Year-end tax planning in Canada can help minimize your tax liability for the year and ensure you're taking full advantage of deductions, credits, and tax-saving strategies. Here are several key strategies to consider before the year ends:
1. Maximize RRSP Contributions
Deadline: Contributions made by March 1 of the following year can be applied to your previous year's income.
Contributing to a Registered Retirement Savings Plan (RRSP) can reduce your taxable income and lower your tax bill for the current year. If you have unused RRSP contribution room, it’s a good time to top it up.
Tip: If your income is higher this year, contributing to an RRSP can give you a significant tax deduction, especially if you're in a higher tax bracket.
2. Use Your TFSA (Tax-Free Savings Account)
While TFSA contributions are not tax-deductible, any income or gains earned inside the account are tax-free, even when withdrawn.
The contribution limit for 2024 is $7,000, but if you have unused room from previous years, you can contribute more.
Tip: If you're nearing the contribution limit, consider making a deposit before the year ends to take full advantage of tax-free growth.
3. Charitable Donations
Donations to registered charities are eligible for tax credits.
Supercharge your donation: Combine donations over multiple years, or donate appreciated securities (stocks, bonds, etc.) instead of cash to avoid paying capital gains taxes on the appreciated value.
Donations made in December can also help reduce your taxes for the current year.
Tip: If you’re planning to make a donation anyway, consider doing it before year-end to maximize your tax savings for the current year.
4. Tax Loss Harvesting
Offset capital gains by selling investments that have lost value. The realized loss can offset capital gains and potentially reduce your taxable income.
Tip: Be mindful of the "superficial loss rule," which means if you buy back the same or an identical security within 30 days, the loss won’t be recognized for tax purposes.
5. Review and Maximize Tax Credits
Non-refundable credits include the basic personal amount, the age amount (for seniors), and various family-related credits. Ensure you are claiming all the credits for which you're eligible.
Consider disability tax credits or other specific credits (e.g., the Canada Caregiver Credit).
Tip: If your children are turning 18 or 19, ensure you're claiming the appropriate credits, such as the Amount for an Eligible Dependant or the Canada Child Benefit (CCB).
6. Income Splitting
If you are in a higher tax bracket than your spouse or children, consider shifting income to them to lower the family’s overall tax burden. Strategies could include lending money to a spouse or adult child for investment purposes, or contributing to their RRSP.
Tip: Income splitting strategies require careful planning and should be reviewed with a professional to ensure they meet the CRA's rules.
7. Use of RESP for Education Savings
Contributing to a Registered Education Savings Plan (RESP) can result in government grants (up to 20% of contributions) and tax-deferred growth.
While contributions are not tax-deductible, they can reduce the amount of tax the student will pay when the funds are withdrawn.
Tip: If you haven’t made contributions to an RESP for your children, this is a good time to maximize your grant eligibility.
8. Corporate Tax Planning for Business Owners
Dividend vs Salary: If you're a business owner, consider the most tax-efficient way to draw income from your corporation. If you’ve been paying yourself a salary, you may also consider paying dividends, which could result in tax savings due to a more favorable dividend tax rate.
Year-end bonuses: If you're a shareholder and have not yet taken a bonus, paying it before year-end can help reduce corporate taxes for your business, as the expense is deductible.
Tip: Speak to an accountant about the most tax-efficient compensation structure for your situation.
9. Adjust Your Payroll Deductions
If your situation has changed, consider adjusting your payroll deductions for the next year. You can change the amount of tax withheld at source to ensure you're not overpaying or underpaying throughout the year.
10. Claim Medical Expenses
Medical expense tax credit: Eligible medical expenses can be claimed to reduce your taxable income. The threshold is typically 3% of your net income or a fixed dollar amount (whichever is less).
Collect receipts for any medical expenses that have been incurred in the past 12 months (you can claim expenses from the previous calendar year as long as they were paid in the same year).
Tip: Ensure that any health-related expenses, such as prescriptions, dental work, and certain types of therapy, are claimed if they fall within the eligible range.
11. Income Splitting with Family Members
If your spouse or common-law partner is in a lower tax bracket, you can reduce your overall family tax burden by transferring certain assets or income to them (e.g., through an income splitting strategy involving investments or dividends).
12. Use the $15,000 Gift Exemption for Family
For individuals considering transferring assets to family members, the annual $15,000 gift exemption allows for gifts up to this value to be given without triggering any tax consequences. Consider using this strategy to reduce potential capital gains taxes or increase wealth in a lower-taxed family member’s hands.
13. Plan for 2024 Changes
Stay updated on any changes in tax laws that could affect your 2024 tax planning. For example, changes in tax brackets, new credits or deductions, and other incentives may affect how you structure your finances.
14. Consult a Tax Professional
Tax planning can be complicated, especially if you have multiple sources of income, investments, or other financial considerations. It’s often beneficial to consult a tax professional who can help optimize your tax strategy and ensure compliance with the latest tax laws.
Summary of Key Deadlines for Year-End Planning
RRSP Contributions: By March 1 of the following year for the previous year's tax year.
TFSA Contributions: Anytime, but consider maxing out the annual limit of $6,500 for 2024.
Charitable Donations: By December 31 to claim them in the current tax year.
Tax Loss Harvesting: Before year-end to offset capital gains.
By employing these year-end tax strategies, you can help reduce your tax burden and position yourself for financial success in the upcoming year. Always keep track of the specific deadlines for each strategy, and when in doubt, consult with a tax advisor.
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