As the year draws to a close, it’s a prime time to review your financial plans, make adjustments, and take advantage of any tax-saving opportunities. A strategic approach to year-end financial planning can help Canadian businesses and individuals start the new year on solid ground. Here are some detailed tips for optimizing your financial position and ensuring a smooth tax season.
1. Maximize Your RRSP Contributions
Contributing to your Registered Retirement Savings Plan (RRSP) is one of the most effective ways to reduce taxable income. For 2025, the RRSP contribution limit is 18% of your previous year’s income, up to a maximum of $32,490. To maximize tax benefits, consider topping up your RRSP contributions before the contribution deadline (usually 60 days into the new year, but planning early gives you more flexibility).
Tip: If you have unused contribution room from previous years, this could be an ideal time to catch up. Speak to your CPA to see if contributing more this year makes sense based on your financial situation.
2. Tax-Loss Harvesting for Investment Portfolios
Tax-loss harvesting is a valuable strategy for investors looking to reduce capital gains taxes. If you have investments that have declined in value, you can consider selling them to offset capital gains from other investments. This strategy can reduce your overall tax liability, but it's essential to review your investment goals and avoid making impulsive decisions.
Note: The "superficial loss" rule states that you cannot repurchase the same security within 30 days of selling it if you want to claim the capital loss. A CPA can help you assess which securities to sell and guide you through the timing of these transactions.
3. Review Taxable Income and Deductions
Assess your taxable income and deductions with an eye toward optimizing your tax bracket. Here are a few specifics:
- Income Splitting: If you’re a high-income earner with a spouse or partner in a lower tax bracket, consider income-splitting options. Transferring income or utilizing spousal RRSPs can help lower your tax rate.
- Charitable Contributions: Donating to a registered charity before year-end can provide tax benefits. In Canada, donations offer tax credits, and claiming all eligible donations in one year may increase the credit.
- Medical and Tuition Credits: Make sure you claim all eligible credits, including medical expenses and tuition. Certain tax credits, like tuition, can be transferred to a family member if they are not needed by the student.
4. Optimize Corporate Year-End Planning
If you run a business, review your corporate tax strategies for maximum efficiency. Here are a few areas to consider:
- Accelerate Expenses and Defer Income: If your income is high this year, consider accelerating business expenses like purchasing equipment or supplies. Conversely, you may want to delay invoicing to push income into the next year if you expect lower total income next year.
- Dividends vs. Salary: Decide whether it’s more tax-effective to pay yourself a salary or dividends, based on your total income and deductions. Salaries are deductible for the corporation but attract CPP contributions, while dividends can offer a lower personal tax rate but aren’t deductible.
- Use of Capital Cost Allowance (CCA): Review whether you have unused CCA on depreciable assets. Taking the maximum allowable CCA can reduce taxable corporate income. Discuss with your CPA which assets to claim depreciation on and which to carry forward.
5. Contribute to a TFSA Before Year-End
The Tax-Free Savings Account (TFSA) limit for 2024 is $7,000, and any unused contribution room carries forward indefinitely. Contributions to a TFSA grow tax-free, and withdrawals are not subject to taxes.
Tip: While TFSA contributions don’t reduce your taxable income, maximizing your TFSA provides future tax-free growth, making it a powerful tool for long-term financial planning.
6. Optimize Your Debt Strategy
Evaluate your debt to see if there’s an opportunity to improve your financial health. Consider paying down high-interest debt, such as credit card balances. Mortgage interest rates are currently variable, so planning for potential rate adjustments can protect you from unexpected payment increases.
For business owners, reviewing business loans and lines of credit could reveal opportunities for refinancing at lower rates. A CPA can assist in evaluating whether it makes sense to prioritize certain debt payments before year-end.
7. Assess Health & Dental Expenses
If you have significant medical or dental expenses that haven’t been reimbursed, consider timing these expenses to fall within the same tax year to maximize your claim. The Medical Expense Tax Credit allows Canadians to claim eligible medical expenses on their tax return, but they must exceed a minimum threshold.
Tip: Check with your CPA about what qualifies for the Medical Expense Tax Credit, as items like certain medical devices or out-of-country treatments might be eligible.
8. Prepare for Changes to Tax Laws
Stay informed about any tax law changes for the upcoming tax year. Canadian tax regulations are updated periodically, and being aware of these changes can help you plan better. For instance, recent adjustments to the capital gains inclusion rate may impact your existing tax plan.
Conclusion
Year-end financial planning is a powerful opportunity to assess your financial goals, minimize tax liabilities, and strengthen your position going into the new year. Working with a CPA can ensure that you’re using every strategy available to maximize savings and set yourself up for long-term financial success. Whether you’re an individual, a small business owner, or a corporation, start early to take full advantage of these year-end opportunities.
For personalized guidance on your year-end financial planning, feel free to reach out to our team at JMH&Co. We’ll work with you to create a strategy tailored to your specific needs, ensuring you make the most of every available tax-saving option.
This blog was written using the assistance of ChatGPT.
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