian news organizations.

This is only a brief summary of certain tax deadlines, deductions and credits. Please reach out to discuss your specific situation before implementing any tax planning strategies.