Golombek’s Year-End Tax Tips

Text transcript

Welcome to Advisor To Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject matter experts themselves. 

Jamie Golombek, managing director, tax and estate planning with CIBC Private Wealth. 

Each year, towards the end of the year, we talk to clients about year-end tax planning.  

And we talk about the normal stuff, like tax-loss selling and donations, and we certainly can talk about that today, but what’s new and unique for the first time in 2024 is tax-gain selling.  

That’s right. And that’s because as of June 25, the capital gains inclusion rate was increased to two-thirds for individuals with more than $250,000 of gains annually. 

So, the question that we’re talking about with many of our clients is whether or not it makes sense to crystallize $250,000 of capital gains before the end of the year to take advantage of the fact that the first $250,000 of gains are taxed at the lower 50% inclusion rate.  

Now, crystallization for publicly traded shares is simply as easy as selling the position on the open market and immediately buying it back. So, you know, as opposed to tax-loss selling, where you have to wait 30 days to buy it back, there’s no equivalent superficial gain rule, and therefore you can literally buy back that stock immediately and be able to recognize that gain.  

Now, the question is, Is this actually a good idea?  

And to decide whether this is a good move, you really need to consider your expected rate of return and your time horizon. So, for example, if, for example, you don’t pay the tax in 2024, and you had invested that to earn a 6% rate of return in capital gains, it would take about eight years, after-tax, to be able to beat the tax savings attributable to that lower inclusion rate. So in other words, there is a break-even number based on your expected rate of return and hold period to determine whether it makes sense to crystallize that gain in 2024, as opposed to just recognizing that gain in a later year, when perhaps you would be in the higher inclusion rate because your gains are over 250.  

Common scenarios for that would be if you’re planning to sell a vacation property or perhaps an income property in a future year with a significant capital gain, then that might put you in a higher bracket. Similarly, on death, the deemed disposition at fair market value could put someone with gains easily over $250,000. 

Then we get into the stuff that we talk about every year.  

We do talk about tax-loss selling. The big difference for 2024 is that we have now moved to a T+1 settlement date, meaning that for 2024 you can actually trade as late as December 30, 2024, to complete the settlement of that trade by December 31. Take that capital loss; it must be applied against capital gains of the current year, and any excess can go back three years or carried forward indefinitely. So that’s tax-loss selling. Of course, we’re mindful of that 30-day rule, which says that if you buy it back within 30 days after the date of sale, then ultimately, either you or your spouse or partner, corporation, your RRSP or TFSA buys it back, that’s a superficial loss. And therefore, that loss is denied and added to the ACB of the repurchased securities. So again, keep that in mind.  

In terms of other things to think about, if you’re going to take money out of your TFSA, sometime in 2025, maybe you take that withdrawal out in late 2024. The reason is that any TFSA withdrawals will be added to your contribution room, beginning the following calendar year. So, for individuals that are looking to take out a TFSA withdrawal — maybe for a wedding reception, to buy a home, to buy a car, for renovations — anytime in sort of 2025, at least in the early part, maybe you take it out in December, which means that you can start repaying it as soon as January 1 should you come into some money, inheritance, severance, things like that.  

In terms of other strategies, we’re talking about, you know, clients who turn 71 should convert the RRSP to a RRIF before December 31. You’ve got only till December 31 to make that final RRSP contribution unless, of course, you’ve got a younger spouse and you want to do a, you know, a spousal RRSP. 

And then, I would also suggest that for anyone who is a first-time homebuyer, which means they haven’t owned a home in the current year and the previous four calendar years, as long as you’re a resident of Canada and 18 years of age, don’t forget to open up the FHSA before December 31, 2024, if you’ve never done so. And the reason you would do that is opening up the FHSA immediately entitles you to contribute $8,000. If you don’t open up the FHSA, you cannot have any carryforward. So again, even if you don’t put any money in, you open up the FHSA, you get $8,000 of room, and then next year, you get another $8,000 of room. So again, for anyone who’s a first-time homebuyer, we have clients that are giving money now to their children, once they reach age of majority, to open up their own FHSAs. This can be a good strategy.  

Before the end of the year is also a good time to finalize any home renovations that might be eligible either for the Home Accessibility Tax Credit, which can assist seniors and people with disabilities for certain home renovations. That’s 15% of $20,000 — that’s $3,000 of value. And similarly, the Multigenerational Home Renovation Credit for $50,000 of home renovations to effectively create a self-contained dwelling, a secondary unit in your home to be occupied by a qualifying relative, typically a parent or grandparent, and to live with you. And so again, if you spend those dollars before the end of the year, you’ll be able to claim that credit this year in 2024. 

RESPs, education savings plans, we want to get that $2,500 a year as a minimum to get the government grant. That’s worth doing before the end of the year. Similarly, if there’s someone in the family with a disability, a long-term disability, they qualify for the Disability Tax Credit. Don’t forget about the Registered Disability Savings Plans. You want to get those grants and bonds before the end of the year.  

And in terms of charitable giving, we always say those charitable gifts have to be done by December the 31st to get your credit and receipt for 2024. The big opportunity on charitable giving, as many of us would have experienced significant gains on various stock positions in a non-registered account, is to make a gift in-kind to a registered charity. Because if you do that, not only do you get a receipt for the fair market value but you also pay zero capital gains tax. That’s even more important if you’ve got gains over $250,000 now, where you have a significantly higher capital gains tax, which now could be completely sheltered by making a gift in-kind to a registered charity.  

If you’re not sure what registered charity, but you still want to get your tax deduction this year, you might consider something called the donor-advised fund. And a donor-advised fund is an account that you have with a public foundation where you make that gift, either of cash or of securities in-kind, you get your receipt for 2024, but the money is now invested inside the donor-advised fund. And then you can decide in the future which charities you wish to support.  

And then finally, I would say for business owners, it becomes a little bit more complicated to think about rules of thumb in terms of compensation. Do I pay salary or bonus, or do I pay dividends? Again, lots of material has been written on this. I would say, as a general rule, for a business owner that needs to withdraw funds from their corporation, probably worthwhile taking out at least enough money to create your RRSP maximum. So, for 2024 you want a salary or bonus of $180,500. At 18% that will give you the maximum RRSP contribution for next year, which is $32,490.