2024 YEAR-END PERSONAL TAX PLANNING
Capital Gains Transactions:
· The inclusion rate for capital gains was 50% at the beginning of 2024. Budget 2024 proposed an increase of the inclusion rare to 2/3 effective June 24, 2024.
This change has not yet received Royal Assent. It is expected that this will be legislated
in January 2025.
· In accordance with Budget 2024, individuals are eligible to claim a deduction from their taxable income which would effectively reduce the inclusion rate on the first $250,000 of capital gains to 50%. This deduction would apply to gains realized after June 24, 2024. As with many of the other items introduced in Budget 2024, it is not expected that this will receive Royal Assent until January 2025.
· Net capital losses recognized in the year can be carried back to any of the three preceding years or carried forward indefinitely.
· The Capital Gains Exemption on dispositions of certain Qualifying Small Business Corporation shares and Qualifying Farm Property was $1,016,836 at the beginning of 2024. Budget 2024 proposed to increase this limit to $1,250,000 effective June 25, 2024. This increase has not yet received Royal Assent. If legislated, this amount will indexed for
inflation beginning in 2026. The total is reduced by the amount of any capital gains exemption previously claimed. Similar reductions occur if you have claimed an Allowable Business Investment Loss or have a balance in your Cumulative Net Investment Loss account.
If you are considering selling assets in the near future, watch the timing of the sale carefully. Delaying the sale of an asset which will trigger a capital gain to 2025 will usually defer the applicable tax until April 30, 2026. On the other hand, selling an asset which will create a loss before December 31, 2024 may allow application of the loss against 2024 gains or net gains in any of the preceding three years. Care must be taken in the case of stock and bond transactions. If you wish to trigger a 2024 loss, check with your broker or investment advisor to ensure your settlement date will be on or before December 31, 2024, (December 23, 2024 is the likely deadline for publicly traded securities). Any losses triggered in 2024 can be offset against gains realized during the year or carried back against gains reported in any of the three preceding tax years.
Capital Gains Rollovers for Small Business Investors:
Individuals are permitted to defer capital gains arising from the disposition of shares of eligible small businesses when the proceeds of disposition are reinvested in other small businesses:
· The size limitation on eligible businesses is up to $50 million in assets immediately after the investment.
· The investment must be in ordinary common shares issued from treasury.
· The eligible business must be carried on primarily in Canada for 24 months while the investor holds the shares.
· Specified financial institutions, professional corporations and corporations with significant real estate holdings do not qualify as eligible small business.
· The reinvestment must be made at any time during the year of disposition or within 120 days after the end of the year (April 30, 2025 in the case of 2024 dispositions).
Deductions and Credits:
Ensure the following amounts are paid on or before December 31, 2024 as they are
deductible only in the year the payment is made:
Deductions from Taxable Income:
· Child care expenses (accommodation costs at a boarding school qualify, as do certain summer camps and sports camps). The maximum annual deduction is $11,000 per
child for children who are eligible to claim the disability tax credit. This applies regardless of the age of the eligible child. For other children, the limits are $8,000 (under 7 years old at December 31st) and $5,000 (7-16 years old).
· Moving expenses (if you move at least 40 kilometres closer to your new place of employment or business); this includes students moving for summer employment and under certain circumstances, returning for post-secondary education.
· Professional dues and union dues.
· Alimony or maintenance payments.
· Investment counsel fees (i.e. fees paid for investment portfolio management and administration services, which are not related to RRSP, RRIF, or TFSA accounts).
· Employment Expenses
- Home Office Expenses
o Those employees who were required to work from home in 2024 and incurred certain costs related to working from home may still be able to deduct those expenses from their 2024 income. In order to qualify for this treatment, the employee must have worked mainly from that workspace (more than 50% of the time), or used the space exclusively to earn employment income on a regular and ongoing basis for meeting clients, customers or other people in the course of the employment duties.
The employee must not be reimbursed for these expenses and must receive a completed T2200 – Declaration of Conditions of Employment from their
employer.
· Tradespeople’s Tool Costs
o Tradespeople can claim a deduction of up to $500 for the cost of new tools, in excess of $1,433, used in their employment and acquired in 2024. The amount deducted also qualifies for the GST rebate (see employees – GST). An Apprentice Mechanic may qualify for an additional deduction if the cost of their new tools exceeds the claim allowed for Tradespeople.
Tax Credits:
· Pension Income Credit
o Consider creating pension income eligible for the pension income credit. You are
entitled to a tax credit in respect of up to $2,000 of pension income ($1,491
for Alberta tax). If you are under 65, pension income includes private pension income received through a life annuity. If you are over 65 (or under 65 and receiving payments as a result of your spouse’s death), pension income includes an annuity payment out of an RRSP, a payment out of a RRIF or the income portion of a regular annuity. Old Age Security and CPP do not qualify for this credit.
· Teacher and Early Childhood Educator School Supply Credit
o This is a refundable tax credit of up to $1,000 of eligible supplies paid by an eligible educator. Eligible supplies include supplies purchased for use in a school or a regulated child care facility for the purpose of teaching or enhancing students’ learning in the classroom or learning environment. An eligible educator must hold a teacher’s certificate valid in the province or territory in which they are employed. Certain early childhood educators may also be eligible. The educator may either claim this credit or claim the supplies as employment expenses pursuant to a T2200 – Declaration of Conditions of Employment but cannot claim both.
· Canada Caregiver Credit
o Individuals providing care for an infirm dependent relative, including an adult child or grandchild, brother, sister, aunt, uncle, niece or nephew may be eligible for the caregiver tax credit. For 2024, the maximum federal credit is $8,375 (Alberta $12,669). The federal credit is reduced when the dependant’s net income exceeds $19,666 (Alberta $20,142). Where the individual receiving care is an infirm spouse for whom the spousal credit is also being claimed, the federal portion of the Caregiver credit is reduced to $2,616
o An eligible infirm dependent must have a physical or mental impairment as supported by a signed statement from a medical practitioner or already have an approved T2201 – Disability Tax Credit Certificate on file.
o The Canada Caregiver Credit does not require the individual receiving the care to reside with the individual claiming the credit and is not available in respect of non-infirm seniors residing with their adult children.
· Interest on student loans under the Canada or provincial student loans
programs.
· Tuition fee credits are available to be claimed. Textbook and education credits have been
eliminated; however, any tuition and education credits related to 2019 and
earlier periods which carry forward to future years would not be affected and would still be available to be claimed.
· First-Time Home Buyer’s Tax Credit
o A taxpayer and his or her spouse can claim
a combined maximum $10,000 of non-refundable tax credit on the purchase of a
qualifying home as first-time home buyers.
To qualify:
– The taxpayer and his or her spouse/common-law partner cannot have owned another home during the year the purchase is made or the four preceding calendar years; and
– The taxpayer and/or spouse or common-law partner must live in the home.
· Climate Action Incentive
o The climate action incentive is a refundable tax credit, consisting of a basic amount and an additional supplement for residents of small and rural communities. Only one person per family may claim the payment and it is available to residents of:
– Alberta;
– Saskatchewan;
– Manitoba;
– Ontario;
– Nova Scotia;
– New Brunswick;
– Prince Edward Island; and
– Newfoundland & Labrador.
o In 2024 – 2025, the refundable tax credit available to Alberta Residents is $900 per adult or $1,350 per couple, plus an additional $225 per minor child. This credit is increased by 20% for residents of communities outside of the Census Metropolitan Areas for Calgary, Edmonton, and Lethbridge.
· Home Accessibility Tax Credit
o This is a non-refundable credit of 15% on a maximum $20,000 of eligible home renovation expenses per qualifying individual. Qualifying renovations improve the
accessibility of a principal residence for any individual 65 or older by the
end of the year or an individual eligible for the disability tax credit. The credit can be claimed by an eligible individual including the qualifying individual or anyone who claimed or could have claimed one of the following amounts in respect of a qualifying individual: spousal amount, eligible dependent amount, caregiver amount or infirm dependent amount. The eligible amount of the expenditures claimed in this credit is not reduced by other tax credits or government grants received with respect of these expenditures, including the medical expense credit.
This means eligible expenditures could be claimed under both the Home
Accessibility Tax Credit and the Medical Expense Credit.
Consider the timing of:
Charitable Donations:
The charitable donation tax credit is generally calculated at a combined Federal
and Alberta rate of 75% on the first $200 of donations made in a year and 50%
on donations exceeding $200. The limit on charitable donations claimed is 75% of net income. Unused Charitable Donations can be carried forward for up to five years. The
federal portion of the Charitable Donation credit is increased from 29% to 33%
to the extent that a taxpayer has taxable income exceeding $200,000, bringing
the combined tax credit for high income taxpayers to 54%. The 50% credit (54% if you have high rate income) makes it more beneficial to make donations personally rather than through a corporation. For example, a shareholder wishing to make a $10,000 donation could withdraw $10,000 by way of a taxable dividend and use these funds to make the donation. The maximum tax payable on the dividend would be $4,230. This tax would be offset by a combined $5,400 donation credit.
Capital gains arising from charitable donations of publicly-traded securities by individuals and corporations have been reduced to zero (i.e. no tax on the capital gain). The total fair market value of the security qualifies for the charitable donation credit. This can be a very tax efficient way of supporting a registered charity.
There is a similar treatment for donations which stem from the disposition of private
corporation shares or real estate. The exemption from tax for these capital gains will only be allowed where the cash proceeds from the disposition of the shares of a private corporation or real estate to a non-arm’s length party are donated to a qualified donee within 30 days of the disposition. There are a number of anti-avoidance rules that have been proposed to ensure that the shares or real estate are not re-acquired by the donor or someone not dealing at arm’s length with the donor. In the case where only a portion of the cash resulting from the disposition of such assets is donated, only a proportionate portion of the capital gain will be exempt from tax.
Political Contributions:
The Federal political tax credit is calculated as 75% of the first $400; 50% of the
next $350; and one-third of amounts over $750 to a maximum credit of $650.
Contributions over $1,275 do not result in a credit. If you wish to make a
political donation of more than $400, consider paying part this year and part
early in January 2024 to get an increased tax credit over the two years.
The Alberta political tax credit is calculated as 75% of the first $200; 50% of the
next $900; and one-third of amounts over $1,100 to a maximum credit of $1,000.
Contributions in excess of $2,300 do not result in a credit. Again, consider
making one political donation this year and another in January 2025 if you wish
to donate more than $200.
Donations to candidates in municipal government elections and political party leadership
contests are not eligible for a tax credit.
Medical Expenses:
Medical expenses for any twelve-month period ending in the calendar year in excess of
3% of your net income or $2,759 for Federal ($2,828 for Alberta), whichever is
less, entitles you to a tax credit. Therefore, it is to your advantage to group as many expenses as possible into a twelve-month period. Expenses may be claimed for yourself, your spouse and your dependents. Medical expenses include prescriptions, eye glasses, dental, attendant/nursing care, and premiums to private medical and dental plans such as Blue Cross. Medical travel insurance premiums also qualify. Costs of cosmetic procedures are not eligible for the credit.
If you are required to travel more than 40 km (one way) to receive medical treatment, you may be entitled to claim a medical expense credit for the mileage required. In 2023 the mileage rate for medical expenses was $0.53/km. The rate for 2024 is
expected to be released in early 2025. If you were required to travel 80 km or more (one way) to receive medical treatment, you may also be eligible to claim meal expenses and parking expenses.
GST Issues:
Employees – GST
o Employees who incur expenses to earn their employment income may be entitled to recover GST included in these expenses if they were not fully reimbursed by the employer or the payment from the employer was included in their income (e.g. travel allowance). The employee must complete and include Form GST 370 with their tax return to claim back the GST they have paid and must have Form T2200, Declaration of Conditions of Employment, signed by their employer.
Partners – GST
- Partners who incur business expenses that are not reimbursed by the partnership may be entitled to recover GST that was paid on those expenses by submitting Form
GST 370 with their income tax return.
Goods and Services Quarterly Tax Credit – Persons Turning 19:
A person will be able to receive the GST/HST credit the next time Canada Revenue Agency makes a payment after the person turns 19, as long as the person has filed a personal tax return for the previous year. For example, a person who qualifies and turns 19 in August of 2025 could receive the GST/HST credit starting with the payment in October of 2025, provided the person has filed a return for 2024 and applied for the credit on that return.
If an individual will turn 19 during the 2025 calendar year, he/she should file a tax
return (which can be a nil return) for the 2024 year.
Registered Retirement Savings Plans (RRSP’s):
· RRSP contributions must be made on or before March 3, 2025 in order to be deductible on your 2024 personal tax return.
· The maximum RRSP limit has increased to $31,560 for the 2024 taxation year. The
contribution limit for 2024 is the lesser of $31,560 or 18% of your 2023 earned
income, plus any unused deduction room from prior years. The maximum contribution limit is scheduled to increase to $32,490 in 2025, which will require 2024 earned income of $180,500.
· When claiming contributions to your RRSP’s it is important to consider your marginal tax rate in the year the contribution is made in comparison to the marginal tax rate expected in the next year. If there is reason to expect that the marginal tax rate next year is higher than the current year, it may make sense to delay claiming the RRSP contribution to the next year in order to achieve greater tax savings.
·
If you are a member of a Registered Pension Plan (“RPP”) or a Deferred Profit Sharing Plan (“DPSP”), your RRSP contribution room is eroded by the amount of the “Pension Adjustment” (“PA”) reported by your employer on your T4 Slip.
· Before making your 2024 contribution, check your 2023 Notice of Assessment for your deduction limit and reduce that figure by any undeducted contribution from prior years.
· You must windup your RRSP by the end of the year in which you turn 71. At any time before then, you can transfer your RRSP funds tax-free to an annuity, a registered retirement income fund (“RRIF”) or a life income fund (for locked-in accounts only). Alternatively, the funds can be withdrawn from the plan, in which case the withdrawn amount would be included in income in that year.
· If 2024 is the last year you can make RRSP contributions because you turned 71 during the calendar year, and if you have earned income in 2024, consider making an extra contribution in December 2024 for 2025 in addition to the 2024 contribution. Any such contribution in excess of $2,000 will be subject to a 1% penalty tax for one month, but will create an extra RRSP deduction for 2025
· Where an RRSP or an RRIF is wound up following the death of the annuitant, any loss in plan value incurred in the period between death and windup can be carried back and deducted from the income included in the deceased’s terminal return. In order to qualify, the RRSP or RRIF must be wound up within one year of the date of death.
· On death, a taxpayer is normally taxed on the entire amount of any RRSP’s or RRIF’s, except where the funds are left to the taxpayer’s spouse or a financially dependent child. Where there is a named beneficiary other than the spouse or financially dependent child, the tax liability accompanying the RRSP or RRIF is borne by estate. This often leads to
a misalignment of liabilities and bequests.
· The over-contribution limit for RRSP’s is $2,000. Individuals are subject to a penalty tax in respect of excess contributions exceeding the $2,000 limit. As the penalty tax is levied at the rate of 1% per month, the potential cost is quite high.
Some other RRSP considerations include: If you are in a penalty situation because of an excess contribution, you are required to file form T1-OVP on which you calculate your excess amount and related penalty. You can withdraw the excess amount without tax being withheld if approval is obtained from the Canada Revenue Agency.
· Unused RRSP contribution room is carried forward indefinitely. This is very
beneficial to individuals who are unable to make current contributions but will
be able to make catch-up contributions in future years. Younger taxpayers in particular can benefit from this. For example, money earned delivering newspapers, baby-sitting, etc., can create future RRSP contribution room provided such earnings are reported on a personal income tax return. This contribution room can be utilized after
the taxpayer turns 18.
· Individuals are entitled to utilize the Home Buyers’ Plan, whereby funds are
withdrawn from your RRSP, to assist with the purchase of an owner-occupied home
to a maximum of $60,000 if they have repaid all previous amounts received under
the plan and have not owned a home in the past five calendar years. In
addition, individuals who claim the disability credit, or individuals related
to such persons, may make additional withdrawals from the Home Buyer’s Plan to
purchase a home that is more accessible or better suited for the disabled
person or to assist such person in buying a house.
Individuals who live separate and apart from their spouse or common-law partner for a period of at least 90 days as a result of a breakdown in their marriage or common-law relationship also qualify for the Home Buyers’ Plan. If, however, the new principal place of residence is a home owned and occupied by a new spouse or common-law partner, the individual will not be able to make a withdrawal under the Home Buyer’s Plan.
If you withdraw funds from your RRSP pursuant to the Home Buyer’s Plan, you have until October 1 of the following year to purchase the home. Amounts withdrawn under the Home Buyer’s Plan must be repaid to your RRSP in 15 equal annual installments. If not repaid, the annual installment will be added to your income. The first repayment must be made in the second taxation year following the year of withdrawal.
· Review the type of income you are earning inside your RRSP or RRIF. All investment
income earned within an RRSP or RRIF is exempt from tax within the fund. However, once income is withdrawn from the plan, it is treated as regular income and taxed at regular marginal tax rates. This will be the case even if the RRSP or RRIF earned capital gains or dividend income which would have preferential tax treatment if earned outside the RRSP or RRIF. Accordingly, if you have a combination of investment types, it may be worthwhile to hold interest and ordinary income investments inside the RRSP or RRIF, and capital gains and dividend-producing investments and perhaps income trusts outside the RRSP or RRIF.
Past Service Pension Contributions:
If you plan to make a past service pension contribution under a defined benefit
registered pension plan, ensure it is made before December 31, 2024 in order to
obtain a deduction on your 2024 return. All past service pension contributions
made in 2024 for 1990 and later calendar years should be deductible. The timing of the deduction for past service contributions made in 2024 for 1989 and earlier years will depend upon whether the contribution is for service while you were or were not a contributor.
Spousal/Common-law Partner RRSP Contribution:
A spousal/common-law partner contribution is where one person makes a RRSP
contribution directly to a RRSP for his/her spouse. If you lend or give money
to your spouse who then makes a contribution to his/her own RRSP, the Canada
Revenue Agency has stated that it could apply the attribution rules, which
would treat any income received from the RRSP as taxable income of the person
originally providing the funds. However, the attribution rules will not apply
where the amount is contributed directly to a spousal/common-law partner RRSP
plan. Spousal contributions are particularly useful where:
· Your spouse’s income is expected to be lower than yours in subsequent years. If the contribution is left in the RRSP for at least three years and no further contributions are made to any spousal RRSP, the funds may be withdrawn by the spouse and taxed at the spouse’s lower marginal rate. Alternatively, the funds can be left in the spousal RRSP and withdrawn in the normal fashion upon retirement.
· You can no longer contribute to your RRSP because of the age restriction, but you have
earned income and a younger spouse. If you are over the age of 71 but have a
younger spouse/common law partner, you can continue to make contributions to a
spousal/common law partner RRSP until the year the spouse turns 71.
Your total
contributions are still subject to your normal deduction limit (lesser of $31,560
and 18% of 2023 earned income, plus any unused contribution room carried
forward etc.).
If you are 65 or older in 2024, you will be able to split certain pension
income with your spouse, including payments out of RRIF’s. If your spouse is 65 or older, he/she might also be entitled to claim the pension credit to offset some of this income.
RRSP Withdrawals for Education:
A Canadian resident may withdraw funds from an RRSP, free of immediate income
tax, in order to finance full-time training or education for the taxpayer and his/her spouse. This program is similar in concept to the RRSP Home Buyers’ Plan, and is known as the RRSP Lifelong Learning Plan. Up to $10,000 per year can be withdrawn, as long as the total amount does not exceed $20,000 over a four‑year period.
If you have made this type of withdrawal from your RRSP in 2024 before enrolling in a
qualifying educational program, you must receive, as a minimum, a conditional written offer from a qualifying educational institution before March 2025 to enroll. If you have not received this document by the deadline, the withdrawal must be included in your 2024 income.
The withdrawals must be repaid over 10 years. Any amount not repaid as required will be included in income.
Tax Free Savings Accounts (“TFSAs”):
The TFSA allows Canadian resident individuals to earn investment income, including
interest, dividends and capital gains, on a tax-free basis. Contributions to the TFSA will not be deductible, but the income in the account will not be subject to tax, either while in the account or upon withdrawal.
The annual contribution limit for a TFSA in 2024 is $7,000. If you have not previously made any contributions to your TFSA, the total contribution room is $95,000. Unused TFSA room can be carried forward indefinitely. Withdrawals from the account will free up more TFSA room. Excess contributions will be subject to a 1% tax per month.
The rules surrounding qualified investments for a TFSA are similar to those of an RRSP. As with RRSP’s interest on borrowed money used to invest in a TFSA is not deductible. However, the assets in the TFSA can be used as collateral for a loan of the individual.
Unlike an RRSP, there is no time limit at which the TFSA must be wound up or converted into another investment vehicle. Thus, the TFSA can be used to fund pre-retirement years or post-retirement years, and there are no limits on withdrawals or the use of the withdrawn funds.
The attribution rules will not apply to income earned in a TFSA. Therefore, one spouse can contribute to another spouse’s TFSA and the investment income remains tax exempt and not subject to attribution.
Upon death, the value of the TFSA is not included in income (unlike an RRSP or RRIF), although any income that accrues after death will be subject to tax. To retain the tax-free status of the account, it may pass to the deceased’s spouse or common-law partner, or the assets of the account can be transferred to a TFSA of the spouse or common-law partner.
Tax-Free First Home Savings Account (FHSA)
Tax-Free First Home Savings Accounts (FHSA) help first time home buyers save up to $40,000 toward the purchase of a home purchase.
FHSA Contributions are deductible to the taxpayer, similar to those made to a Registered Retirement Savings Plan (RRSP) and income is earned within the account on a tax-free basis. Qualifying withdrawals related to the purchase of a first home are non-taxable like those made from a Tax-Free Savings Account (TFSA).
There is an annual contribution limit of $8,000 beginning in the year the taxpayer turns 18 and subject to a lifetime limit of $40,000. Contributions are deductible in the calendar year they are made. Undeducted contributions can be carried forward to future years, and unused contribution room can be carried forward, subject to a cap. Spousal contributions are not permitted, but amounts gifted to a spouse and the contributed to the recipient spouse’s FHSA are exempt from the attribution rules. Individuals are also able to transfer funds from an RRSP to an FHSA tax-free, subject to the annual and lifetime contribution limits. Contribution room carry-forward amounts would only start accumulating after an FHSA is opened for the first time.
Withdrawals made for reasons other than the purchase of a first home are taxable. Funds can be transferred from an FHSA to an RRSP tax-free (at any time before the taxpayer turns 71) or an RRIF without reducing or impacting the taxpayer’s RRSP limit.
Non qualifying withdrawals and transfers to RRSP’s will not replenish the FHSA limits. If an individual has not used the funds in their FHSA for a qualifying purchase within 15 years of opening the account or when the taxpayer turns 71 years old; the FHSA would need to be closed and any unused funds would need to be transferred to a RRIF or an RRSP or withdrawn on a taxable basis.
In the case of a relationship breakdown funds can be transferred from on spouse’s FHSA to the other’s regardless of the contribution room of the recipient. These transfers to not replenish the contribution room of the transferor. The value of assets in an FHSA that are pledged as collateral are treated as income.
In order to be eligible to open an FHSA, individuals must be at least 18 years old and resident of Canada. The individual must not live in a house that they or their spouse own at any time in the year the account is opened or at any time in the preceding four calendar years. Ownership is broadly defined and includes beneficial ownership. This legislation was effective as of January 1, 2023.
An individual can make both an FHSA withdrawal and a Home Buyer’s Plan (HBP) withdrawal in respect of the home being purchased.
Individuals would be permitted to designate their spouse as a successor account holder to maintain the account’s tax-free status. The inheritance of a spouse’s FHSA as a successor beneficiary will not affect the surviving spouse’s contribution limit.
Registered Education Savings Plans (“RESPs”):
These plans are designed to encourage people to take a more disciplined approach to financing the post-secondary education of their children, grandchildren, etc. There are tax deferral and income-splitting advantages relating to RESPs, but the feature that qualifies them as true incentive plans is the ability to access the Canada Education Savings Grant (“CESG”). There is no annual limit to the amount you can contribute to a plan. However, there is a lifetime contribution limit of $50,000 for each beneficiary.
The CESG provides at least 20 cents for every dollar on the first $2,500 of annual RESP
contributions made on behalf of a child. Unused grant room can be carried forward for a maximum annual grant of $1,000. If your family net income is below $53,359, the grant will be 40 cents for every dollar on the first $500 contributed and if your family net income is between $53,359 and $106,717, the grant will be 30 cents on the first $500 contributed (20 cents thereafter). The maximum lifetime grant per child is $7,200. Contributions must be made by December 31 in order to qualify for the CESG in respect of a given calendar
year. If you intend to start a new RESP, you should allow sufficient time to obtain a Social Insurance Number for your child, a prerequisite to obtaining the CESG.
Registered Disability Savings Plans (“RDSP’s”):
The Registered Disability Savings Plan (RDSP) is a mechanism to save for the long-term security of a child with a disability who is eligible for the disability tax credit. The RDSP will be accompanied by a Canada Disability Savings Grant (CDSG) and Canada Disability Savings Bond (CDSB). The RDSP will be similar to the Registered Education Savings Plan (RESP).
An RDSP can be started by a person who is eligible for the disability tax credit, the
recipient’s parent or other legal representative. Contributions into the RDSP will not be tax
deductible. Growth within the RDSP will not be taxable. Payments out of the RDSP
that exceed contributions will be taxable. Taxable payments include CDSGs, CDSBs and earned investment income in the plan. The lifetime contribution limit to an RDSP is $200,000. Anyone can contribute to an RDSP. Contributions can be made to an RDSP until the beneficiary turns 59 years old.
CPP Contributions:
Maximum pensionable earnings for 2025 will be $71,300 (up from $68,500 in 2024). The
contribution rate for 2025 will be 5.95% (5.95% in 2024). As a result, the maximum employee and employer contributions for 2025 will be $4,034.10 each ($3,867.50 in 2024) and
maximum self-employed contributions will be $8,068.20 ($7,735.00 in 2024). In 2025, employees will also contribute additional CPP of 4% on their income between $71,300 and $81,200 (between $68,500 and $73,200 in 2024). The maximum additional contribution will be $396 and $792 for self employed individuals ($188 and $376 respectively in 2024). The combined maximum employee and employer CPP contributions for 2025 will be $4,430.10 each and $8,860.20 for self-employed individuals.
The “employer” portion of CPP contributions made by self-employed individuals is
deductible. The “employee” portion is treated as a tax credit.
Notable facts regarding the CPP Program include:
· You can elect to receive CPP benefits as early as age 60 without stopping work or reducing your hours of work. However, an employee who works and receives
CPP must continue to contribute to CPP in respect of employment income received
between the ages of 60 and 65. Individuals between the ages of 65 and 70 may
file an election to choose to stop contributing to the CPP. Once a taxpayer turns 70, CPP contributions are no longer required.
· Although you can receive CPP benefits starting at age 60, this will result in your benefits being reduced by 0.60% for every month (total of 7.2% a year) you receive CPP benefits prior to your 65th birthday.
· Conversely, there is an incentive to delay collecting CPP even after you turn 65. Your benefits will increase by 0.7% for every month (total of 8.4% a year) that you delay collecting CPP after your 65th birthday.
EI Contributions:
The EI Premium Rate for 2025 will be 1.64% (1.66% in 2024). Maximum insurable earnings
for 2025 will be $65,700 ($63,200 in 2024). Maximum annual contributions for 2025
will be:
· Employees $1,077.48 ($1,049.12 in 2024)
· Employers $1,508.47 ($1,468.77 in 2024)
Self-employed individuals are normally exempt from EI Contributions; however, it is possible
for self-employed persons to voluntarily opt-in to become eligible for certain types of Special Benefits under the EI program. Special Benefits which would be covered include: maternity benefits; parental benefits; sickness benefits; compassionate care benefits and benefits
for parents of critically ill children.
Those individuals opting in will pay the annual employee portion of the EI contribution on their personal income tax returns. Once registered, the individual can cancel his/her participation within 60 days at no cost. If an individual opts into the program and receives the payment of special benefits, that person would continue to be required to pay EI premiums on all self-employment income for their entire self-employment career.
Where the second parent agrees to take a minimum of five weeks of the maximum 40
weeks under the standard parental leave of 55% for 12 months, parents are able to apply for an extension of up to five weeks to their EI parental leave. Where families have opted for extended parental leave at 33% of earnings for 18 months, the second parent would be
able to take an additional eight weeks of parental leave.
Employers who provide short term disability benefits for their employees qualify for a
reduction in the employer’s contribution rate. Eligible employers must be approved by Service Canada before reducing their contribution rate. Contact your Daye & Partners representative for more information about this program.
Old Age Security (OAS):
Those individuals turning 65 have the opportunity to defer the collection of their OAS pension. As with the deferral to collect CPP, deferring to collect OAS comes with an incentive in the form of increased benefits. Seniors who are over 74 are eligible for an additional 10% increase over their normal entitlement.
Benefits will be increased by 0.6% for every month (7.2% a year) that you delay
collecting OAS after your 65th birthday.
· If your income is or would be over the threshold for OAS claw back, there is incentive to delay collecting as it will increase the amount available in future years when income may be lower.
· If you have large RRSP’s that will have to be converted to RRIF’s, and the annual withdrawal will result in your income exceeding the OAS claw back threshold, you may wish to collect OAS early to get a few years of OAS before the claw back threshold is reached.
Old Age Security Clawback:
· In 2024 when your net income reaches $90,997 the Old Age Security benefit starts to be taxed back so that it is fully repaid when net income reaches $148,065 ($153,771 for seniors 75 or older). If your net income exceeds the threshold for the first time, the repayment is made upon filing your tax return.
· Subsequently, the clawback is withheld from your monthly benefit cheques. The amount
withheld is based on your income in the prior two years. For example, in the first six months of 2025, the tax withheld from your OAS payment will be based on 2023 income, while for the last six months of 2025 it will be based on 2024 income. Any excess tax withheld will be applied against income taxes or refunded to you upon filing your 2025 income tax return.
Income Splitting:
A family unit can realize some tax savings by shifting income from higher tax rate individuals to lower tax rate individuals. Some techniques which can be used include:
· The higher income spouse should pay liabilities of the lower income spouse (such as income tax, credit card payments, car loans, all household bills, etc.), thereby increasing the amount of funds available to the lower tax rate spouse for investment purposes.
· Income earned from property loaned or transferred to a spouse or minor is attributable back to the transferor for tax purposes. However, any income earned from the reinvestment of the attributed income by a minor is not subject to the attribution rules. Accordingly, it is important to keep track of the income subject to attribution and the income not subject to attribution.
· Capital gains arising from property transferred to a spouse are attributable back to the transferor. However, capital gains arising from property transferred to a minor are generally not attributable.
· The higher income spouse can lend money to the lower income spouse. The loan must
be documented and interest paid each year at a rate not lower than the prescribed rate in effect at the time the loan was made (currently 5%). Such interest must be paid no later than January 30 of the following year.
· A proprietorship, partnership or corporation may deduct a reasonable salary paid to a spouse or a child for bona fide services provided to the business. This provides an income-splitting benefit and may enable the spouse or child to make CPP contributions and accumulate RRSP contribution room. In recent years, CRA has become more
aggressive in challenging the reasonability of spousal salaries.
· If you have a business that is contemplating the payment of salaries or wages to a spouse or child, you should consider making such payment before December 31, 2024 so that income will be included in the recipient’s hands in 2024. The normal source deductions for income tax, CPP and EI, must be deducted and remitted to the Receiver General together with the employer’s share of CPP and EI. Under certain circumstances, a salary paid to a spouse or a child may be exempt from EI.
· It should be remembered that in order for such payments to be deductible by the paying business, the amount of the salaries or wages must be “reasonable in the circumstances”. In other words, the remuneration must not exceed the market value of the employment services provided by the spouse or child.
· Employment income is not subject to the Tax on Split Income (TOSI) rules.
Split CPP:
The provisions of the Canada Pension Plan allow one spouse to assign a portion of the annual CPP benefit payments to the other spouse. In general, the amount that may be assigned to the other spouse is equal to one-half of the benefit payments associated with the credits which were earned during the marriage period. An application for the assignment is obtained from and filed with Human Resources and Social Development Canada – Income Security Programs.
Split Pension Income:
A pensioner can elect to allocate up to 50% of Eligible Pension Income to a spouse or common-law partner. This transfer is effected by means of a joint election made by both transferor and transferee. The election is an annual election which provides flexibility in future years. This election is made in your personal tax return.
The types of pension income eligible for transfer include:
· Annuity payments from a superannuation or pension fund or plan; and
· If the pensioner is 65 or older, or if payments are received as a result of the death of a spouse or common law partner, annuity, RRIF, DPSP and RRSP annuity payments.
The age of the recipient spouse has no bearing on the pensioner’s ability to make the allocation. However, if the transferee spouse is under 65 access to the Pension Income Tax Credit is restricted. If the transferee spouse or common law partner is 65 or older, the pension income allocated to such spouse or common law partner qualifies for the Pension Income Tax Credit to the maximum of $2,000.
Any tax withheld at source in respect of Eligible Pension Income must be allocated in the same proportion as the related pension income is split between the pensioner and the transferee spouse or common law partner.
The splitting of pension income will be particularly helpful in situations where the splitting of the income will allow the pensioner to reduce or eliminate the clawback of Old Age Security.
Interest Income Recognition:
For most individuals, determining the amount of interest to be reported for tax purposes
is straight-forward – i.e. you report the amount of interest shown on an information slip (e.g. T5 and T3 Slips). However, there are a number of special situations where care must be
exercised in determining the amount of interest income to be reported for tax
purposes, such as:
· Accrued interest on bonds purchased during the year.
· Accrued interest on T-bills or bonds sold during the year.
· Interest earned or received during the year on debt instruments denominated in a foreign currency.
· Interest component of annuity payments received during the year.
· Interest earned during the year on strip bonds, strip coupons, deep discount bonds and bankers acceptances.
Interest Expense Planning:
It is not uncommon for individuals to have both deductible interest (such as on business or investment loans) and non-deductible interest (such as on house mortgages and credit cards). An effective tax planning strategy is to use available cash or securities to retire personal debts (e.g. house mortgages, car loans etc.) rather than loans incurred for business or investment purposes. This will minimize non-deductible interest expense.
Employee Stock Options:
Generally, employees will be able to defer tax on stock option benefits vesting from most public companies or foreign controlled corporations to a maximum of $200,000 per year. Amounts in excess of this threshold will not be entitled to this deduction, and will be included in income like regular employment income. This restriction will not apply to stock options from Canadian Controlled Private Corporations or Public Corporations with less than $500 million of annual gross revenues.
Loans to Shareholders and “Overdrawn” Shareholder Loan Accounts:
Where an individual shareholder (or almost anyone related to a shareholder) owes money
to a corporation at the end of its year and will still be in a debit balance (i.e. “overdrawn”) at the end of the following year, steps should be taken to repay the indebtedness before the end of the taxation year following the year the overdraft occurred, otherwise the full amounts of the loan will be included in the shareholder’s 2024 income. If the loan is not repaid by the end of the taxation year following the year of advancement and the amount of the loan has been included in the shareholder’s income in the year advanced, the amount of any repayment of the loan to the corporation will be deductible from the shareholder’s income in the year of repayment. Exceptions include certain housing loans made before April 26, 1995
and certain automobile loans meeting specific conditions.
Other Considerations:
Common-Law Partners:
For tax purposes, a common-law partner is defined as a person of the same or opposite
sex who is living with you in a conjugal relationship, and:
a) is the parent of your child, or
b) has been living with you for at least 12 continuous months.
There are many tax implications that flow from this definition. Some examples: you can make RRSP contributions to your common-law partner’s plan; donations and medical expenses can be added together and claimed on one return; moving expenses can be claimed by the higher income earner. Conversely, the GST credit and child tax benefit may be reduced because these benefits are based on joint incomes; the “amount for eligible dependent” credit may no longer be available; and child care expenses must be claimed by the lower income partner.
Alternative Minimum Tax (“AMT”):
You may have an AMT carry-forward balance as a result of having capital gains or
“rolled over” retirement allowances in prior years. Such AMT balances represent, in effect, a
prepayment of tax and may be available to be drawn down in any of the subsequent seven taxation years. These drawdowns occur in a year when “regular” tax exceeds “minimum” tax. Accordingly, it would be prudent to consider utilizing any AMT carry-forward balances as part of the year-end tax planning exercise. The calculation of AMT significantly
changed in 2024. If you are uncertain if AMT might apply to you in 2024, please contact your Daye & Partners representative.
Age Credit Clawback:
Taxpayers over 65 are entitled to claim the “age credit” amount of up to $8,790 ($6,099 for
Alberta tax). In 2024, the age credit will be reduced by 15% of net income over $44,325 ($45,400 for Alberta tax). As a result, the benefit will be eliminated when net income reaches about $102,925 ($86,060 for Alberta tax).
Employment Insurance Clawback:
Benefits are repayable at the rate of $30 for each $100 that net income exceeds $79,000. Benefits not repayable are taxed as regular income. First-time claimants (in the last ten years) or individuals receiving maternity, parental or sickness benefits are exempt from the benefit repayment provisions.
Child Disability Benefit:
The Child Disability Benefit (CDB) is an additional monthly supplement to the Canada Child Tax Benefit to be paid for children who meet the eligibility criteria for the disability tax credit. Benefits ($3,322 per eligible child) will be reduced starting at a family income level of $79,087 and fully phased out at $182,899.50 for a family caring for one disabled child.
Canada Workers Benefit:
The Canada Workers Benefit program provides low income employees with a refundable tax
credit calculated as follows:
· 21% of “earned income” over $2,760 to a maximum of $1,518 for singles and $2,616 for families. An additional $784 is available as a disability supplement.
· The credit is reduced by 15% of net family income over $24,975 for singles and $28,494 for families.
· The credit is eliminated at a net family income of $35,095 for singles and $45,934 for families.
· Taxpayers who are entitled to receive the benefit will receive 50% of the estimated benefit for the subsequent year issued in 3 payments.
Canada Child Benefit (CCB):
The Canada Child Benefit (CCB) is a tax-free monthly benefit made to eligible families with children under the age of 18. The maximum annual benefit under the CCB is $7,787 per child under 6 and $6,570 per child aged 6 through 17. This benefit is income based and reductions begin when the family income level is greater than $36,502. The phase-out
rates are based on both income levels and number of children. The government has a calculator available to help calculate a family’s entitlement at https://www.canada.ca/en/revenue-agency/services/child-family-benefits/child-family-benefits-calculator.html
Please ensure you advise
Canada Revenue Agency of any changes in marital status and of any additional
children as credit entitlement will change.
Scholarships, Bursaries and Fellowships:
The total of all amounts received in the year on account of scholarship, bursary and fellowship income will be excluded from income, provided the student is enrolled in a program under which he or she is entitled to the education tax credit. Such programs are usually at the post-secondary level or certified occupational skill training. The exemption on the taxation of scholarships and bursaries also applies to students who attend elementary and secondary schools.
Northern Residency Deduction:
An individual residing in a prescribed northern zone for a period of at least six consecutive months may be eligible to claim the northern residence deduction which consists of three components:
· A deduction in respect of medical travel benefits provided by employers;
· A deduction in respect of non-medical travel benefits provided my employers; and
· A residency deduction determined using a daily rate (a maximum $22 basic rate for 2024) (reduced by half for prescribed intermediate zones)) and limited to 20% of the individual’s income for the year.
· Since 2022taxpayers have had the option to claim a standard amount of $1,200 ($600 for those in intermediate zones) per eligible family member that could be allocated across eligible trips. This allows individuals without employment benefits to claim this deduction.
Alberta Child and Family Benefit:
· If you are an Alberta resident eligible for child tax benefits, you may be entitled to receive the Alberta Child and Family Benefit.
· For the period July 2024 to June 2025, the maximum benefits are $1,469 for one child; $2,204 for two children; $2,939 for three children; and $3,674 for four or more children. The benefit is reduced by 4% of family net income over $27,024.
· In addition, families with working income of more than $2,760 may be entitled to receive the working income component of: $752 for one child; $1,437 for two children; $1,847 for three children; and $1,982 for four or more children. The amount is again reduced if the family net income is more than $45,285.
Foreign Reporting Rules:
Canadian residents have always been required to report their worldwide income.
Rules are in place for reporting ownership of foreign assets. If at any time during 2024 you owned foreign assets costing more than $100,000 in total, you are required to file a separate
reporting form on or before April 30, 2025 (or June 15 in some cases). Foreign assets include bank accounts, indebtedness, shares in foreign corporations, real estate and certain other assets. There is an exemption for personal use property, (e.g. a vacation home).
There are also rules for reporting an interest in a foreign trust (excluding testamentary trusts) or a foreign affiliate. Penalties for non-compliance can be costly.
Failure to file the return can result in significant penalties. If you did not file a T1135 in 2023 but have specified foreign property over the $100,000 limit, please contact our office.
Lump-Sum Receipts:
Sometimes a person will receive a lump-sum payment that, although taxable in the year of
receipt, is clearly related to a prior year(s). A negative result can arise where the tax rate applied in the year of receipt exceeds the rate applicable to the earlier year(s) to which the payment relates. A special rule allows taxpayers to pay a lower tax in the year of receipt, on the assumption that the payment had been allocated over earlier, low income years to which it relates.
This rule applies to certain payments larger than $3,000 per year, such as; employment income, retiring allowances, non-periodic pension benefits, arrears of spousal and child support payments, Employment Insurance payments; and pay equity adjustments.
Gifts and Awards for Employees:
All items of an “immaterial or nominal value”, such as coffee, tea, mugs, plaques, trophies, etc. will not be considered a taxable benefit to employees.
Non-cash gifts and awards, regardless of number, will not be taxable unless they exceed $500 annually. If they do, only the total value in excess of $500 will be taxable. It is important to note that CRA treats “near cash” items such as gift cards as though they were cash.
A separate non-cash long service or anniversary award will also qualify for non-taxable status as long as its value does not exceed $500. Again only the total value above $500 will be taxable. The award must be for five or more years of service.
There continues to be no exemption for the following:
· All cash or near-cash awards (e.g. gift certificates)
· All “performance-related” awards (e.g. for meeting sales targets)
· Gifts and awards to employees in non-arms-length situations
Sale of a Principal Residence:
A principal residence is generally any residential property owned by you or your spouse and occupied by you, your spouse or your child at any time during the year. Only one such property can be designated as a principal residence in any given year. When an eligible property is sold, the principal residence exemption allows a taxpayer to avoid tax on a proportion of the resulting capital gain based on a formula that incorporates the number of
years a property is designated as a principal residence versus how long the
property has been owned. Technically, the disposition of a principal residence and the claim of the principal residence exemption should be reported on the owner’s income tax return in the year of disposal. Prior to October 2016, CRA administratively waived this filing requirement for individuals unless a portion of the gain was taxable. This is no longer the case.
Individuals who dispose of a principal residence will have to report the disposition on
their personal income tax returns, even if there was no taxable gain on the
sale.
CRA will only allow the claim for a principal residence exemption if the sale is reported and the proper designation is made. CRA will accept a late filed designation under certain circumstances but a penalty may apply. The penalty is $100 for each month the form was late to a maximum of $8,000. While the CRA has the discretion to waive the penalties, there is a significant risk of incurring a punitive penalty if the disclosure is missed. CRA can now reassess taxpayers who fail to make the appropriate disclosure for an additional three years past the normal limitation period.
Caution:
The above commentary is a very brief summary of complex legislation. Further advice should be sought to verify how these notes may apply to your particular situation.