By Olev Edur
Now’s the time to ensure that you’ll pay as little income tax as possible in 2025
When it comes to tax planning, the end of the calendar year is a significant date that in most cases involves careful consideration. The following are some things you need to think about before December 31 rolls around.
1. Investment Assets
The government earlier this year raised the inclusion rate on capital gains in excess of $250,000 per year from one half to two-thirds, and for those retirees with substantial capital assets—in particular, second properties such as cottages or rental homes—this change could introduce a further complication to their year-end tax planning.
Many retirees put these second properties into joint ownership with their kids at some point or eventually sell them. Either way, the result from a tax perspective is a partial (with joint ownership) or full disposition of the property, and any accrued capital gains on the transaction become subject to tax that same year. Since real estate can easily have accrued gains exceeding $250,000 these days, you may want to defer any other capital dispositions (such as investment sales) to the following year—or vice versa: if you’re planning to dispose of the cottage next year, consider executing those other sales before year-end. That way you can minimize the amount subject to the higher inclusion rate.
Of course, there may be other reasons for juggling the sale of capital assets between one year and the next. If, for example, your income this year has been higher than usual, to the point at which any additional investment income or gains would be taxed in a higher bracket, it may be worthwhile to move some or all of those investment sales into next year to minimize the amounts that otherwise would be taxed at a higher rate.
Finally, bear in mind that when it comes to selling any investment, there will be a delay between the time you execute a transaction and the time it’s actually registered. It could be as little as a few days or longer, depending on the nature of the transaction, so be sure to allow enough time for your transactions to be registered before year-end.
2. RRSPs
You can’t own an RRSP beyond the end of the year in which you turn 71—after that, all remaining assets in your RRSP(s) will be deregistered and added to your other income for the current year. Needless to say, this could result in a horrific tax bill if you have sizable RRSP assets. As a result, to avoid that one-time tax hit, you need to convert any RRSPs into RRIFs or annuities before year-end so that the tax is deferred as the funds are gradually with- drawn over many years—and at a much lower tax rate.
Also, if you have any RRSP contribution room left, you have to use it before year-end or you’ll permanently lose the tax deduction it could generate. (Note that, unlike RRSPs themselves, the deductions can be kept beyond age 71 and used to offset income in future years.)
If you turned 71 this year and have used all your RRSP contribution room to date but still have some earned (i.e., employment or self-employment) income for the year, it could generate further contribution room next year. By then you’d no longer have an RRSP to which you could contribute. but you can make an overcontribution equal to that additional room in December of this year, pay a one-per cent penalty for the month, and then claim the deduction for that contribution in January 2025.
Also, as with other one-time income boosts, RRSP withdrawals are generally best made when your other income is lowest so that the additional tax bill will also be lowest. If you’re planning withdrawals soon and this year’s income was lower than usual, you should make the withdrawal before year-end rather than after.
Finally, although you must collapse your RRSP the year you turn 71, you can continue contributing to a younger spouse’s RRSP (and getting the resulting tax deduction) as long as you have any remaining contribution room.
3. RRIFs and the Pension Credit
Once you are 65 or older, RRIF (and annuity) withdrawals are deemed to be pension income and thus eligible for the federal pension credit of up to $2,000. If you haven’t any pension income against which you could otherwise claim the credit (Canada Pension Plan and Old Age Security benefits don’t qualify) and you have an RRSP, consider transferring some RRSP money into a RRIF when you turn 65 and start making $2,000 withdrawals each year so that you can claim the pension credit each year.
4. Tax-Free Savings Accounts (TFSAs)
If you have set up a TFSA and you’re planning to make a withdrawal temporarily—perhaps to buy a car or fund a vacation—you should consider doing so before rather than after year-end. It makes no difference tax-wise because TFSA withdrawals are non-taxable, but TFSA withdrawals are added back to your contribution room the following year. By making the withdrawal before year-end, you can get the added contribution room back almost right away, rather than having to wait until 2026.
5. Charitable Donations
If you want to make a claim for charitable donations on this year’s tax return, you’ll have to make the donation before year-end. However, since the first $200 of each year’s donation is accorded a much lower federal tax credit than any additional donations, and given that you can carry forward any donations for up to five years before claiming them, you might want to wait and accumulate several years’ worth of donations. That way, you’ll incur the initial reduced credit rate only once and not several times.
6. Registered Education Savings Plans (RESPs)
If you want to help a grandchild pay for post-secondary education, RESPs are excellent vehicles for doing so. Not only are there significant potential tax benefits but under certain conditions the government will supplement your contributions. There are time limits, though.
There’s no annual limit for RESP contributions, and the lifetime limit per beneficiary is $50,000, but you may want to contribute sooner rather than later to get those supplemental benefits. The Canada Education Savings Grant (CESG), for example, provides a basic grant of 20 per cent on the first $2,500 of annual contributions and an additional 10 or 20 per cent (depending on family income) on the next $500.
However, the CESG is available only until the end of the calendar year that the beneficiary (grandchild) turns 17. And it’s conditional on certain contributions being made before the end of the year in which the beneficiary turns 15.
In addition, the Canada Learning Bond is available for eligible children in low-income families and provides an initial payment of $500 for the first year the child is eligible, plus $100 for each additional year of eligibility, up to age 15, for a maximum of $2,000. To help cover the cost of opening an RESP, the gov- ernment will also pay $25 into the plan.
Then there’s the Quebec Education Savings Incentive and the British Columbia Training & Education Savings Grant Program—these could provide further benefits to a student.
7. Business and Other Deductible Payments
There are strict limits on moving income or eligible expenses from one year to an- other in order to save tax—income is declared in the year received, period, and eligible expenses are deductible only in the year they’re incurred. So, expenses such as political donations, investment counsel fees and safety deposit box charges, tuition fees (these may be claimable by you on behalf of a low-income child or grandchild), professional dues, and alimony payments must be made before year-end to be deductible this year.
If you own a business or are self-employed, though, you have more options. You can, for example, defer or accelerate the purchase of business equipment or supplies, or it may be possible to accelerate or defer certain work projects without penalty. The goal, as always, is to level out your income from year to year so that you don’t have high-income years in which your tax bill is higher than usual.
