In a few weeks we’ll be turning the page on 2024. The short period remaining before the new year is a great time to consider certain options that could have a noticeable financial impact in the future, especially in terms of taxes. 

So here are eight topics you might want to discuss with your advisor as the year winds down. 

1. New capital gains inclusion rate 

The federal government’s decision to increase the capital gains inclusion rate is without a doubt this year’s most talked about tax measure. It’s important to note that the mechanics of this change, which came into force on June 25, have been subject to some finetuning since then. As well, experts note that the fate of this measure could be uncertain if an early election is triggered since, at the time of this writing, the bill containing it has not yet been passed. Even so, here are the general principles to be aware of. 

Before last June 25, only half of a capital gain realized within a non-registered account had to be included in your taxable income. The other half was tax free. Since June 25, this inclusion rate has been increased from 50% to 66.6% (more precisely, from half to two-thirds), now leaving only one-third of the gain tax free. An important qualification to remember is this: if you realize the gain as an individual, the first $250,000 of capital gains realized each year will continue to benefit from the rate of 50%. But if it’s your business that realizes the gain, the new rate of 66.6% will apply to the whole amount. 

The following table illustrates the difference in tax for a $400,000 capital gain realized on the sale of an income property, second home or other major taxable assets in 2023, and the same gain realized in 2024. For the purpose of this example, the marginal tax rate is assumed to be 50%.  

For a business owner, the difference is more striking, as shown here: 

This “new normal” might prompt you to consider different strategies to reduce the amount of taxable capital gains you realize in a given year. Especially if you own a business, you might try to realize more gains as an individual than within your company, or consider investment solutions that generate low or no taxable capital gains each year, such as life insurance, some classes of mutual funds, or an individual pension plan (IPP).  

In any case, be sure to discuss options with your advisor. 

2. Another reason to plan carefully: passive income 

Business owners have another reason to carefully analyze the investments (or “passive income”) made by their companies. Since 2018, any passive income realized by a company in excess of a $50,000 annual limit will gradually reduce the company’s eligibility for the reduced small-business tax rate (known as the small business deduction, or SBD). In principle, this favourable rate applies to the first $500,000 of the company’s income from operations (or “active income”). However, as shown in the following diagram, if the company has passive income of more than $50,000, the proportion of its earnings eligible for the SBD begins to decrease, dropping to zero once passive income exceeds $150,000. 

As a result, if you were in a position similar to that of the entrepreneur in our previous example, it would be important to know that not only would two-thirds of your $400,000 capital gain now be taxable, but also that, because of this gain, the tax on your income from operations would be about 26% instead of about 12% (the exact numbers vary depending on the province). 

Another good reason to seek out informed advice. 

3. Buying real estate just got easier… but more expensive    

A number of new developments were introduced in 2024 for individuals hoping to become homeowners. To begin with, first-home buyers can now withdraw up to $60,000 from their registered retirement savings plans (RRSP) to use as a down payment under the Home Buyers’ Plan (HBP). The previous limit was $35,000. They also have a longer period available before starting to repay their RRSPs, although some conditions apply. For more information, see this article. 

Second, eligibility for 30-year mortgages, which had been limited to people with a down payment of at least 20%, is now also available to first-home buyers with a down payment of less than 20%. With the benefit of more time to repay the loan, they will be able to reduce the size of their periodic payments. 

Finally, the value of a property you could buy with a down payment of less than 20% (by obtaining insurance from the CMHC – Canadian Mortgage and Housing Corporation) is now $1.5 million. It used to be $1 million.  

Taken together, these measures are intended to make it easier to purchase a first home, particularly in markets with very high prices. However, it doesn’t mean that the properties are any more affordable. The diagram below illustrates the case of a family with $200,000 to put down. In the first scenario, the couple buys their home under the old rules and puts a 20% down payment on a property selling for $1 million, with an uninsured 25-year mortgage. In the second scenario, the couple takes advantage of the new rules to get an insured 30-year mortgage on a property selling for $1.5 million. As we can see, after five years, the amount of interest paid and the balance owing are much higher in the second scenario. For other sample calculations, see this article. 

If you’re thinking about buying a home, it would be a good idea to make a number of different projections. You’ll probably also want to find out about using another tool designed to help in the purchase of a first home, the first home savings account (FHSA). For further details about this topic, have a look at this article. And for a comparison of the HBP and the FHSA, take a moment to watch this video. 

4. If you want to use the HBP    

If you’ve decided to purchase your first home using the Home Buyers’ Plan, keep in mind that you would have until October 1 of the year following your HBP withdrawal to buy or build your home. So if you’re about to go ahead with your HBP, it might be worth your while to consider waiting a few weeks. Making your HBP withdrawal at the beginning of 2025 would give you until October 1, 2026, to complete your project. But if you made it before the end of 2024, you would have to complete your project no later than October 1, 2025. Since buying or building a home can involve any number of unforeseen issues, you might be glad to have this extra leeway. 

5. Watch out for year-end distributions  

If you hold mutual funds* in a taxable account, you might receive some tax statements in early 2025 reporting taxable investment income, even if you haven’t sold any securities. In fact, at year-end, many mutual funds credit their unitholders with the interest, dividends and capital gains the funds realized during the year. The logic behind these “distributions” is that it’s generally preferable from a taxation point of view for this income to be taxed in the hands of the investor rather than the fund itself. These distributions are made in the form of additional units in proportion to the units already held, regardless of when they were purchased. That’s why, if you’re planning to invest in mutual funds before the end of this year, you might want to confer with your advisor to determine whether it might be better to delay your purchase a few weeks to avoid paying tax on an investment you only just bought. As for the funds you already hold that will be distributing substantial year-end capital gains, it might be a good idea to offset these gains with losses realized on other investments. 

Which brings us to the next point. 

6. Losers can be winners 

An investment portfolio usually contains some securities that have gained value and others that have lost it. This fact gives rise to a tax strategy that can be advantageous at year-end: tax-loss selling. The idea is to sell investments that will result in capital losses that can be applied against capital gains realized in the same year or the three previous years. In this way, investment losses can be used to reduce your tax bill.  

One thing to watch out for: if you plan to sell an investment to realize the loss and then immediately buy the same investment again for its upside potential, be aware that this would be classified as a “superficial loss” – a tactic prohibited by law. Another point to remember is this strategy only works with taxable accounts. It doesn’t apply to investments held in registered accounts, such as RRSPs, tax-free savings accounts (TFSA), FHSAs or registered education savings plans (RESP). To gain an understanding of the rules for tax-loss selling, talk to your advisor. 

7. Turning 71 already? 

If you turned – or will be turning – 71 this year, it’s time to make some important decisions about your retirement income: you will have to convert your registered retirement savings plan (RRSP) into a registered retirement income fund (RRIF) or an annuity before December 31. While the RRSP is a savings accumulation plan, the RRIF and the annuity are decumulation vehicles, and they come with minimum annual withdrawals. Similarly, if you have a locked-in retirement account (LIRA), it will also have to be converted into a decumulation plan, annuity or life income fund (LIF), which also involves minimum annual withdrawals. For more information about annuities, check out this article. 

By the way, you also have until December 31 to make a final RRSP contribution, assuming you have enough contribution room. You can also deduct this amount from your income for 2024 to reduce your tax bill. 

8. Time to give back 

Lastly, as the year draws to a close, you may be solicited by charitable organizations that rely on donations in order to do their work. Note that a donation made in 2024 to a registered charity that can issue tax receipts will allow you to claim a deduction on your next tax return. At the federal level, the tax credit is 15% for anything under $200 and 29% above that, with some conditions. There are also provincial tax credits that can increase the total tax saving associated with a donation.  

However, if you have significant wealth that you would like to use for charitable works, why not develop a true planned giving strategy that can make use of additional tax levers to optimize the impact of your giving? Talk to your advisor, who can suggest various ways of proceeding, such as taking advantage of the possibility of giving eligible securities or life insurance policies. 

These eight reminders are only a sampling of the many financial and tax decisions that you may want to consider before the year is over. For a detailed look at the decisions that apply to your specific situation, once again there’s a single starting point: your advisor! 
 

* Mutual funds are offered by group savings representatives at SFL Investments, a financial services firm.