Year-End Tax Strategies: Reduce Your 2024 Tax Burden and Plan for a Prosperous 2025

As the year draws to a close, it’s easy to get caught up in holiday preparations, but this time of year is also an ideal opportunity to focus on tax planning strategies that can help reduce your tax liability and put you on a path to achieving your financial goals. With just over a month left in 2024, there are several proactive steps you can take now to ensure your financial success in both the short and long term.

These tax planning strategies that can benefit individuals and small businesses (whether you’re a sole proprietor or incorporated). The goal of effective tax and financial planning is always to take a proactive, forward-thinking approach. By aligning your financial goals with the strategies that best suit your circumstances, you can position yourself for long-term success. Open communication with your accountant is crucial—by sharing your goals and understanding your current financial position, they can help you craft a tax strategy that aligns with your objectives.

End-of-Year Tax Strategies: Opportunities to Reduce Your Tax Burden in 2024

1.       Maximizing Registered Retirement Savings Plan (RRSP) Contributions If retirement savings are on your mind, now is the time to maximize your RRSP contribution. RRSPs offer a tax-deferred growth advantage, and contributions made by March 1, 2025, can be deducted from your 2024 income. By contributing before the deadline, you reduce your taxable income for the current year and save on taxes. The more you contribute, the more you can potentially reduce your overall tax liability for 2024, making this a powerful tax-saving strategy.

2.       Contributing to a First Home Savings Account (FHSA) For those looking to buy their first home, the FHSA is an excellent tax-advantaged savings tool. By contributing to your FHSA before December 31, 2024, you can claim deductions against your 2024 income. If you haven’t yet opened an FHSA, doing so now gives you a great opportunity to save for a down payment while enjoying both tax deferral and tax-free withdrawals for qualifying home purchases. The annual contribution limit is up to $8,000, with a lifetime limit of $40,000, so maximizing your contributions can set you up for a successful home purchase.

3.       Utilizing Capital Losses If you have investments or capital assets that are currently underperforming, it may be an opportune time to realize those losses before the end of the year. By selling investments at a loss, you can offset any capital gains you've realized during 2024, which could reduce your overall tax liability. Additionally, if you have capital losses carried forward from previous years, you might want to consider selling investments that have appreciated in value to utilize those carried-forward losses. By doing so, you can reduce or even eliminate the taxes owed on the capital gains from these investments. This approach can be especially valuable if you’re looking to improve your cash flow for 2025, as it can lower the taxes assessed on the net capital gain while also freeing up cash.

With this strategy, it’s important to also consider the impact of the proposed increase to the inclusion rate for capital gains. In addition, if you are subject to the Alternative Minimum Tax (AMT), you should carefully assess how the change in the capital gains inclusion rate might affect your AMT liability. Given the complexity of these changes, it is essential to discuss the potential impact with a tax professional before making any significant dispositions.

4.       Charitable Donations If giving to charity is part of your year-end plans, remember that charitable donations made before December 31 can be claimed as a tax credit for the 2024 tax year. Donations to registered charities provide both personal satisfaction and tax benefits. Larger donations may qualify for enhanced tax incentives, so consider making your contributions early to maximize your credits. Whether in the form of cash or other assets, donations are an excellent way to reduce your tax liabilities while supporting causes that are meaningful to you.

5.       Paying Out a Bonus to Reduce Corporate Taxes If you are a business owner and have the flexibility to do so, consider paying yourself a bonus before the end of the year. Bonuses paid in 2024 will reduce your corporation’s taxable income, lowering its corporate tax bill for the year. While the bonus will be included in your personal income in 2025, the timing of the payment allows you to defer taxes personally. The key benefit here is that you have until six months into the new year to pay out the bonus and make your payroll remittances, providing flexibility in your cash flow planning.

6.       Staggering Corporate Withdrawals If you need to take a large sum out of your corporation—perhaps for a significant purchase like a home down payment—consider staggering the withdrawal over two years. By taking a portion of the withdrawal before December 31, 2024, and the remainder in 2025, you can spread your personal income across two tax years. This strategy can help you avoid pushing yourself into a higher marginal tax bracket in one year, ultimately reducing your overall tax burden.

Looking Ahead to 2025: Key Tax Considerations for the New Year

While it’s important to take advantage of tax-saving opportunities in 2024, it’s equally important to start thinking ahead to 2025. The following items should be on your radar as you plan for the year ahead:

1.       Ensuring You Have Sufficient Cash Flow for Tax Obligations One of the most important aspects of tax planning is ensuring that you have enough liquidity to meet your tax obligations when they arise. Start preparing now to set aside money for your 2024 tax payments. Depending on your business structure, this could include income taxes, GST/HST, or payroll-related remittances. Planning ahead will help you avoid surprises when your tax bills come due. The final tax payment for corporations with a December 31 year-end is typically due by March 31, 2025. For individuals and sole proprietors, the final tax payment for 2024 is generally due by April 30, 2025. Be sure to review your payment deadlines and ensure you have enough funds set aside to meet these obligations on time to avoid penalties and interest.

2.       Capital Gain Inclusion Rate Increase Starting June 25, 2024, corporations and most trusts will need to include 66.67% of capital gains in income for tax purposes, up from 50%. For individual taxpayers, the higher inclusion rate will apply only to the portion of capital gains exceeding $250,000. Capital gains below this threshold, whether realized directly by an individual or indirectly through a trust or partnership, will continue to be subject to the 50% inclusion rate each year. Graduated rate estates (GREs) and qualified disability trusts (QDTs) will also benefit from the $250,000 threshold, but this will apply only to capital gains taxed within the trust itself, not those allocated to beneficiaries.

3.       BC Home Flipping Tax If you’re considering selling a property in British Columbia, especially within a short time frame, be aware that the BC government has implemented a "home flipping tax" which takes effect January 1, 2025. Property acquired before the tax's effective date could still be subject to the tax if sold on or after January 1, 2025, and held for less than 730 days, unless an exemption applies. The tax applies to 20% of the income earned from a property sold within 365 days of acquisition. The tax rate decreases over the following 365 days, and after 730 days, the tax no longer applies. It's also important to note that any gain from the sale of a property held for less than 365 consecutive days before its disposition is considered business income, not a capital gain, unless the sale was triggered by specific life events (e.g., death, divorce, relocation for work, etc.). In such cases, the federal tax will apply to 100% of the gain, rather than the 50% or 66.67% inclusion rates for capital gains.

4.       Bare Trusts Required to File in 2025 In 2025, bare trusts will be required to file a return with the Canada Revenue Agency (CRA) even if the trust was only active for a single day during the year. If you’ve been using a bare trust for property ownership or investment purposes, this new requirement means you’ll need to ensure that you meet the filing obligations for the trust. Failing to file could result in penalties, so it’s critical to stay informed and ensure compliance. For income tax purposes, a bare trust is a trust arrangement in which the trustee is considered to act as an agent for all the beneficiaries with respect to the trust's property dealings. A trustee is considered to act as an agent for a beneficiary when the trustee has no substantial powers or responsibilities, can take no action without instructions from the beneficiary, and their only role is to hold the legal title to the property.

By taking a proactive approach to tax planning now, I can help you reduce your tax burden for 2024 and set you up for long-term financial success in 2025. Working together, we can implement strategies that align with your personal and business goals, ensuring you're making the most of your opportunities and staying ahead of any changes. Let me guide you through the process to optimize your tax position and secure a stronger financial future.