As the year draws to a close, it’s the ideal time to implement strategies to minimize your personal tax bill due next April. At Tax Return Filers Ltd., we specialize in helping clients navigate effective year-end tax planning. These tailored strategies can significantly reduce your tax liability and maximize savings. Here are seven smart approaches you can adopt before the year ends.
1. Maximize Charitable Donations
Make charitable contributions before year-end to claim valuable tax credits. The CRA permits claiming donations up to 75% of your net income.
Pro Tip: Consider transferring appreciated stocks to a charity instead of donating cash. This avoids capital gains tax while granting a tax credit equal to the stock’s fair market value.
2. Leverage Capital Losses to Offset Gains
Tax-loss selling, or harvesting losses, allows you to reduce taxable capital gains by selling investments that have decreased in value.
Example:
- Stock A: Bought for $10,000, now worth $15,000 (gain of $5,000).
- Stock B: Bought for $8,000, now worth $5,000 (loss of $3,000).
By selling both stocks, your Net Capital Gain is reduced to $2,000 instead of $5,000. This lowers your capital gains tax.
Note: Ensure compliance with the “superficial loss rule,” which prohibits repurchasing the same investment within 30 days.
3. Contribute to a Spouse’s RRSP
Help balance retirement income by contributing to your spouse’s Registered Retirement Savings Plan (RRSP).
Example:
If one spouse’s RRSP balance is significantly higher, their withdrawals during retirement may result in higher taxes. Equalizing RRSP balances can lower the couple’s overall tax burden.
Note: Contributing before year-end provides an immediate deduction for the contributing spouse.
4. First Home Savings Account (FHSA)
For first-time home buyers, the FHSA offers a triple tax advantage:
- Tax-deductible contributions
- Tax-free investment growth
- Tax-free withdrawals for a first home purchase
Annual contribution limit: $8,000 | Lifetime limit: $40,000.
5. Boost RESP Contributions
Contribute to your child’s Registered Education Savings Plan (RESP) before year-end to maximize the Canada Education Savings Grant (CESG).
- Government matches 20% of your contributions, up to $500 annually.
- There is no annual RESP contribution limit, but the CESG is a “use-it-or-lose-it” opportunity.
6. Max Out TFSA Contributions
Take advantage of the Tax-Free Savings Account (TFSA) to grow investments tax-free. While contributions aren’t tax-deductible, any growth or withdrawals are.
Contribution Limits:
- 2024: $7,000
- 2023: $6,500
- 2022: $6,000
For instance, if you turned 18 in 2022 and haven’t contributed yet, you can invest up to $19,500 in your TFSA in 2024. Check your available room on the CRA’s MyAccount portal or your latest Notice of Assessment.
7. Capture Income in the Current Year
If you anticipate a higher income or tax rate next year, consider capturing more income this year.
How?
- Sell investments with unrealized gains.
- Exercise stock options that are “in the money.”
This strategy locks in income at your current marginal tax rate, potentially saving you money in the future.
8. Medical Receipts
Please arrange the medical receipts for which you have paid out-of-pocket expenses
Let Tax Return Filers Ltd. Help You Save
Effective year-end tax planning ensures you retain more of your hard-earned money. At Tax Return Filers Ltd., we’ll help you:
- Navigate tax-loss harvesting rules.
- Optimize contributions to registered accounts.
- Implement strategies tailored to your financial goals.
Contact us today to maximize your savings and minimize your tax burden!