These end-of-year tax strategies are what we use with clients to save them a lot of money in the past. Let’s see how it can help you too.
These are the go-to tax strategies we use with our clients every December to help them save thousands of dollars in taxes. We’ve narrowed it down to 9 actionable items, so let’s see which ones could work for you.
Manage Capital Gains and Losses
Managing your capital gains and losses before year-end can significantly reduce your tax bill. If you’ve realized capital gains earlier this year, consider realizing capital losses by selling underperforming investments to offset those gains. This strategy, known as tax loss harvesting, reduces your taxable income and can help rebalance your portfolio.
Example: If you made $10,000 in capital gains from the sale of property, then sell another at a $4,000 loss, your taxable gain drops to $6,000. This will save you a lot in taxes.
Another strategy, is if you’re sitting on profitable investments, consider delaying selling until January to defer taxes for another year. For example, selling a $15,000 gain in January of 2025 pushes your tax payment into 2026, giving you extra time to manage cash flow and keep more of your money to accumulate interest or investment returns.
These are very simplified examples, and the scenarios can get quite complex, especially if you have capital losses which can carryforward or backward, or if your income varies a lot from year to year. Depending on the size of your assets, you’ll also need to factor in the new capital gains inclusion rules of 66.7% over $250,000.
There’s also the consideration of retirees managing capital gains to avoid triggering OAS clawbacks and recovery taxes, which I will go over in more detail in another video.
Capital gains and losses planning is an area where we spend a lot of time with our clients, particularly our business ones, so take the time to figure this out.
Tax-Free Savings Account (TFSA)
If you need to withdraw funds from your TFSA, it’s important to do so before December 31. Why? Because any amounts withdrawn from your TFSA this year will free up equivalent contribution room for the following year. However, if you wait until January, you’ll have to wait an extra year to regain that room.
For example, if you need $5,000 for an emergency or a large purchase, withdrawing it now ensures you can recontribute that same $5,000 next year. Delaying this could cost you valuable contribution space, limiting your ability to grow your investments tax-free.
First Home Savings Account (FHSA)
Next up, the FHSA, which is my favorite new account in Canada. For existing FHSA account holders, remember that the FHSA contribution deadline is December 31 to get your tax deduction for this year, not 60 days into the following year like an RRSP.
You can contribute up to $8,000 annually, and doing so by year-end lets you claim a tax deduction for this year. That’s instant savings when you file your taxes. The one exception to this is if you think your income will be much more in 2025 than in 2024, then it might be worth delaying it until next year, if you are in a much higher marginal tax bracket.
Example: Suppose you earn $70,000 annually and contribute $8,000 to your FHSA before December 31. This reduces your taxable income to $62,000, which saves you a lot of taxes.
For those that haven’t opened an FHSA:
If you qualify but haven’t opened one yet, make it a priority before December 31. Why? Your contribution room only starts accumulating once the account is open, so starting now ensures you’ll maximize your benefits next year.
Pro Tip: Even if you’re unsure about buying a house, opening an FHSA is still a smart move. If unused, the account can eventually convert into an RRSP, giving you more RRSP contribution room.
Caution: Avoid withdrawing funds early unless you’re purchasing a home. Early withdrawals can trigger penalties and the loss of tax benefits.
Income Splitting
For income splitting with a spouse or common-law partner, consider the following year-end actions:
Spousal RRSP Contributions
- Contribution Deadline: For the 2024 tax year, contributions to a Spousal RRSP can be made until March 3, 2025. However, note that there is a Dec 31 deadline if your spouse turns 71 this year, so be careful of that.
Key Considerations
- Attribution Rules: Withdrawals from a Spousal RRSP within three years of contribution will attribute income back to the contributor, so be mindful of limitation.
CPP Pension Sharing
- Application Timing: CPP pension sharing begins once Service Canada approves your application; it cannot be backdated. To benefit in the upcoming year, submit your application this year, using form ISP1002.
RESP and RDSP Contributions and Grants
RESP: Contributing to a Registered Education Savings Plan (RESP) by December 31 ensures your child receives up to $500 in Canada Education Savings Grant (CESG) this year. The government matches 20% of contributions, up to $2,500 annually per child. Missing the deadline means losing this year’s grant, though unused grant room can be carried forward.
RDSP: For the Registered Disability Savings Plan (RDSP), contributing by December 31 can earn up to $3,500 in grants (CDSG) and $1,000 in bonds (CDSB) this year. Unused entitlements carry forward for 10 years, but contributing now maximizes annual benefits.
Registered Retirement Savings Plan (RRSP)
If you turned 71 in 2024, December 31 is your final chance to contribute to your RRSP before it must be converted into a Registered Retirement Income Fund (RRIF). Don’t miss this deadline, as it’s your last opportunity to contribute to your RRSP!
For everyone else, it’s worth noting that the RRSP contribution deadline is March 3 of 2025 so you still have time to optimize your contributions. However, avoid early withdrawals from your RRSP unless absolutely necessary, as the penalties can be significant.
Medical Expenses
As the year comes to a close, now’s the perfect time to review your medical expenses. In Canada, you can claim a Medical Expense Tax Credit (METC) for eligible costs exceeding the lesser of 3% of your net income or $2,759 for the 2024 tax year. This means the more expenses you’ve incurred, the greater your potential savings.
Example:
If your net income is $50,000, 3% of that is $1,500. Since $1,500 is less than the $2,759 threshold, you can only claim expenses that exceed $1,500. If you’ve spent $4,000 on eligible medical expenses, you can claim the difference ($4,000 – $1,500 = $2,500) on your tax return.
Eligible Expenses:
- Prescription medications
- Dental work
- Vision care
- Mobility aids
Pro Tip: If you’re close to the threshold, consider scheduling additional treatments or purchasing necessary medical items before December 31 to maximize your claim. For example, getting dental work done or buying medical equipment now could push your claimable expenses higher for this tax year.
- 2024 Tax Year: $2,759
- 2025 Tax Year: $2,833
Charitable Donations
Donating to registered charities by December 31 can reduce your tax bill through the Charitable Donation Tax Credit (CDTC). The federal credit is 15% on the first $200 donated and 29% on amounts over $200, with additional provincial credits varying by region. You can see here that Alberta has a really high 60% donation tax credit on the first $200.
Example: If you donate $100 in Alberta, you would receive the 15% federal tax credit, plus the 60% provincial, so you would get a $75 tax credit on that $100.
Key Tips:
- Donation Limit: Claim donations up to 75% of your net income annually.
- Carry Forward: Unused donations can be carried forward for five years.
- Pooling: Spouses or partners can combine donations for maximum benefits.
Maximize Employer Benefits
While not directly tax-related, this tip can still save you money before year-end.
Many health benefits reset at the end of the year. If you have unused allowances for dental, vision, or massage therapy, book those appointments now. Similarly, take any remaining vacation days that won’t roll over to next year.
Don’t leave money on the table this tax season. At Blueprint Financial, we create tailored strategies to help you reduce taxes and grow your wealth. See our services to learn more and get started with our expert guidance.
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