As 2024 wraps up, it’s time to take control of your finances, reduce taxes, and prepare for a successful 2025. Whether you’re contributing to savings accounts, taking advantage of new tax breaks, or managing investments, these actionable Year-end tax tips will help you maximize your financial opportunities before December 31.
1. Maximize Your RRSP Contributions
If you are one of the people who have made significant amount of income and have extra savings available, you should consider contributing to RRSP. Contributing to your Registered Retirement Savings Plan (RRSP) is one of the best ways to reduce your taxable income.
- Deadline: March 1, 2025, for the 2024 tax year.
- Calculation of contribution limit added annually: 18% x earned income from prior year, up to a maximum of $31,560 in 2023 (amount is indexed to increase annually)
- Example: Emma earns $100,000 annually from your day job, she earns 18% x $100,000 = $18,000 contribution room to her RRSP.
- Example 2: John, on the other hand, earns $200,000 annually from his employment income, based on the formula $200,000 x 18% = $36,000, but this would exceed the annual contribution limit $31,560 in 2023 as set out by CRA. So the maximum John is eligible to add to his contribution room is $31,560.
- Actual contribution limit: the actual contribution limit is calculated based on the unused RRSP contribution limit carried forward from prior years + current year contributions. If you are unsure of what it is, please verify against your personal Notice of Assessment issued by CRA.
- Pro tip: If you are expecting to owe $10,000 tax payable, a $10,000 contribution to RRSP will NOT wipe out your tax payable. A $10,000 contribution will simply reduce your taxable income. The amount of taxes it saves depends on your marginal tax rate. If the marginal tax rate is 30%, you can only save $3K of tax liability. If you want to save full $10,000 of tax liability with 30% marginal tax rate, you have to contribute $33,333 to wipe out your tax liability.
Example: Emma earned $70,000 in 2023 and contributed $10,000 to her RRSP in December 2024. This reduced her taxable income to $60,000, saving her approximately $2,500 in taxes.
2. Withdrawing from Your RRSP When Your Income Is Low
If you’re earning little to no income in 2024, consider withdrawing funds from your Registered Retirement Savings Plan (RRSP). While RRSP withdrawals are generally taxable, you may pay little to no tax if your income is below the Basic Personal Amount (BPA), also known as personal tax exemption.
Why This Strategy Works
Using progressive tax system to your own advantage: In Canada, the more income you earn, the higher the tax rate and the higher the tax liability. The flip side though is that everyone every year is entitled to a low set of marginal tax rates.
Withdraw while you have low income can reduce future tax liability: The federal basic personal amount for 2024 is $15,705 and Ontario basic personal tax exemption is $12,399, meaning you can earn up to this amount without paying income tax. Any amount earned between $12,399 and $15,705 would have minimal Ontario tax of 5%. This also means that, if you do not have any other income, 2024 can be a good year to unwind some of your RRSP. You can technically withdraw $12,399 from your RRSP without paying taxes.
If you withdraw more than your annual personal tax exemption, additional withdrawals amount (which is treated as taxable income on your personal tax return) can still be subjected to low marginal tax rates – reducing the overall tax liability.
Example
John is currently unemployed and has no other taxable income in 2024. He withdraws $15,000 from his RRSP in December.
- Federal Tax Liability: $0 (income is within the BPA).
- Withholding Tax: The bank withholds 10% ($1,500) when John withdraws. However, he can claim this as a refund when filing his tax return, as his taxable income is below the BPA.
By withdrawing from his RRSP in a low-income year, John reduces future taxable income when his marginal tax rate is higher.
Important Considerations
- Withholding Tax: Banks withhold taxes on RRSP withdrawals, ranging from 10% to 30% depending on the withdrawal amount. While this is recoverable if your income is low, plan for the short-term cash impact.
- No Contribution Room Restoration: Unlike TFSA withdrawals, RRSP withdrawals don’t increase your contribution room, so only withdraw what you truly need. Once you withdraw from your RRSP, the RRSP contribution room is gone forever.
- Future Tax Implications: Withdrawing now can reduce the tax you’d pay in retirement, especially if you expect a higher income later due to pensions or investments.
- Additional tax: Also worthwhile mentioning that if you already earn some other income, the tax the banks withhold may not be sufficient to cover your tax liability. Do make sure you check with your accountant before you pull any money out of your RRSP.
3. Withdraw from Your TFSA
Planning to withdraw from your Tax-Free Savings Account (TFSA)? Do it before December 31. Withdrawals made this year will increase your contribution room for 2025, while waiting until January will delay that room until 2026.
Example: Sarah withdrew $10,000 from her TFSA in December 2024. Her 2025 TFSA contribution room will increase by $10,000, in addition to the $7,000 annual limit.
Pro Tip: If you’re carrying unused TFSA contribution room, it’s also a good time to add funds to benefit from tax-free growth.
4. Open and Contribute to an FHSA
The First Home Savings Account (FHSA) allows you to save for your first home while enjoying tax advantages. Contributions are tax-deductible, and withdrawals for a qualifying home purchase are tax-free.
- Annual Contribution Limit: $8,000.
- Lifetime Limit: $40,000.
Important: FHSA contributions cannot be retroactively applied to the prior tax year. Contributions made in 2025 will only reduce your 2025 taxable income—not 2024.
Action Item: Even if you don’t have money to contribute now, open an FHSA account to start accumulating contribution room for future year. Note that FHSA contribution room can only be carried forward for one year.
Example: Emma contributed $8,000 to her FHSA in December 2024, reducing her taxable income for the year. If she waits until January 2025, she won’t benefit from a 2024 deduction. Instead, she can deduct the FHSA contribution in 2025.
5. Take Advantage of the GST/HST Holiday
From December 14, 2024, to February 15, 2025, certain items are temporarily exempt from GST/HST, offering a chance to save.
Eligible Items:
- Children’s clothing, footwear, diapers, and car seats.
- Toys, video game consoles, and physical video games.
- Prepared foods and beverages, such as restaurant meals, snacks, and alcohol.
Example: If you spend $300 on taxable groceries like snacks and frozen meals, you’d normally pay $39 in tax (13% in Ontario). During the holiday, you’ll save that amount. Dining out is even more noticeable—a $50 restaurant bill saves $6.50.
Action Item: Stock up on taxable groceries, plan restaurant visits, or purchase client gifts like alcohol during the GST/HST holiday to maximize savings.
6. Airbnb Taxes: Get Compliant Before December 31
Operating an Airbnb or other short-term rental? Starting January 1, 2024, the CRA requires compliance with local rules to claim deductions.
- Key Points:
- Register your property with local authorities and obtain any required permits or licenses by December 31, 2024 to ensure that you can deduct your short-term rental expenses.
- Non-compliant rentals cannot deduct expenses like mortgage interest, property taxes, or maintenance costs.
Action Item: Ensure compliance by year-end to maintain your tax deductions for 2024.
7. Claim Capital Losses on Bad Debts
If someone owes you money and you can’t collect it, you may be able to claim a capital loss on your taxes.
Steps:
- Confirm the debt is uncollectible (e.g., legal action, bankruptcy).
- File an election under subsection 50(1) of the Income Tax Act.
- Report the loss as a capital loss on Schedule 3 of your tax return.
Example:
You lent $50,000 for a house flip, but the borrower defaulted. After failed recovery attempts, you can claim the $50,000 as a capital loss, reducing taxable gains.
Why It’s Important: Reporting the loss offsets taxable gains, reduces your tax bill, and creates a clear paper trail for CRA compliance. Capital losses can be carried backward to 3 prior years and can be carried forward indefinitely. Report the losses the year you realize it, you can offset the capital losses against the future capital gains to lower the future tax liability.
8. Harvest Investment Losses
Selling underperforming investments before year-end can offset capital gains from other investments, reducing your tax bill.
Example: Say Alex made a large amount of capital gain of $200,000 as a result from selling a rental property that he’d hold for a long time. Alex can choose to sell shares that are in a loss position. Loss from selling shares, assuming he is trading them as capital property, can be used to offset against the capital gains he realized earlier on sale of his rental property. A $50,000 loss on sale of shares in December 2024 – and he must realize and settle the shares sale before the end of the year, is offsetting against $200,000 gain from sale of rental property. Reducing his taxable income to $150,000 capital gain.
Pro Tip: If Alex repurchases the same asset within 30 days, the losses that he recognizes are deemed to be “superficial loss”. When you have a “superficial loss”, you technically cannot deduct such an expense. Avoid the superficial loss rule by not repurchasing the same investment within 30 days.
9. Plan for Tax Instalments
If you owed more than $3,000 in taxes last year, the CRA may require quarterly tax instalments. Missing the final instalment in December 2024 could result in interest charges.
Example: Jason is self-employed and expects to owe $12,000 in taxes for 2024. His December 15 instalment ensures he avoids interest penalties.
Pro Tip: Set reminders for instalments to stay on track, and consult with your accountant to ensure accurate calculations.
10. Consider Setting Up a Corporation for Your Side Hustle
If you’re earning significant income from a side hustle, incorporating can lower your tax bill and offer opportunities for tax deferral.
Example: Emily earns $100,000 from her full-time job and $50,000 from a photography side hustle.
- As a sole proprietor, her total income of $150,000 is taxed at her marginal rate (~43% in Ontario), resulting in taxes of $42K. The additional tax she must pay on her $50K side hustle is roughly $21K.
- If she incorporates the side hustle, the $50,000 is taxed at the small business rate of 12.2% (Ontario), resulting in taxes of $6,100.
- By leaving the $50,000 in the corporation, Emily defers paying personal taxes on it, saving approximately $15K in the current year.
Takeaway: Incorporating offers significant tax deferral opportunities if you don’t need to withdraw all your side hustle income immediately.
11. Donate to Charity
Donations made before December 31 can reduce your taxes while supporting causes you care about.
- Tax Credit: 15% federal credit on the first $200 donated and 29% on amounts above that (higher in some provinces).
Example: Liam donated $1,000 to a registered charity before December 31, 2024. He is eligible to claim the donation tax credit on his 2024 personal tax return.
Pro Tip: Keep receipts for all charitable donations to claim your tax credits.
12. Review Health Spending Accounts and Medical Expenses
If your employer offers a health spending account (HSA) or medical benefits, check your balance and usage before the year ends. Many plans have a “use-it-or-lose-it” rule, meaning unused funds will not roll over to the next year.
Maximize Your Benefits
- Check Your Coverage Limits: HSAs and medical benefits often cover a range of services, such as physiotherapy, dental care, or vision. If you haven’t used these benefits, now is the time to take advantage.
- Schedule Appointments: If you’ve been putting off necessary health treatments, such as physiotherapy, massages, or dental cleanings, book them before December 31 to ensure coverage.
Example
Chloe’s employer provides an HSA with $300 annually for physiotherapy. Despite having minor back pain all year, she hasn’t made any claims. By scheduling a physiotherapy session in December, Chloe can use her $300 balance before it expires and avoid leaving money on the table.
Action Item: Review your benefits plan and book appointments now to ensure you maximize the value of your employer-provided health coverage.
13. Wind Up Your Trust Relationship in 2024 to Avoid Future Filing Obligations
The CRA’s enhanced trust reporting requirements, temporarily paused for 2024, will return in 2025. These rules apply to any trust relationship that exists during 2025, even if the trust property is sold or the relationship ends partway through the year.
Why This Matters
- Avoid Filing Obligations:
- Trusts active at any point in 2025 will need to file a T3 Trust Income Tax and Information Return, providing detailed disclosures about trustees, beneficiaries, and the trust’s activities.
- Filing requirements remain extensive and involve significant penalties for non-compliance, even for trusts with no income.
- Exemptions End in 2024:
- For 2024, many trusts, including bare trusts, are not required to file unless specifically requested by the CRA. This makes 2024 the ideal year to wind up inactive or unnecessary trust arrangements.
- Avoid Future Administrative Burdens:
- By closing the trust in 2024, you eliminate the need for detailed compliance in 2025, saving time, costs, and administrative hassle. If you are unsure about how to wind down a trust relationship, make sure you consult your accountant or lawyer.
Example: Rental Property Held in a Trust Relationship
John is the sole owner of a rental property, but his wife, Sarah, co-manages the property. While Sarah isn’t on the title, she helps with tenant management, maintenance, and other operations. The intention is to earn all income and capital gain on a 50/50 basis, hence, they’ve been reporting the rental income as 50% John and 50% Sarah, even though John is the sole legal owner of the property.
Why a Trust Relationship Exists
Since John is on title but Sarah benefits from the property and reports income, this arrangement creates a bare trust relationship where John is considered the legal owner (trustee) and Sarah is the beneficial owner.
- Under the CRA’s enhanced trust reporting rules, this relationship would require the filing of a T3 Trust Income Tax and Information Return starting in 2025.
Solution: Add Sarah to the Property Title
To avoid future trust filing obligations, John and Sarah can add Sarah’s name to the title by December 31, 2024. By doing so:
- The trust relationship is eliminated.
- Sarah becomes a direct legal co-owner, and they can continue to split the rental income as 50/50 without triggering trust reporting.
Impact of Delaying This Action
If Sarah’s name isn’t added to the title in 2024, the trust relationship will remain in effect for 2025. Even if they sell the property partway through 2025, they’ll still need to file a T3 return for the year because the trust relationship existed during that period.
Action Steps
- Review Trust Relationships: Identify any trusts that are inactive or no longer needed.
- Wind Up Before Year-End: Finalize all transfers or sales and formally close the trust by December 31, 2024.
- Consult a Professional: Ensure all legal and tax obligations are satisfied to avoid issues in 2025.
Final Thoughts
From maximizing contributions to managing deductions, year-end tax planning is an essential step toward financial success. By taking action now, you’ll not only save money but also set yourself up for a stress-free tax season in 2025.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
