As 2024 winds down, it’s time to focus on year-end tax planning strategies to start 2025 on solid financial ground. With significant changes (and proposed changes) to tax laws this year — there is still a lot of uncertainty as to if the capital gains inclusion rate will change for the dates proposed by the government — being proactive now can help individuals and business owners minimize liabilities and maximize opportunities. Make sure to consult with your CPA about your specific tax situation before acting on any of these.
Here are ten tips to consider:
1. Review Capital Gains Strategies
The proposed capital gains inclusion rate increased from 50% to 66.7% in mid-2024. Gains under $250,000 annually for individuals remain taxed at the lower rate, but planning ahead is essential to optimize timing. Consider realizing gains strategically or using trusts to allocate gains to beneficiaries. If you have an investment corporation, it is still practical tax planning to trigger the gains now and pay out the Capital Dividend Account (see item 10 below) to the shareholders as early as possible.
2. Leverage Capital Losses
If you realized capital losses this year, use them to offset gains taxed at the higher inclusion rate. Losses can also be carried back three years or forward indefinitely, allowing flexibility to reduce future tax liabilities.
3. Manage Capital Gains Reserves
If you’re deferring proceeds from the sale of a capital asset over several years, consider recognizing more of your reserve now to benefit from the 50% inclusion rate for gains realized before mid-2024.
4. Maximize Your First Home Savings Account (FHSA)
If eligible, ensure you’ve opened an FHSA to start accumulating annual contribution room of $8,000. This tax-advantaged account is an excellent tool for prospective first-time homebuyers.
5. Withdraw TFSA Funds If Needed
If you anticipate needing cash soon, withdraw from your Tax-Free Savings Account (TFSA) before year-end. Contribution room for withdrawals resets in January, avoiding over-contribution penalties.
6. Optimize Timing for Asset Transactions
If you’re planning to sell a capital asset, consider whether selling in 2025 could defer taxes. Conversely, purchasing assets late in the year allows a half-year capital cost allowance claim, offering immediate deductions.
7. Plan for Stock Options
With new limits on the stock option deduction, exercising options up to the $250,000 threshold ensures eligibility for the 50% deduction. Review your holdings to optimize tax efficiency.
8. Revisit Compensation Strategies
Incorporated business owners should evaluate salary versus dividend strategies. Salaries generate RRSP contribution room, while dividends may reduce overall tax burdens. Consider hiring family members or paying bonuses to shift tax obligations effectively.
9. Understand the New Alternative Minimum Tax (AMT)
The 2024 AMT changes will impact more taxpayers. Although complex, AMT functions as a tax prepayment available to offset future taxes for up to seven years. Careful planning can align income to recoup any AMT paid.
10. Maximize the Capital Dividend Account (CDA)
If your company holds non-taxable gains, distribute these through the CDA before realizing capital losses, which reduce the account balance. Timing is critical to preserving tax-free payouts.
Bonus Tip: Pay Outstanding CRA Balances
CRA charges 9% interest on overdue payments—much higher than its refund interest rate. Clearing any balance minimizes unnecessary costs heading into the new year.
By implementing these strategies, you’ll be well-positioned for 2025. Collaboration with financial advisors is key to navigating these tax changes and achieving long-term financial success.
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