As we approach the end of 2024, it’s natural to reflect on the year gone by and the new year to come. The year-end is a good time to review your portfolio and complete any needed housekeeping. It has been an excellent year for market and portfolio returns, but a very challenging year for tax planning, given the federal budget announced in April.
The obvious starting point for year end planning is to think about topping up your registered accounts. Second, tax loss harvesting is best to review all year long, but the deadline to take action to reduce your 2024 gains is Dec. 30th. This year, due to proposed changes in the federal budget, we also need to consider potentially harvesting gains in very specific circumstances, though that strategy has been muddied by recent political developments in Canada.
Lastly, it’s a perfect time to evaluate your charitable giving.
Let’s go over each of these three points in more detail.
The year-end is your opportunity to top up registered accounts, if you or your advisor haven’t done so already. This means using up any remaining contribution room in your Tax-Free Savings Account (TFSA) and maximizing any uncollected grants in a Registered Education Savings Plans (RESP) for your children or grandchildren.
You can find the unused contribution room in your TFSA in your CRA My Account online access. Contact your RESP provider to see how much room you have left to add to the education plan in order to maximize the grants available federally (and provincially if you live in Quebec). If your RESP provider doesn’t have a complete history, you can call CRA’s Individual tax enquiries line (1-800-959-8281, have your child or grandchild’s SIN and date of birth on hand) to get a history of RESP contributions made and grants received for your child or grandchild’s RESP accounts, wherever they might be held.
You don’t have to worry just yet about Registered Retirement Savings Plans. Contributions applying to the 2024 tax year are allowed until March 1, 2025. If you have a Registered Retirement Income Fund (RRIF) or Lifetime Income Fund (LIF), be sure to withdraw the minimum amount before the calendar year is out.
A good financial advisor would have already spoken with you about these questions or likely plans to go over them with you soon.
The year-end is a time to review your portfolio to identify any positions that have had a loss in a non-registered account. Before the year is out, you can “harvest losses”—the practice of selling positions that are in the red to offset other capital gains during the year.
You can also carry back losses to offset prior gains going back up to three tax years in order to obtain a potential refund. You can also bank losses indefinitely against future capital gains.
You do need to be wary of the superficial loss rules, which say that you cannot repurchase the same asset within 30 days of having sold it. Otherwise, the loss could be denied by CRA. That said, since markets have performed so well in the last two years, PWL clients are highly unlikely to have any losses to harvest!
This year, for the first time, we’re also advising clients to consider harvesting gains. This is because of changes announced in the federal budget in June when Ottawa said it would increase capital gains taxes on gains exceeding $250,000.
The portion of capital gains subject to tax (aka the inclusion rate) is to be increased from one-half to two-thirds on gains above $250,000 each year. Gains of up to $250,000 will be taxed on only 50% of the realized gain as per before.
As a result, if you have unrealized gains over $250,000, you may want to consider selling a portion of those holdings to “harvest” gains of up to $250,000 and avoid potentially getting taxed at a higher rate later on the entire amount of the gains. This is particularly true if you think it’s possible the entire holding may need to be sold in coming years. This becomes particularly relevant later in life for large estates that may have very high unrealized gains on both portfolios and second properties. The idea is to spread the gain out over several years to maximize the portion subject to the lower 50% inclusion rate for the first $250,000 in gains in a tax year. It is possible to sell and repurchase the same asset immediately to crystalize the gain. There is no ‘superficial gain’ rule. The government is happy to collect your tax dollars early if you’re willing to take the gains!
There is an important caveat to the idea of harvesting gains. The federal budget announced on April 16th said that the new capital gains rules would come into effect as of June 25, 2024. However, the legislation to enact this element of the budget has not yet been passed. If the current Liberal government falls before this legislation is passed, or if all the other parties vote against it, capital gains harvesting would all be for nought.
Again, a good financial advisor would have already spoken with you about these considerations if they apply to your situation or should be doing so soon.
As we approach the festive season, many of us consider our charitable giving. Donations can offer tax benefits worth factoring into our financial planning.
This is especially the case when giving in-kind donations of equities that have appreciated in value. When making such a donation, you don’t pay tax on the appreciation, like you would if you sold them, but you do get a receipt for the full fair market value of the securities, which you can use to offset your tax bill.
The benefit can be even greater if you make the donation from a holding company. The company avoids paying capital gains tax on the gain, while getting a deduction for the full value of the donation.
In addition, the capital dividend account of the business increases by the full amount of the gain on the securities that are donated. This allows you to withdraw that amount from the corporation tax-free in the future.
As you wrap up the year, take the time to assess your finances and make needed adjustments to maximize your savings and tax benefits. Speaking with your financial and tax advisors can ensure you’re making informed decisions that align with your long-term goals.
