As we approach the end of the year, it’s important to set aside some time to assess certain financial matters that can lead to substantial tax savings. Below is an overview of several year-end tax planning strategies, as well as some new things to consider for 2024.
Tax Loss Selling
One of the most common strategies around year-end is tax loss selling. If you've generated any capital gains in a non-registered account and also hold securities with unrealized losses, consider selling those securities to realize the losses and offset your gains. The best way to make this selection is to review your portfolio and identify positions that may no longer align with your investment goals.
Charitable Donations
Contributing to a charitable cause is an effective way of lowering your personal tax liability, with the added benefit of making a difference to a cause that you support. The deadline for making contributions to a registered charity is December 29, 2023. Donations made by this date will qualify for a donation tax receipt for your 2023 income tax return.
If cash is limited, an alternative way to donate is to gift publicly listed securities. These gifted securities will be exempt from tax on any realized capital gains. The donation tax receipt will reflect the fair market value of the security at the time of the donation. For those considering donating securities in-kind, take into account the necessary time needed for settlement to ensure that the process is completed before year-end, and double check that the chosen charity is able to accept such in-kind donations.
Year-End Bonus Planning
If you are eligible for year-end bonus payments, you may have the option to transfer some or all of the bonus directly to your RRSP, which will help avoid withholding tax. In order for this to work, one needs sufficient unused RRSP contribution room in the year of transfer.
If you anticipate a lower tax bracket in the coming year, perhaps due to a job change, leave of absence, or other reason, it may be beneficial to delay receiving your bonus until 2024.
Deferring Capital Gains
In a similar vein to the above, if you anticipate that your marginal tax rate will be lower in 2024 than in 2023, you may want to consider deferring your liquidation of any securities with capital gains until the following year. This may also be beneficial in terms of the time you have until needing to pay tax to the CRA. Taxes will be owed in April 2024 for gains realized in 2023, whereas gains realized in 2024 are owed in April 2025.
First Home Savings Account (FHSA)
The FHSA is a new registered account for 2023 that combines features of both a registered retirement savings plan (RRSP) and a tax-free savings account (TFSA). Similar to an RRSP, the contributions you put into an FHSA are eligible for tax deductions; And similar g a TFSA, any withdrawals, including the investment income earned, made for the purpose of purchasing a first home are not subject to taxation. If you, or any of your adult-aged children have never purchased a home, open an FHSA in 2023 to immediately generate $8,000 in contribution room. Whether or not you choose to contribute to the FHSA this year will depend on your marginal tax rate and whether or not you think it’s worthwhile, but just keep in mind that there is a lifetime carry forward maximum of $8,000. Even if you don’t plan on contributing this year, ensure that you open an account in 2023 such that you can at least carry over this year’s contribution to 2024.
Everyone’s financial situation is different and the strategies are just a few examples of pro-active tax planning approaches. Consult with us to assess what strategies would be suitable based on your unique circumstances.