Year-End Tax Planning

As the year end approaches, it may be a good time to review your financial affairs. We have summarized some of the common tax planning strategies below:

• We’ll be reviewing portfolios prior to the end of the year, looking for opportunities to neutralize capital gains, if necessary. 2024 is a unique year with the change in the capital gains inclusion framework as of June 25, 2024.
• Defer realizing additional capital gains until the 2025 taxation year.
• Making a Charitable contribution is one of the ways you can significantly reduce the personal tax that you pay. The final day to make contributions to a registered charity in order to claim the donation tax receipt on your 2024 income tax return is December 31, 2024.
• If you have not yet done so, you can make your TFSA contribution for 2024 (up to $7,000) and catch up on any unused contribution room from 2009-2024 (a total of $95,000).
• The deadline to contribute to a First Home Savings Account for deduction against your 2024 income is December 31, 2024. Unlike a TFSA, you only begin accruing FHSA contribution room when the account is open, and you can carry forward up to a maximum of $8,000 of unused FHSA contribution room to use in the following year. If you plan to contribute in 2025, consider opening the account in 2024 to allow additional contribution room in 2025 for a total of $16,000.
• If you are turning 71 in 2024, you must convert your RRSP, Individual Pension Plan (IPP), Locked-in Retirement Account (LIRA) or Locked in RRSP to one of the maturity options that are available by December 31, 2024. Keep in mind, if you would like to make a final contribution to an RRSP of which you are the annuitant and want to claim the contribution on your 2024 tax return, you DO NOT have the extra 60 days after 2024 to make your RRSP Contribution.
• Registered Education Savings Plans (RESPs) are not only an excellent way to save for a child’s post-secondary education costs; it’s also a good income splitting strategy. You should consider contributing to your RESP by December 31st.
• You should remember to pay all investment management fees, tuition fees, deductible accounting and legal fees, childcare expenses, alimony and medical expenses by December 31st if it is your intention to deduct them on your 2024 tax return.

Market Update

It has been a busy few weeks with several issues garnering investor attention. The U.S. jobs report has taken on more importance given the Federal Reserve’s admission that it is watching it more closely. Elsewhere, investors have been preoccupied with the escalating conflict in the Middle East. Meanwhile, the third quarter earnings season is upon us.

The U.S. Federal Reserve cut interest rates in September, joining many other major developed central banks who have started to reduce interest rates in recent months. Another important development was the notable decline in Canada’s inflation rate, with August’s headline inflation reaching the Bank of Canada’s target of 2% for the first time since 2021. Below, we take a closer look at the Fed decision and explore how lower interest rates may impact the economy, and what they may mean for the financial market outlook.

The Fed opted to cut interest rates by a half of one percent - larger than the quarter percent reductions seen from other central banks. Fed Chairman Jerome Powell characterized the move as one that was needed to “recalibrate” the bank’s approach given the fall in inflation and increase in unemployment over the past year. In contrast to the past few years, when the Fed felt the balance of risks was skewed more heavily towards inflation, it noted the risks between inflation and employment are now “roughly in balance”. The Fed telegraphed that additional rate cuts are likely through the remainder of the year, but Mr. Powell emphasized they are meant to preserve and extend what it regards as a reasonably healthy economy.

Lower interest rates translate into reduced borrowing costs for businesses and consumers. As with interest rate increases, there is often a lagged effect from interest rate cuts, with the speed at which any relief is felt varying and depending on the circumstances of borrowers. On the business front, small businesses often hold floating-rate loans, which adjust quickly to lower interest rates, while larger companies often hold longer-term fixed rate debt that takes longer to reprice.

Consumers may also feel the impact to varying degrees. Credit card users should see some early benefit given the variable rate nature of credit card debt. Meanwhile, the impact to mortgages may be more mixed. For consumers looking to buy a new home, they may be encouraged by the decline in mortgage rates though they may also be tempted to wait given the Bank of Canada and U.S. Federal Reserve have telegraphed the potential for even lower rates in the months to come. Meanwhile, for Canadian homeowners that are facing mortgage renewals, the reduction in rates this year may simply reduce the headwind that some Canadian mortgage holders are facing given many will have to renew at borrowing costs that are still substantially higher than the ultra-low rates they may have locked in years ago.

While global equity markets have responded favourably to the initial round of interest rate cuts from central banks, history suggests some caution is warranted. There have undoubtedly been some periods of strong equity markets gains following the beginning of an easing cycle. Likewise, there have also been some notably weak periods following the first interest rate cut, typically reflecting a deteriorating economic and corporate earnings backdrop. Overall, the range of historical outcomes for equity markets has been wider than normal after the first interest rate cut.

We view the path forward with cautious optimism, acknowledging that lower interest rates will eventually lead to easier financial conditions. Nevertheless, as with hikes, the cuts will take time to provide some relief to consumers, businesses, and the economy. In the meantime, we are mindful of the lesson that history has taught us: the start of interest rate cuts can either extend the economic cycle or mark an important turning point. We will be watching closely for signs of either scenario unfolding.

Should you have any questions, feel free to reach out.