Year-End Tax Planning To Minimize Your Tax Bill

As we get closer to the end of the year, now is the perfect time to take advantage of year-end tax planning to minimize your personal tax bill due in April of next year. While some strategies can be applied to businesses as well, these tax strategies are tailored to individuals filing their T1 – personal tax returns. Here are seven smart strategies that you can implement in the next month to reduce your tax burden.

1: Harvesting Losses (Tax Loss Selling)

Harvesting losses, also known as tax-loss selling is one of the many year-end tax strategies that can reduce your tax bill. It involves selling investments that have gone down in value in order to offset the capital gains from your more profitable investments. This strategy reduces your overall taxable capital gains, therefore lowering your tax burden.

This strategy is useful if you have any investments that have lost value in the year. For example, let’s say you have an investment portfolio with these stocks:

Stock A: Bought for $10,000, now worth $15,000 (unrealized gain of $5,000).

Stock B: Bought for $8,000, now worth $5,000 (unrealized loss of $3,000).

If you sell Stock A to realize the $5,000 gain, you can sell Stock B as well to realize the $3,000 loss. This means your Net Capital Gain is $2,000 instead of $5,000 (from selling Stock A alone), which will lower your capital gains tax.

If you do choose to sell both Stock A and Stock B, be sure to comply with the “superficial loss rule,” which prohibits repurchasing the same investment within 30 days of the sale.

2: Maximizing Charitable Donations

Another way to minimize your tax burden is to make charitable donations before the end of the year. These donations are considered tax credits that reduce your overall taxable income. According to the Canada Revenue Agency (CRA), you can claim charitable donations up to 75% of your net income for the year.

If you don’t have cash to donate, you can choose to transfer stocks to charities instead. By transferring the stock instead of selling it, you avoid paying capital gains tax on the appreciation of the stock. Plus, you’ll receive a tax credit equal to their fair market value. Maximizing charitable donations is another effective year-end tax strategy to reduce your taxable income while supporting causes you care about.

3: Contribute to Your Spouse’s RRSP

This personal tax strategy allows one spouse to contribute to the other’s Registered Retirement Savings Plan (RRSP) account, creating a more balanced income distribution in retirement. In this case, the contributing spouse receives a tax deduction for the contribution, while the receiving spouse owns the RRSP.

Having unbalanced RRSP accounts may make sense today if one spouse earns more than the other, but it can pose issues once withdrawals are taken in retirement. For example, one client we spoke to recently had $2,000,000 in his RRSP, while his wife had $12,000. The problem in this scenario is that once the couple retires, they will have to draw more from his RRSP account, resulting in a higher tax bill for him.

If that couple decides to withdraw $100,000 per year in retirement and draw down only from the husband’s RRSP, he would pay $22,401 in taxes. Alternatively, if they both withdrew $50,000 from their RRSP accounts, each spouse would only pay $7,643 in taxes, totalling $15,286 in taxes.

Contributing to your spouse’s RRSP before the year-end is not only a key part of year-end tax planning but will also reduce the overall tax burden on withdrawals during retirement.

4: Top Up TFSA Contributions

A Tax-Free Savings Account (TFSA) allows you to grow your investments without paying capital gains tax. The contributions are not tax-deductible, but any investment growth or withdrawals are tax-free. This account is limited to individuals 18 years and older who have a social insurance number and has a maximum contribution limit each year.

The contribution limits change each year and is $7,000 in 2024 and will be the same in 2025. However, contributions are cumulative, meaning you can contribute the maximum amount for every year since you turned 18 years old. For example, let’s say Parth turned 20 in 2024 and he has never contributed to his TFSA.

Given these contribution limits,

Parth would be able to contribute $19,500 to his TFSA in 2024. To see your contribution limits, check your most recent Notice of Assessment or login to My Account on the CRA website. Since the contributions are not tax deductible, this may not reduce your year-end tax liability in April, but it can set you up for greater investment growth over time.

5: First Home Savings Account

The First Home Savings Account (FHSA) is a registered plan created by the Canadian government that helps first-time home buyers save for a down payment. The contributions are tax-deductible, any investment growth within the account is tax-free, and withdrawals for a first home purchase are also tax-free. That’s a triple-tax advantage! The FHSA has an annual contribution limit of $8,000 with a lifetime contribution limit of $40,000.

6: Maximize RESP Contributions

For parents, you can contribute to your child’s Registered Education Savings Plan (RESP) before the end of the year to receive the Canada Education Savings Grant (CESG). The CESG is a grant where the government will match 20% of your contribution, up to $500 annually.  There is no annual contribution limit on the RESP and the contributions are not tax-deductible, however, the grant is only offered for the calendar year and is a “use it or lose it” opportunity.

7: Capture Income in the Current Year

Strategic year-end tax planning can help you capture income in the current year to reduce your overall tax burden in the following year. This is useful if you anticipate a raise or if you’re a sole proprietor who expects to serve more clients in the coming year. This is important because your marginal tax bracket in the following year will increase, meaning your capital gains rate will increase. To capture income, you could sell investments with unrealized gains or exercise stock options that are “in the money.”

Take Advantage Of These Year-End Tax Strategies

Effective year-end tax planning can help you keep more of your hard-earned money. From maximizing registered account contributions to harvesting tax losses, these strategies can make a significant difference in your tax bill. Take the time to review your financial situation, and consult with a tax professional to ensure you’re making the most of these opportunities.