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Year-End Tax Tips for Canadians: Saving Smart Before the Deadline

December 17, 2023
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As the year draws to a close, it’s crucial for Canadians to assess their financial status and take advantage of potential tax-saving opportunities before December 31st. Here’s a comprehensive breakdown of essential tax tips tailored for individuals and small business owners in Ontario and across Canada.

Investors

Tax-Loss Selling: This strategy involves selling investments that have decreased in value to offset gains from other investments. Be mindful of the currency exchange rates when dealing with foreign investments, as the actual gains or losses can be impacted by these fluctuations.

Superficial Loss Rules: If you plan to repurchase a sold security within 30 days, beware of the “superficial loss” rules that may disallow your capital loss for tax purposes. This rule applies when repurchasing the same security or one that is very similar shortly after selling it at a loss.

Maximizing RRSPs and TFSAs: Making early contributions to Registered Retirement Savings Plans (RRSPs) allows for potential tax-deferred growth. Similarly, contributing to Tax-Free Savings Accounts (TFSAs) provides a tax-free investment opportunity, with no specific deadline for contributions.

Homeowners & Buyers

First Home Savings Account (FHSA): FHSA permits tax-free savings for individuals aiming to purchase a home. Contributions are limited to $8,000 annually and $40,000 over a lifetime. The funds withdrawn to purchase a qualifying home are non-taxable, similar to TFSA withdrawals.

Renovation Credits: Canadians undertaking renovations for accessibility purposes or creating secondary living units for family members may qualify for tax credits under programs like the Home Accessibility Tax Credit (HATC) and the Multigenerational Home Renovation Tax Credit (MHRTC).

Families with Students

RESP Contributions and Withdrawals: Contributing to Registered Education Savings Plans (RESPs) before year-end can help maximize government grants and benefits. For students attending post-secondary institutions, consider withdrawing Educational Assistance Payments (EAPs) from the RESP.

Individuals with Disabilities

Registered Disability Savings Plan (RDSP): Canadians eligible for the Disability Tax Credit can contribute to an RDSP for tax-deferred growth. Government assistance through Canada Disability Savings Grants (CDSGs) and Bonds (CDSBs) may be beneficial.

Medical Expenses & Tax Credits: Eligible medical expenses exceeding a certain threshold can be claimed for tax credits. Individuals should also be aware of the impact of the Alternative Minimum Tax (AMT) system on medical expenses and consider planning accordingly.

Tax Rate Changes & Charitable Giving

Anticipated Tax Rate Changes: Individuals expecting changes in their tax rates for the upcoming year should consider adjusting their income and expenses accordingly.

Maximizing Charitable Donations: Donating to charitable organizations can result in tax benefits, particularly when gifting publicly-traded securities. Consider donor-advised funds for planned charitable giving.

Business Owners & Employers

Compensation Planning:

  • Salary vs. Dividends: Business owners often have the choice between receiving income as salary or dividends from their corporations. In 2023, taking a salary allows for RRSP contribution room creation, where receiving up to $175,333 in salary could generate up to $31,560 in RRSP contribution room for 2024.
  • Tax Treatment: Salary is taxed at personal graduated rates, while dividends can provide advantages due to the dividend tax credit. Understanding the balance between these options can significantly impact after-tax income.

Passive Investment Income Strategies:

  • Small Business Deduction (SBD): The SBD reduces corporate tax rates on the first $500,000 of active business income. However, it can be affected by passive investment income. For every $1 of passive income over $50,000 in the previous year, the SBD is reduced by $5.
  • Strategic Investments: Employing a “buy and hold” strategy for investments might help in deferring capital gains taxes and optimizing SBD eligibility.
  • Provincial Variations: While federal rules limit the SBD based on passive income thresholds, certain provinces like Ontario and New Brunswick maintain the SBD for active business income up to $500,000 annually, offering potential tax advantages.

Income Splitting and TOSI Rules:

  • Tax on Split Income (TOSI): TOSI rules apply when dividends or interest income are received from a corporation by a related individual. Understanding these rules is crucial, as they might affect dividends’ taxation at the highest marginal rate.

Corporate Loss Planning and Business Transition:

  • Loss Consolidation: In cases where multiple corporations exist within a group, consolidating losses between profitable and loss-incurred companies within the group can help offset taxable income.
  • Estate Planning and Business Transition: Considering estate freeze strategies or transitions within the business, especially if the business’s value has recently changed, can have substantial tax implications and benefits.

Numerical Impact:

  • For example, if a corporation had $70,000 in passive income in 2022, $100,000 in 2023, and is projected to have $160,000 in 2024, strategizing to keep passive income below $50,000 could help maintain the SBD eligibility for reduced tax rates on active business income.
  • Comparing the tax implications between salary and dividends at various income levels (e.g., $100,000, $200,000, $300,000) to assess their impact on personal taxes and corporate tax deductions.

These tips offer insights and strategies for optimizing your financial situation before the year ends, however, tax planning is a continuous process. Remember, proactive tax planning can significantly impact your tax return. To explore these options further and maximize tax savings, schedule a consultation with our experts at Qualivests.

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