Year-end tax planning

Long-term investors

Timing is everything

Investors with realized capital gains this year or in any of the preceding three years (back to 2021) can apply net capital losses realized this year against those gains. To realize capital gains and losses in 2024, trades must be executed by Monday, December 30 to ensure settlement by Tuesday, December 31, the last business day of 2024.

Give special attention to trades executed within the calendar year but settled in the following calendar year. Remember, the year a disposition occurs for tax purposes is based on the settlement date and not the trade date. These trades may appear on the relevant tax slips (e.g., a trade initiated in 2024 but settles in 2025 might appear on a 2024 T5008 slip) and statements but are technically reportable in the year of settlement. See below on the capital gains inclusion rate changes.

Take note of the Budget 2024 capital gains inclusion rate changes

One of the most noteworthy measures to come from Budget 2024 is the proposed change to the capital gains inclusion rate, which was previously held steady at 50% since 2001.

For individuals, capital gains in excess of $250,000 annually will be subject to an increased 66.67% inclusion rate as of June 25, 2024, while capital gains up to $250,000 will continue to be subject to the existing 50% inclusion rate. As a transitional measure for 2024, only the capital gains realized by individuals on or after the effective date of June 25 that are above the $250,000 threshold will be subject to the increased inclusion rate. For trusts and corporations, the inclusion rate on all capital gains will increase from 50% to 66.67% starting on June 25, 2024.

There are transitional rules to account for the inclusion rate to be used where an individual has realized capital gains/losses from January 1, 2024 to June 24, 2024 (period 1) versus realized capital gains/losses from June 25, 2024 to December 31, 2024 (period 2). As a general rule of thumb, the capital gains and losses are first computed separately for each period respectively, where gains and losses are netted against each other within the same period. All net capital gains incurred in period 1 are taxed at the 50% inclusion rate, whereas the portion of net capital gains incurred in period 2 that exceeds the $250,000 threshold are taxed at the higher 66.67% inclusion rate. Note that net losses in period 1 can be applied against net gains in period 2 to reduce the gains in period 2. The calculations become more complicated when capital losses from previous years are involved, as different adjustment factors must be applied to use the carryforward losses accurately. Individuals should consult with a qualified tax professional who can help them implement any planning strategies.

For further information on these changes, please see our insight titled, Capital gains changes not very inclusive.

Pay investment expenses and make charitable donations before year-end

Eligible expenses incurred to earn investment income must be paid by Tuesday, December 31, 2024 to be deductible for 2024. Eligible expenses may include interest and investment advisory fees. To give individuals an opportunity to deduct investment advisory fees for services rendered this year, advisors should send invoices with enough time to allow clients to make payments before the end of the year.

Individuals considering making a charitable donation through cash or donating securities in kind should do so by Tuesday, December 31, 2024 if they wish to claim the donation tax credit in the 2024 tax year. From a federal income tax perspective, the first $200 of donations for the year allows an individual to claim a 15% non-refundable tax credit. Donation amounts in excess of $200 enable an individual to apply a federal tax credit towards taxes payable: 29% if income is $246,752 or lower (for 2024) and 33% if income exceeds $246,752. That said, charitable donations can be carried forward to any of the next five years, or to any of the next 10 years for a gift of ecologically sensitive land made after February 10, 2014. Therefore, individuals do not have to claim the donation tax credit on their income tax return for the current year. For more information, please refer to our Tax & Estate InfoPage, Planned charitable giving.

Track the adjusted cost base (ACB) on investments and note transactions that nullify losses

Investors are responsible for keeping track of their own ACB. Be aware that certain transactions can affect the ACB without necessarily being tracked by the financial institutions that hold the investments.

Return of capital (ROC) distributions, which represent principal paid back to investors, are not taxable but instead reduce the ACB of the investment by the amount of the distribution. After ROC distributions reduce the ACB to nil, additional ROC distributions are taxable as capital gains in the year they are received.

“Phantom distributions” (sometimes referred to as “notional distributions”), which are distributions from exchange-traded funds (ETFs) that do not result in the issuance of more units or a change in the net asset value (NAV) of the units, may increase the ACB. Phantom distributions do not give the investor any tangible cash payments but are taxed in the year they are received just like regular distributions. If investors do not correctly account for this by increasing the ACB by the amount of the distribution, they risk being taxed twice on the same amount when they redeem. For more information, please refer to our Insight titled, “How to handle “phantom distributions” from ETFs to avoid double taxation”.

Beware of loss transactions that will be denied

Certain capital losses may be “deemed to be nil” and cannot be claimed. An in-kind transfer from a non-registered plan to a registered plan – for example, a Registered Retirement Savings Plan (RRSP), a Registered Educations Savings Plan (RESP), a First Home Savings Account (FHSA) or Tax-Free Savings Account (TFSA) – results in a disposition for tax purposes. Any capital gains are taxable, and any capital losses are denied. As a reminder, this provision that denies the loss is separate and distinguishable from the superficial loss rules discussed below. Keep this in mind if funding RRSP or TFSA contributions by way of an in-kind transfer of securities from a non-registered account.

In addition, beware of the superficial loss rules. A capital loss realized on a property that is disposed of and repurchased (by the same investor or an affiliated person) within 30 days before or after the disposition is considered a superficial loss if that same or identical property continues to be held after this period. The amount of the loss is added to the property’s ACB. The same rule applies to a property acquired by a company controlled by the investor or an affiliated person or a trust for which the investor or the investor’s spouse/common-law partner is a majority interest beneficiary. It is possible to avoid a superficial loss by not acquiring an “identical” property. Two properties are generally considered identical if they are the same in all material respects and an individual would be indifferent to owning one property over the other. For more information, including a discussion of planning strategies, please refer to our Tax & Estate InfoPage, Capital loss planning.

Consider prescribed rate spousal loans

The current prescribed rate on spousal loans is 5%, and this remains in effect for the duration of the term of the loan. The 5% prescribed rate loan was effective starting October 1, 2024 through to December 31, 2024.

Spousal loan arrangements permit individuals who have a higher tax rate to split income with individuals who have a lower tax rate. If set up properly, the prescribed rate in effect at the time of entering spousal loan arrangement will endure throughout the arrangement despite any changes to the prescribed rate. Payment of the accrued interest expense is due by January 30 of the following year to preserve eligibility for deductibility (for the paying spouse) and to avoid the spousal attribution rules. Also remember that the interest must be included as income for the lending spouse. Given the rise in prescribed rate, individuals may wish to exercise caution and obtain advice from their advisors before entering into spousal loans, since the rate will remain unchanged once the loan is established. One must conduct a cost-benefit analysis on the expected return on investment compared to the cost of servicing that investment.

Families and children

Maximize grants on Registered Education Savings Plan (RESP) contributions

Government grants on RESP contributions depend on the age of the beneficiary. The maximum amount of the basic Canada Education Savings Grant (CESG) that can be received on RESP contributions made in a beneficiary’s name in a given year is $1,000. The maximum CESG that can be received in a child’s lifetime is $7,200. To ensure the maximum CESG amount is received, contributions in a child’s name must begin no later than age 11. In addition, a minimum amount of contributions must be made before a child reaches age 16; otherwise, contributions made while the child is 16 or 17 will not be eligible for the CESG.

For more information, please refer to our Tax & Estate InfoPage, Registered Education Savings Plans.

People with disabilities

Take advantage of Registered Disability Savings Plans (RDSPs) and the medical expense tax credit

People who claim the disability tax credit (DTC) may also make use of RDSPs. These plans offer strong incentives for saving, including the opportunity to shelter investment income and growth from tax and the potential to attract free government bonds and matching government grants. Those bonds and grants are available only until the end of the year in which the beneficiary turns 49, but personal contributions may be made until the end of the year in which the beneficiary turns 59. The maximum lifetime contribution limit is $200,000. There are no annual limits on contributions.

For 2024, the amount individuals can claim federally is the total of all medical expenses exceeding the following two amounts: 3% of net income and $2,759. An equivalent provincial/territorial credit may also be available.

Home buyers and sellers

Make required Home Buyers’ Plan (HBP) repayments

Under the HBP, a first-time home buyer may withdraw up to $60,000 from an RRSP to purchase a qualifying home that he or she intends to occupy as a principal residence. A couple who both qualify can withdraw up to $120,000. (The HBP limit was increased from $35,000 to $60,000 per Budget 2024, applicable to HBP withdrawals made after April 16, 2024.) A “first-time home buyer” is a Canadian resident who has not occupied a home owned by themselves or their spouse/common-law partner as a principal place of residence during the past four full calendar years. For more information on the HBP, please refer to our Tax & Estate InfoPage, Home Buyers’ Plans (HBPs).

The repayment period for HBP participation starts the second year after the year of the HBP withdrawal. That means 2022 HBP participants must repay, or include as income, the minimum HBP amount in 2024. The first 60 days of 2025 may also be used to facilitate the 2024 HBP repayment.

A client who acquired a home during the calendar year and is considered a first-time home buyer may claim a non-refundable tax credit under the “Home buyers’ amount” of $10,000 (equivalent to a value of $1,500) on their income tax return for 2024.

First Home Savings Account (FHSA)

An FHSA will allow a first-time home buyer to save $40,000 tax-free during their lifetime, with an annual contribution limit of $8,000. As with registered retirement savings plans (RRSPs), FHSA contributions are deducted from income. Qualifying withdrawals (i.e., used to purchase a qualifying home by a first-time home buyer) will be tax-free to the individual. The FHSA must be closed upon its 15^th anniversary or when the individual turns 71, whichever comes earlier.

An individual needs to be at least 18 years old and meet the conditions of a first-time home buyer to open an FHSA. The definition of a first-time home buyer mirrors that for HBP purposes. Note that an individual is able to withdraw from both an FHSA and under the HBP for the same qualifying home purchase.

Use the principal residence exemption (PRE)

If a client has recently sold their home, they should examine whether the PRE applies. The PRE may reduce or eliminate a capital gain (for income tax purposes) on a disposition or deemed disposition (e.g., on death) of a house on land not exceeding 0.5 hectares. A few conditions must be met for an individual to claim the PRE:

• The individual must own the property in the year the property is claimed as a principal residence
• The individual must designate the property as their principal residence on their income tax return in the year of disposition
• No other property may have been designated by the individual or a member of the individual’s family unit (spouse/common-law partner or child under age 18)

For all dispositions after 2015, an individual must designate the property on Schedule 3 of the income tax return. In addition, the property must be “ordinarily inhabited” by the taxpayer or by their current or former spouse/common-law partner or child(ren), for each year designated. Note that only one property may be designated by a family unit (generally includes the individual, their spouse/common-law partner, and children under 18) in any particular year.

If your client’s family has multiple properties, refer to our Tax & Estate InfoPage, Planning for a family cottage for a more detailed discussion.

Retirees and seniors

Understand spousal RRSP contributions and withdrawals

A contribution is better made before the end of the year than at the beginning of the following year if the resource is available. Income attribution to an RRSP contributor spouse applies if the annuitant spouse makes a withdrawal before the end of the second calendar year following the spouse’s contribution. For example, a contribution made in January 2023, though deductible by a spousal contributor for the 2022 tax year, was made in the 2023 calendar year. As a result, a withdrawal from the spousal RRSP before 2025 will result in the application of the attribution rules. If that same contribution had been made in December 2022 instead, a withdrawal could be made in 2025 without triggering the attribution rules.

Make final RRSP contributions at age 71

Contributions to an RRSP can only be made up to December 31 of the year in which a person turns 71. For individuals who continue working into their early 70s, this age limit complicates the act of making a final RRSP contribution, as RRSP contribution room for a given year is not credited until the following year.

One approach is to make a final contribution in December of the year the RRSP annuitant turns 71, suffer the 1% overcontribution penalty for that month, and then be back onside in January when the room is credited to the annuitant. If the annuitant has a younger spouse, another option is to contribute to a spousal RRSP (provided the spouse is under 71) in the new year, after the contribution room is credited to the annuitant.

Make final RRSP contributions after death

The legal representative may make a final RRSP contribution into a spousal RRSP on behalf of the deceased individual. This option is only available if the deceased’s spouse/common-law partner is the annuitant. For this final RRSP contribution to take place, the deceased’s spouse/common-law partner must meet the RRSP age requirement (i.e., not be over 71 years old). Moreover, to claim a deduction on contributions made on behalf of a deceased individual, the final RRSP contribution must be made into the spousal plan either in the year of death or during the first 60 days after the end of the year of death. If an individual passed away in 2024, RRSP contribution made on their behalf into their spouse’s/common-law partner’s RRSP may only be deductible (up to the individual’s 2024 RRSP deduction limit) if they were made in 2024 (the year of death) or within the first 60 days of 2025 (i.e., by March 1, 2025¹). If the contributions are made within that designated period and were not deducted from the deceased individual’s 2024 final tax return, an adjustment of the deceased’s terminal return may be allowed. The Income Tax Act does not provide for any deductibility of RRSP contributions paid (on behalf of a deceased individual) into a spouse’s/common-law partners’ RRSP after the first 60 days following the year of death.

TFSA holders

Know the TFSA annual dollar limit and withdrawal deadline

The 2024 TFSA room is $7,000, a $500 increase from $6,500 in 2023. Based on the annual inflation for 2024, the TFSA annual dollar limit will stay at $7,000 for 2025, to be confirmed by the CRA. Further, our internal calculations require an approximate annual inflation rate of 3.13% ending in September 2025 to raise the 2026 annual limit by $500 to $7,500.

Withdrawals from a TFSA are added back to the TFSA holder’s contribution room in the following year. For contribution room to be re-credited to a TFSA holder for 2025, a withdrawal should be made no later than Tuesday, December 31, 2024. The total cumulative TFSA contribution since 2009 equals $95,000 per individual as of 2024.

Recall that money gifted to a spouse or common-law partner to contribute to their own TFSA will not attract the income attribution rules on investment income generated while that gifted money remains inside the TFSA. However, if the amounts are subsequently withdrawn from the TFSA and reinvested outside of the plan, attribution rules will apply on any future income and capital gains earned from the gift.

Consider TFSA exempt contributions at death

On the death of a TFSA holder, the amount up to the fair market value (FMV) of the plan as of the date of death is received tax-free by the beneficiary of the TFSA or by the deceased’s estate if no beneficiary is named. Any growth from the date of death and date of payment is generally taxable to the beneficiary or estate. In the context of TFSAs, a “survivor” is defined as an individual who was, immediately before the TFSA holder’s death, a spouse or common-law partner of the holder. When the survivor is designated as beneficiary directly on the TFSA or through the deceased’s will, it is possible to directly or indirectly transfer the proceeds to the survivor’s own TFSA and designate the contribution as an “exempt contribution.” The exempt contribution must be made by December 31 of the calendar year following the year of death (known as the “rollover period”), and the survivor must file the prescribed Canada Revenue Agency Form RC240, Designation of an Exempt Contribution – Tax-Free Savings Account (TFSA), within 30 days after the day the contribution is made to designate the amount as an exempt contribution. The amount that may be designated as an exempt contribution is usually limited to the FMV at the date of death. The Canada Revenue Agency issued an income tax ruling that addresses various scenarios, including when:

• The estate is designated as the beneficiary of the TFSA
• The FMV of the property held by a TFSA decreased after the death of the TFSA holder; and
• The survivor is a beneficiary of the TFSA holder’s estate through the will

In these circumstances, the ruling indicates the amount that may be designated as an exempt contribution is limited to the lower of the amount paid from the TFSA to the deceased’s estate and the FMV on the date of death, provided the survivor receives at least that amount from the estate as an estate beneficiary.

For more information regarding the treatment of TFSAs following the holder’s death, please refer to the Invesco Tax & Estate InfoPage, Death and taxes.

Further change to the enhanced trust disclosure requirements

Trust reporting rules altered

To counter tax avoidance and assess tax liability for trusts, Budget 2018 introduced a tax return filing and information reporting requirement for taxation years ending after December 30, 2023.

A trust was previously only required to file a T3 Trust Income Tax and Information Return (“T3 return”) for a given year if it has tax payable or if it distributes all or part of its income or capital to the beneficiaries of the trust. The rules were expanded to apply to “express trusts” that are resident in Canada (or deemed to be resident in Canada) or non-resident trusts with a requirement to file a T3 return. The rules require applicable trusts to report, on the relevant T3 return, the identity of the settlor(s), trustee(s), beneficiary(ies), and anyone who has the ability to influence the trustee’s decisions regarding the allocation of income or capital. Additionally, the rules require specific information – such as the name, address, date of birth, jurisdiction of residence and taxpayer identification number (TIN) – to be disclosed for each of these parties (on Schedule 15). Penalties apply to trustees who make a false statement or fail to file a T3 return, either knowingly or in incidents that result in gross negligence. Some exceptions to the new rules apply to certain types of trusts, such as graduated rate estates (GREs), qualified disability trusts (QDTs), mutual fund trusts, and segregated funds. The other notable exemption being trusts that held less than $50,000 in assets through the year with the caveat that those assets are held within a prescribed list of investments.

The rules caused much confusion and uncertainty particularly as it pertains to bare trust arrangements². The CRA eventually waived the enhanced reporting requirement for bare trusts for the 2023 tax year unless the CRA made a direct request for the information.

New proposed changes

In August 2024, draft legislation was released repealing the requirement for bare trust arrangements from filing a T3 return for their 2024 tax year. The proposals introduce a set of new requirements for 2025 tax year and onward. The proposals will require all “deemed trusts” (which will be treated as express trusts) to file a T3 return. Further, with respect to the enhanced trust information reporting requirement, it will apply to all deemed trusts that are not listed trusts³. The proposals make it clear that bare trusts are deemed trusts subject to the income tax return and enhanced information filing requirements except in situations where they are listed trusts. 

A deemed trust is defined as an arrangement where one or more persons have legal ownership of property that is held for the use of, or benefit of, one or more persons or partnerships, and the legal owners can reasonably be considered to act as agent for the beneficiaries. Under the deemed trust definition, each legal owner of an arrangement is deemed to be a trustee of the trust and each person or partnership that has the use or benefit of property under an arrangement is deemed to be a beneficiary of the trust. The definition intends to provide greater clarity on what constitutes a bare trust and relies upon existing trust concepts.

There are also some exceptions to the deemed trust rules as it applies to certain “common arrangements” including (to name a few):

1. Where all legal owners are also deemed to be beneficiaries. It is our understanding that this exception would apply to joint bank account arrangements amongst certain family members such as between spouses.
2. Where all legal owners are related individuals and the property would be the principal residence of one or more of the legal owners, if a principal residence designation was made under the Income Tax Act (ITA) of Canada. This may apply to property arrangements where a parent is added to title of the child’s principal residence as a requirement for the child to obtain a mortgage.
3. Where the legal owner is an individual who holds real property for the benefit of spouse or common law partner, and the property would be the principal residence of the legal owner, if a principal residence designation was made under ITA. This may apply to real estate property arrangements where the wife holds sole title to the family home and where she and her spouse live in the same home.
4. Where the legal owner is a general partner of a partnership, the property is held for the use and benefit of the partnership and partnership information returns are filed under ITA.

In addition, certain express trusts are excluded from the reporting requirements including (to name a few):

1. Trusts that had been in existence for less than three months.
2. Trusts holding assets not exceeding $50,000 throughout the year irrespective of where the trust assets are situated or invested.
3. Related individual trustee and beneficiary exception where:
   1. All trustees are individuals
   2. All beneficiaries are individuals and related to each trustee
   3. The total fair market value does not exceed $250,000 throughout the year
   4. The trust may only hold or invest in assets within a prescribed list of assets
4. Registered plans that include RRSPs, RRIFs, TFSAs, FHSAs, RPPs, RESPs, RDSPs and DPSPs, to name a few.

We continue to monitor developments in this area and provide updates as necessary. 

Tax reporting reminders

Foreign property

The Canada Revenue Agency’s Form T1135, “Foreign Income Verification Statement,” should be completed and filed if, at any time in the year, the total cost amount of a taxpayer’s specified foreign property is more than $100,000 (CAD). Note that Canadian-domiciled ETFs, mutual fund trusts and corporations do not have to be reported on this form, as the taxpayer owns units or shares of the fund (which is domiciled in Canada), and not the securities directly.

Tracking ACB

Taxpayers should review their records to make any necessary adjustments to the ACB of their investments.

Tax return adjustments

Clients can make changes to previously filed income tax returns dating back 10 years. They must request changes to their 2014 income tax return by December 31, 2024.