Some strategies are time-sensitive, while others can help you start the new year on the right foot.
RESP contributions
Registered education savings plans (RESPs) are used to save for a child’s post-secondary education. Contributing to an RESP can give you access to government grants, including up to $7,200 in Canada Education Savings Grants (CESGs). The federal government provides matching grants of 20% on the first $2,500 in annual contributions. You can catch up on shortfalls from previous years to a maximum of $2,500 of annual catch-up contributions. But there is a lifetime limit of $50,000 for contributions for a beneficiary.
If a child is a teenager and there are a lot of missed contributions, the year-end could be a prompt to catch up before it’s too late. The deadline to contribute and be eligible for government grants is December 31 of the year that a child turns 17. And you need at least $2,000 of lifetime contributions, or at least four years with contributions of at least $100 by the end of the year a beneficiary turns 15, to receive CESGs in years that the beneficiary is 16 or 17.
RRSP withdrawals, or RRSP-to-RRIF conversion
If you’re considering registered retirement savings plan (RRSP) contributions to bring down your taxable income, year-end does not bring any urgency. You have 60 days after the end of the year to make contributions that can be deducted on your tax return for the previous year.
However, if you are close to retirement and contribution to a spousal plan, there are timing advantages to making the contribution in December instead of January or February (the 2 calendar years of wait time for withdrawals to be made).
If you are retired or semi-retired, year-end is a time to consider additional RRSP or registered retirement income fund (RRIF) withdrawals. If you are in a low tax bracket, and you expect to be in a higher tax bracket in the future, you could consider taking more RRSP or RRIF withdrawals before year-end.
Or if you may be eligible for the Guaranteed Income Supplement for low income seniors in the future, you may want to draw down your RRSP before then.
If you are 64, you may want to consider converting some of your RRSP to a RRIF so that withdrawals in the year you turn 65 can be eligible for pension income splitting. This allows you to move up to 50% of your withdrawals onto your spouse’s tax return.
If you are 71, the end of the year does bring some urgency, because your RRSP needs to be converted to a RRIF by the end of the year you turn 71. You will typically be contacted before year-end by the financial institution where your RRSP is held to open a RRIF.
TFSA contributions
For those investing or saving in a tax-free savings account (TFSA), year-end is not a significant event. TFSA room carries forward to the following year, so if you do not contribute by year-end, you can contribute the unused amount next year.
However, year-end does bring new TFSA contribution room. On January 1 of each year, Canadians get additional contribution room, which includes the maximum TFSA room for that year, plus room carried forward, which includes any withdrawals taken the previous year.
It usually makes sense to contribute to your TFSA promptly in the new year to get that money growing tax-free as early as possible.
TFSA withdrawals
If you plan to move some or all of your TFSA from one financial institution to another, instead of transferring and paying fees, you can withdraw by December 31 and add to the new financial institution in January.
FHSA contributions and withdrawals
For someone who has not owned a home in the previous four years or lived in a home owned by their spouse in the previous four years, a first home savings account (FHSA) is a great way to save for a home purchase. Unlike with an RRSP, there is no 60-day extension after year-end to contribute. So, year-end could be a prompt to try to maximize FHSA contributions. It may also be a good idea to open the account before year-end, even if you don’t intend to contribute right away.
The FHSA annual contribution limit is $8,000, but you can also catch up on up to $8,000 of missed contributions from previous years, subject to the lifetime maximum of $40,000 for the account. Contribution room only begins to accumulate once you’ve opened the account.
A contributor may have a tight window to take advantage of FHSA contributions, which are tax-deductible, and FHSA withdrawals, which are tax-free when used to buy an eligible first home. FHSA account holders who become homeowners and remain so for the rest of their lives may not get a chance to use an FHSA in the future.
An FHSA can remain open until the first of these occurs: the account is open for 15 years, the end of the year you turn 71, or the end of the year following the year in which you make a qualifying home purchase. You can transfer unused FHSA funds to an RRSP or a RRIF without being penalized or affecting your RRSP contribution room.
Tax installments
If you have not paid the installments requested by the Canada Revenue Agency and you expect to owe tax, a shortfall could result in installment interest when you file your tax return. The current prescribed rate charged on underpaid installments is a relatively high 9%.
On the other hand, if you have a December 15 installment still to pay, you may be able to estimate your income for the year given the proximity to year-end. If you do an estimate of your 2024 taxes and find paying your December 15 installment in full could lead to a tax refund, you may be able to remit a lower amount or skip the payment altogether. No need to contact CRA; you just better be right!
Deductions and credits
If you are self-employed and anticipate a business expense you will need to incur in the new year, you could purchase before December 31 to claim the deduction (or partial deduction, in the case of capital expenditures) on the current year’s tax return.
Donations & Medical Expenses
Tax credits like donations and medical expenses are good year-end expenses to consider so you can benefit from the tax savings now.
Merry Christmas, Joyeux Noel, Frohe Weihnachten, Glaedelig Jul, Feliz Natal
From your Ste Anne Tax Service team
Anni Markmann is a Personal Income Tax Professional and Certified Financial
Planner; living, working, and volunteering in our community. Contact Ste
Anne Tax Service at 204.422.6631 or 36 Dawson Road in Ste Anne (near Co-op) or info@sataxes.ca