As 2024 comes to an end, it is the perfect time to explore strategies for managing your income tax liability and preparing for the upcoming tax filing season. Taking proactive steps now can help reduce your taxes, maximize available benefits, and avoid surprises when it’s time to file your return.
Increase in the Capital Gains Inclusion Rate (Proposed) and Unrealized Capital Losses/Gains on Investments
If you hold investments with unrealized capital losses, consider selling them before year-end. These losses can offset net capital gains realized in 2024, or even gains from the past three years, helping to reduce your tax liability. (Note: Be cautious of the superficial loss rules, which may deny the loss if you repurchase the same investment within 30 days of the sale.)
If you have unused capital losses carried forward from prior years, you might benefit from selling investments with unrealized gains. The carried-forward losses can offset these gains, minimizing the taxes owed.
For investments with unrealized gains but no available losses to offset them, carefully consider whether to sell before year-end. This decision is particularly critical due to the proposed increase in the capital gains inclusion rate for gains exceeding $250,000, effective June 25, 2024.
The proposed $250,000 threshold, which determines the inclusion rate (2/3rds if exceeded versus ½ if within), will not be prorated for 2024. This means you could potentially trigger more gains subject to the current lower 50% inclusion rate before December 31, 2024, than if the threshold were prorated from the implementation date. Taking advantage of the current inclusion rate could lead to significant tax savings.
Alternative Minimum Tax (AMT)
AMT ensures taxpayers pay a minimum level of tax by recalculating income using an alternate method. This may apply if you benefit from preferential tax rates through deductions, such as the capital gains exemption, or credits, such as charitable donation credits
If your AMT liability exceeds the regular income tax payable, the difference becomes the AMT amount due. While this can increase your tax bill for the year, AMT paid can be carried forward for up to seven years and used to reduce future taxes, provided AMT exceeds your regular tax in those years.
Significant changes to AMT took effect on January 1, 2024, including:
- An increase in the Federal AMT rate from 15% to 20.5%.
- A $173,205 exemption threshold (indexed for inflation).
- A broader range of income subject to AMT and stricter limits on deductions, exemptions, and credits.
Residential Property Flipping Rule
Income from the sale of residential property, including rental properties, held for less than 12 months or from an assignment sale, may be treated as business income. This means the entire gain is taxable and does not qualify for the capital gains inclusion rate or the principal residence exemption.
Exceptions apply in cases of extenuating circumstances, such as death or divorce, which might allow properties held for less than 12 months to avoid these rules.
If the property falls under this rule and is sold at a loss, the loss cannot be claimed for tax purposes.
Update on Bare Trusts
For 2024, the Canada Revenue Agency (CRA) announced that bare trusts are not required to file trust tax returns for information purposes. Instead, details need to be provided only upon CRA’s request. Additional legislative relief is expected to take effect in 2025.
First Home Savings Account (FHSA)
If you are saving for your first home and do not plan to buy one immediately, consider opening a FHSA. To qualify, you must:
- Be a Canadian resident, at least 18 years old.
- Not have owned or lived in a home you or your spouse owned in the year the account is opened or the four preceding years.
Unlike a Tax-Free Savings Account (TFSA), FHSA contribution room does not accumulate until the account is opened. Opening an account now allows you to start building room, even if you are not ready to contribute immediately. Contributions to an FHSA are tax-deductible, similar to a Registered Retirement Savings Plan (RRSP).
If you meet the requirements, you can withdraw funds from both your FHSA and RRSP under the Home Buyer’s Plan to purchase the same home. For 2024, the annual FHSA contribution limit is $8,000.
Conclusion
Year-end tax planning is an essential step to minimizing your tax liability to avoid unexpected surprises when filing your tax return. By understanding key rules—such as the capital gains inclusion rate, alternative minimum tax, and the residential property flipping rule—and taking advantage of new opportunities like the First Home Savings Account, you can make informed decisions that align with your financial goals.
Remember, tax planning is not one-size-fits-all. Your unique circumstances may require tailored strategies, so consider consulting a tax professional to ensure you maximize available benefits and comply with the latest tax regulations. With careful preparation now, you can confidently approach the 2024 tax filing season.
The above content is for informational purposes only and is general in nature. It is not intended to be advice. No person or entity should act upon the information above without receiving professional advice after all the facts and circumstances specific to their situation are thoroughly reviewed.