Mar. 7, 2024 "4 tax tools that can keep more of your money invested": Today I found this article by Dale Jackson on BNN Bloomberg:
Most of us know paying taxes is right up there with death as the two things we can’t avoid.
But there are ways for average investors to lower their tax bills and keep more of their hard-earned dollars compounding in investments over time.
As we head into tax season, here are four basic tax tools that can be used individually or, with the help of a qualified professional, as part of a broader tax strategy.
1. Registered Retirement Savings Plan (RRSP)
Most Canadians who managed to make an RRSP contribution before the February 29 deadline will get a tax refund in the spring.
While many consider it ‘found money’, the refund is actually money deducted by their employers throughout 2023.
Reinvesting your refunds back in your RRSP will not only add to the total amount compounding in investments over time,
but will also generate further refunds.
The RRSP is a great retirement savings tool because
contributions can be deducted from your income
and lower your tax bill.
The biggest savings come to those with big incomes who would normally be taxed at a high marginal rate.
There are limits to how much you can contribute to your RRSP, but even they can be too much.
Unfortunately, contributions and all the returns they generate over the years are fully taxed according to the going marginal tax rates when they are withdrawn.
You could be the victim of your own success,
and even have some of your Old Age Security (OAS) benefits clawed back,
if your annual RRSP withdrawals are taxed at a higher rate
than the original contribution.
High withdrawal rates and clawbacks can be avoided by
splitting income with a lower-income spouse who is taxed at a lower marginal rate.
Higher-income spouses can split up to half of their income with a lower-income spouse once they turn 65,
but there are ways to transfer the tax burden beforehand through a spousal RRSP.
The higher income spouse can deduct contributions from their income (at a high marginal rate),
and withdrawals are taxed in the hands of the lower income spouse (at a low marginal rate).
2. Tax-Free Savings Account (TFSA)
If your RRSP savings are growing too much
or your income is low,
it’s probably better to channel your contributions and refunds to a TFSA.
Unlike RRSP contributions, TFSA contributions can not be deducted from income,
but they – along with any investment returns they generate
– are not taxed when they are withdrawn.
The only exception are dividends from U.S. equities.
You can adjust the balance between your RRSP and TFSA
according to each year’s income
and over time as your retirement goals become clearer,
but the ideal tax situation would allow
you to draw income from your RRSP at a low marginal rate
and top up any additional income from your TFSA (tax-free).
3. First Home Savings Account (FHSA)
The FHSA is new tax-saving tool for young folks saving for a down payment to invest in a new home.
It has the combined tax perks of a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA).
Contributions are tax deductible (like a RRSP)
and gains on the investments are never taxed (like a TFSA)
as long as the funds are used for the purchase of a first home.
Like RRSPs, the higher your income, the bigger the tax savings.
Like TFSAs, the tax savings depend on how well the investments inside them do.
Like an RRSP and TFSA, contributions in a FHSA can be invested in just about anything.
The annual contribution limit for FHSAs is $8,000 with a lifetime limit of $40,000.
Funds can be held in a FHSA for up to 15 years when it can be transferred to an RRSP.
4. Capital gains exemption and dividend tax credits in non-registered accounts
When contribution limits in registered accounts like the RRSP, TFSA and FHSA are maxed out, there are tax saving tools in non-registered accounts.
The biggest tax advantage for most Canadians is the 50 per cent capital gains exemption,
which only taxes half of the gains on stocks
or other equity investment when they are sold.
While a 50-per-cent capital gains exemption is not as good
as a 100-per-cent exemption in a TFSA,
investors in non-registered accounts can also benefit from market losses.
Tax-loss selling permits the use of equity losses
to recoup capital gains taxes already paid in the past three years
or apply them against future capital gains.
Dividend tax credits are also granted on eligible equities in non-registered trading accounts.
Dec. 6, 2024 "4 tax-saving dates for investors to mark on their 2025 calendars": Today I found this article by Dale Jackson on BNN Bloomberg:
Navigating the tax rules can get complicated depending on your individual circumstances, so it might be best to discuss them with a qualified advisor or tax professional.
Here are four significant tax dates to mark in your investment calendar:
Dec. 30, 2024: Tax-loss selling deadline
If you want to use 2024 stock market losses to recoup taxes on stock market gains going back three years or any year in the future, you must sell by Dec. 30 for the trade to settle before the clock strikes midnight Dec. 31.
The deadline to sell U.S. equities this year is Dec. 31.
The tax-loss selling deadline for Canadians last year was Dec. 27 but a new system implemented by the Canada Revenue Agency (CRA) this year has shortened the settlement period.
Because half of capital gains on equities sold in a non-registered trading account are taxed,
half of capital losses can eliminate the taxes on capital gains dollar-for-dollar.
As with any tax strategy, the Canada Revenue Agency (CRA) has strict rules when it comes to tax-loss selling.
The most important is called the superficial loss rule,
which prohibits the repurchase of the same stock within thirty days of the tax loss sale.
The superficial loss rule applies to repurchases in any registered or nonregistered account in the name of the account holder,
and even the account holder’s spouse.
If you want to repurchase the same stock, you must wait at least 31 days after the sale.
Jan. 1, 2025: TFSA contribution limit extension
Canadians who have contributed the maximum amount to their tax-free savings accounts (TFSAs) will be permitted to contribute another $7,000 in the new year.
If you withdrew money from your TFSA in 2024,
that contribution space can also be reclaimed in the new year.
There is no contribution deadline for a TFSA.
Allowable contribution space can be carried forward to future years for the vast majority
of TFSA holders who don’t contribute the maximum amount.
Over-contributions can result in penalties from the Canada Revenue Agency (CRA),
so it’s important to keep track.
The TFSA is an ideal investment vehicle because those contributions can
be invested in just about anything,
gains are never taxed,
and you can withdraw funds at any time.
March 3, 2025: RRSP contribution deadline
Registered Retirement Savings Plan (RRSP) contributions can also be invested
and grow tax-free in just about anything,
but if you want to deduct them from your 2024 taxable income you must contribute by March 3.
Tax savings are based on your personal marginal tax rate,
so the more income you generated in 2024,
the bigger the savings.
Canadians love to get those RRSP refunds in the spring but it’s important to know
RRSPs are fully taxed when they are withdrawn,
ideally at a low tax rate in retirement.
If your income was low in 2024 a TFSA contribution could be a better option.
If you want to contribute to both your TFSA and RRSP,
consider contributing to your RRSP before the deadline
and putting the refund in your TFSA.
April 30, 2025: Income tax deadline
If you had any income in 2024, the deadline to file your tax return is April 30.
How much anyone pays is based on their personal situation but there are ways to steer tax dollars into your investment portfolio.
If you make an RRSP contribution before the March 3 deadline
and want the refund by spring,
don’t forget to deduct it from your taxable income when you file.
Also, don’t forget to include any other
deductions
or credits
you
or your spouse
have accumulated throughout the year.
TFSA contributions are not tax deductible.
Be sure to include all income received during the year including
capital,
dividend
or income gains
from non-registered (not RRSP or TFSA) investment accounts.
This is also the time to use those
capital losses you banked up before the end of 2024
against capital gains that year,
the two previous years,
or save them for future years.
Self-employed individuals and their spouses have until June 16 to file.
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