Year-end tax tips: here’s what’s unique to 2024

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With just six weeks to go until December 31st, now is the perfect time to start your year-end tax planning. Here are a few things to keep in mind that are unique to 2024.

Sales with tax benefits

The Federal budget 2024 proposed an increase percentage for capital gains recognition for profits realized on or after June 25, 2024, with the withdrawal rate increased from 50 percent to 66.67 percent. Individuals and certain trusts (particularly graduated interest estates and qualified disability trusts) are still entitled to the previous 50 percent inclusion rate on the first $250,000 of capital gains per year. The increase in the tax rate on capital gains above $250,000 is approximately nine percentage points, depending on your province or area of ​​residence.

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Although the legislation has not yet been passed, it is widely expected that it will eventually receive royal assent and come into effect from June 25. For investors with significant accumulated capital gains in their portfolios, a new tax planning option exists for 2024.

Consider whether it’s worth crystallizing up to $250,000 in capital gains before year-end to take advantage of the lower 50 percent withdrawal rate. Crystallization for publicly traded stocks is as simple as selling the position on the open market and immediately buying it back. Note that unlike crystallization of losses, there is no equivalent rule for superficial gains, meaning you don’t have to wait 30 days to buy back the shares on which you crystallized the capital gains.

For 2024, the last trading date is December 30, after which the transaction must be settled by December 31.

When deciding whether to take this step, consider your expected return and time horizon. For example, if the taxes you don’t pay until 2024 were invested to earn six percent capital gains, compounded annually, it would take about eight years of tax-deferred growth, after taxes, to exceed the tax savings attributable to the lower inclusion rate.

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First home savings accounts

If you are buying a home for the first time and you live in Canada and are at least 18 years old, the first home savings account (FHSA) This allows you to save tax-free for the purchase of a house in Canada.

First-time home buyer means that in 2024 and the four calendar years before that, you did not live in a home that you or your spouse or partner had as their main residence.

Starting the year you open an FHSA, you can contribute (or transfer from one). registered retirement savings plan, or RRSP) a total of $8,000 plus any carryovers (up to another $8,000) available from the previous year, and up to $40,000 during your lifetime.

If you opened an FHSA in 2023 but have not yet made contributions to the FHSA, you can contribute a maximum of $16,000 in total in 2024. For contributions within this limit, you can claim a tax deduction in the year the contribution is made and any unused contributions can be deducted in each subsequent year. Unlike RRSPs, contributions you make within the first 60 days of 2025 cannot be deducted in 2024. This means that there is a hard contribution deadline of December 31, 2024 for the 2024 contribution.

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It’s important to keep in mind that because FHSA space only starts to grow once you open your first FHSA, it may be worth it to open your first FHSA before December 31, 2024 even if you don’t have the money to make the full contribution. $8,000 this year. That’s because by simply opening the account in 2024, you’ll generate $8,000 of FHSA contribution room for 2024, and you’ll generate another $8,000 of room on January 1, 2025, meaning you can contribute up to $16,000 next year.

The best part of the FHSA is that contributions can grow tax-free for up to 15 years, and withdrawals to purchase a qualifying home, including withdrawals of investment income or growth earned in the account, are not taxable, just like taxes. -free withdrawals from savings accounts.

And if you choose not to use the FHSA to purchase a first home, you always have the option (until the end of the year you turn 71 or 15 after opening an FHSA, depending on what happens) occurs first) to transfer the full fair market value. from the FHSA to your RRSP or registered retirement income fund (RRIF) on a tax-free basis. These transfers do not use the RRSP contribution room, and the money now in your RRSP or RRIF will only be taxed upon final withdrawal (or death).

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Parents or grandparents of children or grandchildren who are over the age of majority (18 or 19, depending on the province or territory in which you live) may consider gifting up to $8,000 to each child or grandchild so they can open their own FHSA to to save for their first house. Although an 18-year-old in grade 12 may not need a tax deduction right now because they likely don’t have much income, if they do, they can keep the FHSA deduction and claim it in a future year. in a higher tax bracket and the deduction is worth something.

Alternative minimum tax

Finally, new for 2024 is the updated version alternative minimum tax (AMT) regime, which imposes a minimum level of tax on taxpayers claiming certain tax deductions, exemptions or credits in order to reduce the tax they owe to very low levels. Under the AMT system, there is a parallel tax calculation that allows fewer deductions, exemptions and credits than under the regular income tax calculation. If the amount of tax calculated under the AMT system is higher than the amount of tax payable under the regular tax system, the difference due must be paid as AMT for that year.

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The good news is that the new AMT will only affect taxpayers whose 2024 taxable income is more than $173,205. But if you’re in that tax bracket and expect to claim large tax deductions on your 2024 return, such as losses carried forward from prior years or significant deductible interest expenses, you might want to speak to your tax accountant well before December. 31 to take advantage of some last-minute planning to reduce or perhaps eliminate that AMT bite before 2024.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is Director of Tax & Estate Planning at CIBC Private Wealth in Toronto. [email protected].

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