Year-end tax tips: Here’s what is unique to 2024

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With just six weeks to go before Dec. 31, now is the perfect time to begin your year-end tax planning. Here’s a few things to consider, which are unique to 2024.

Tax-gain selling

The 2024 federal budget proposed an increase to the capital gains inclusion rate for gains realized on or after June 25, 2024, whereby the inclusion rate was increased to 66.67 per cent, up from 50 per cent. Individuals and certain trusts (specifically, graduated rate estates and qualified disability trusts) are still entitled to the former 50 per cent inclusion rate on the first $250,000 of capital gains annually. The increase in the tax rate on capital gains over $250,000 is about nine percentage points, depending on your province or territory of residence.

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While the legislation hasn’t yet been passed, it’s widely expected to eventually receive royal assent, and be effective as of this June 25. For investors with significant accrued capital gains in their portfolios, a new tax planning option exists for 2024.

Consider whether it’s worth crystalizing up to $250,000 of capital gains before year end to take advantage of the lower 50 per cent inclusion rate. Crystallization for publicly traded shares is as easy as selling the position on the open market and immediately buying it back. Note that, unlike for loss crystallization, there’s no equivalent superficial gain rule, meaning you don’t need to wait 30 days to buy back the stock on which you crystalized a capital gain.

For 2024, the last trade date is Dec. 30 for the trade to settle by Dec. 31.

When deciding whether to make this move, consider your expected rate of return and time horizon. For example, if the tax that you don’t pay for 2024 was invested to earn six per cent capital gains, compounded annually, it would take about eight years of tax-deferred growth, after-tax, to beat the tax savings attributable to the lower inclusion rate.

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First home savings accounts

If you’re a first-time homebuyer who is a resident of Canada and at least 18, the first home savings account (FHSA) allows you to save on a tax-free basis toward the purchase of a home in Canada.

A first-time homebuyer means you didn’t live in a home that you or your spouse or partner owned as your principal place of residence in 2024, or in the previous four calendar years.

Starting in the year that you open an FHSA, you can contribute (or transfer from a registered retirement savings plan, or RRSP) a total of $8,000 plus any carryforward (up to another $8,000) available from the previous year, and up to $40,000 during your lifetime.

If you opened an FHSA in 2023 but did not yet make any contributions to the FHSA, you can contribute up to a total of $16,000 in 2024. You can claim a tax deduction for contributions within this limit in the year the contribution was made and any unused contributions can be deducted in any future year. Unlike RRSPs, contributions you make within the first 60 days of 2025 cannot be deducted in 2024, meaning that there is a hard contribution deadline of Dec. 31, 2024, for the 2024 contribution.

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It’s important to keep in mind that because FHSA room only begins accumulating once you open up your first FHSA, it may be worthwhile opening up your first FHSA by Dec. 31, 2024, even if you don’t have the funds to contribute the full $8,000 this year. That’s because by merely opening up the account in 2024, you’ll generate $8,000 of FHSA contribution room for 2024, and on Jan. 1, 2025, generate a further $8,000 of room, meaning that you could contribute up to $16,000 next year.

The best part of the FHSA is that the contributions can grow tax-free for up to 15 years, and withdrawals to purchase a qualifying home, including withdrawals of any investment income or growth earned in the account, are non-taxable, just like tax-free savings account withdrawals.

And, if you choose not to use the FHSA to buy a first home, you always have the option (until the end of the year you turn 71 or 15 years after opening an FHSA, whichever comes first) of transferring the entire fair market value of the FHSA to your RRSP or registered retirement income fund (RRIF) on a tax-free basis. These transfers don’t use RRSP contribution room, and the funds now in your RRSP or RRIF will only be taxed upon ultimate withdrawal (or upon death).

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Parents or grandparents of children or grandchildren over the age of majority (18 or 19, depending on your province or territory of residence) may wish to consider gifting up to $8,000 to each child or grandchild so that they can open up their own FHSA to save for their first home. While an 18-year-old in Grade 12 may not need a tax deduction right now, as they likely don’t have a lot of income, they can hang on to the FHSA deduction and claim it in a future year when they’re in a higher tax bracket and the deduction is worth something.

Alternative minimum tax

Finally, new for 2024 is the updated alternative minimum tax (AMT) regime, which imposes a minimum level of tax on taxpayers who claim certain tax deductions, exemptions or credits to reduce the tax that they owe to very low levels. Under the AMT system, there is a parallel tax calculation that allows fewer deductions, exemptions, and credits than under the regular income tax calculation. If the amount of tax calculated under the AMT system is more than the amount of tax owing under the regular tax system, the difference owing is payable as AMT for the year.

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The good news is that the new AMT will only affect taxpayers whose taxable income in 2024 is over $173,205. But, if you’re in that tax bracket, and expect to claim large tax deductions on your 2024 return, such as loss carryforwards from prior years, or significant deductible interest expense, you’d better speak to your tax accountant well before Dec. 31 to take advantage of some last-minute planning to reduce or perhaps eliminate that AMT bite for 2024.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.

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