You must pay tax on your 2024 income, of course, but you can lower your tax bill when 2025 rolls around by acting before Dec. 31.
To avoid having to make a hasty decision, here are four tax-saving moves to think about right now:
Lower or postpone income to 2025
The percentage of income tax you pay when you file in the spring increases as your income rises in 2024. By this late in the year, you should have a pretty good idea of how much you will make.
If it’s higher than normal you have three options to stay in a lower marginal tax bracket:
- Take a break and stop earning so much. They can’t tax your free time (yet)
- Postpone work and billing until 2025
- Keep bringing in income and make a large contribution to your or a lower-income spouse’s registered retirement savings plan. Every dollar contributed to an RRSP is deducted from the amount you owe in tax
The good news is that the deadline to apply an RRSP contribution against your 2024 income is not until March 3, 2025.
Turn losses into savings through tax-loss selling
Tax-loss selling brings an opportunity for investors to use 2024 stock market losses to recoup tax paid on capital gains in the past three years or reduce tax on capital gains any year in the future.
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.
The deadline for tax-loss selling this year is Dec. 30, which gives plenty of time to pluck out the losers.
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 from the sale.
Reclaim TFSA space by making a withdrawal
Tax-loss selling does not apply to investments in a tax-free savings account (TFSA) because capital gains – or any gains – in a TFSA are not taxed in the first place.
If TFSA contribution space is an issue, consider making a withdrawal before December 31.
Under federal government rules, contribution space from TFSA withdrawals is not renewed until the following calendar year.
That means the dollar amount of withdrawals made in 2024 will be added to your available contribution space on Jan. 1, 2025, along with a further increase expected for everyone.
If you make a withdrawal after Dec. 31, the additional contribution space will not be available until 2026.
Donate to a registered charity
Anyone can lower their 2023 income tax bill by donating to a registered charity before Dec. 31 and including the receipt with their tax return in the spring.
The tax savings in dollars depends on the income level of the individual. Savings are greater for those with higher income because they are taxed at a higher marginal rate.
If you donate shares or other securities directly to a charity, the tax on any capital gain is eliminated.
You can make a further donation of the tax savings or save your charitable tax credits for future tax returns within five years of the transaction.
A list of registered charities operating in Canada is available on the CRA website. The CRA will not recognize charitable donations to organizations not on the list.