Year End Tax Planning 2024 - 2025

Salary/Dividend Planning 

Many factors must be considered in determining the most beneficial method of remunerating the owner-manager of a closely held corporation. Each case must be examined separately and there is no one "rule of thumb" that applies to all situations.

Here are a few factors that should be taken into consideration:

• The tax rate of the corporation;
• The marginal tax rate of the individual;
• Exposure to “Alternative Minimum Tax”;
• The ability to benefit from childcare expenses, paternity/maternity benefits and RRSP & CPP/QPP contributions, which are all based on salary and not dividend income;
• Wage levies applicable to salaries, such as the Ontario Employer Health Tax, Quebec's Health Services Fund and 1% Training Tax;
• Quebec restrictions on the deductibility of investment expenses by individuals where expenses exceed investment income;
• Whether eligible or tax-free dividends can be paid to shareholders;
• Receiving dividend income will result in a higher net income compared to receiving an equivalent salary, since dividend income is grossed up by 38% for eligible dividends or 15% for non-eligible dividends. This can have an impact on certain credits and benefits of an individual (e.g. old age security benefits);
• Receiving salary income (max $180,500 for 2024) will result in a higher RRSP contribution room in 2025; and
• Remuneration that is accrued and expensed (e.g. bonuses) by a corporation must be paid to the employee within 180 days of the corporation's year-end.

Income Splitting

Prescribed Rate Loans

The prescribed interest rate for the fourth quarter of 2024 is 5%.

Generally, investment income earned by an individual who invested money borrowed at low or no interest from a related person will attribute back to the lender. Subject to a purpose test, this rule does not apply where the loan is to a related person other than a spouse or minor child. Nor will it apply where the loan is to a spouse or minor child if interest is charged at the prescribed rate in effect at the time the loan is made. When relying on this exception, interest must be paid no later than 30 days after the end of the year to avoid the attribution of income.

Since the attribution rules are complex and given the current prescribed interest rate, caution is advised when contemplating a transfer of property or a loan to a spouse or a minor child (including transfers indirectly through a corporation or a trust). Prior to entering into or altering such an arrangement, we suggest you consult with your Crowe BGK advisor.

Tax on Split Income (TOSI)

TOSI may cause certain types of income from private corporations, partnerships or trusts to be taxed at the highest marginal rate. These rules apply to many Canadian resident taxpayers.

These income splitting rules are very broad and complex. Prior to distributing any amounts (other than salary) from a private corporation, partnership or trust we suggest you consult with your Crowe BGK advisor.

Other Basic Tax Planning Ideas 

• Depositing Canada Child Benefit (CCB) and Quebec Family Allowance payments directly into accounts opened in the children's names;
• Using the income of the spouse with the higher income to pay the family's household expenses so that the spouse with the lower income can accelerate the growth of his or her capital; or
• Paying reasonable salaries to your spouse and/or children based on actual work performed. 

Capital Gains and Losses 

Capital losses realized in 2024 (net of any capital gains realized) can be carried back up to three years and carried forward indefinitely to offset future capital gains. It may be worthwhile to conduct an investment portfolio analysis in order to dispose of assets with unrealized losses prior to the end of the calendar year for individuals and taxation year for corporations. Using losses against gains realized in previous years will result in additional tax refunds. Capital losses will not be recognized at the time of disposition where, during the period that begins 30 days before and ends 30 days after the disposition of the investment, the taxpayer or a person affiliated with the taxpayer acquires an identical property (a "superficial loss").

Deductibility of Interest and Investment Expenses 

Individuals who have debt should generally make it a priority to first repay debt having non-deductible interest. In general, interest on loans contracted for personal purposes will not be deductible. However, interest on loans contracted to earn income will be. The Courts have confirmed that a taxpayer can sell an income-producing asset to repay a debt with non-deductible interest and then contract a new debt for the purpose of repurchasing the same asset or a different income-producing asset. 

In Quebec, investment expenses incurred in the year by individuals are deductible up to the amount of investment income for that year. The excess amount may be carried back to the three preceding years or carried forward indefinitely. There exists no similar restriction for corporations.

Donations 

Charitable donations are generally limited to 75% of net income (no limit for Québec). Unclaimed amounts can be carried forward for 5 years.

It is generally advantageous to donate publicly traded securities rather than cash to a registered charity. The amount of the donation receipt will be equivalent to the fair market value of the securities at the time of the donation. However, any increase in value of the securities above the donor's original cost will not be subject to capital gains taxation. In addition, for private corporations, 100% of the gain is credited to the capital dividend account. 

Strategies concerning donations of marketable securities can be complex. Potential donors should consult their Crowe BGK advisor prior to donating marketable securities. 

Political Contributions 

If you’ve made a personal contribution to a recognized federal party, you are eligible to receive a federal tax credit. The maximum amount of the credit is $650 for 2024. If you’ve made a personal contribution to a recognized provincial party and you reside in that province at the end of the year, you may be eligible to receive a provincial tax credit. The maximum amount of the credit is $1,622 for Ontario. In Quebec, only contributions made to municipal political parties are eligible and the maximum credit is $155 for 2024. 

Registered Retirement Savings Plan (RRSP) 

The maximum amount individuals are allowed to contribute to an RRSP for 2024 is the lesser of 18% of their earned income for 2023 (essentially employment income net of any expenses, business income and rental income) and $31,560 plus unused RRSP contribution room from previous years. RRSP contribution room available for 2024 is reported on an individual’s 2023 Federal Notice of Assessment. Membership in a Registered Pension Plan (RPP) or a Deferred Profit-Sharing Plan (DPSP) may reduce the amount of eligible RRSP contributions. 

All or part of an RRSP contribution may be paid to a spousal plan without affecting the contribution room available to the spouse. This tax planning strategy effectively allows income splitting between spouses. Individuals may contribute to their own RRSPs up to and including the year in which they turn 71. If additional contribution room is generated subsequently, RRSP contributions may be made to a spousal plan up to the end of the year in which the spouse turns 71.

If you turn 71 in the current year, you are required to collapse your RRSP no later than December 31, 2024. In order to avoid paying tax on the value of the RRSP, it is recommended that you purchase an annuity or transfer the RRSP to a Registered Retirement Income Fund (RRIF) no later than December 31, 2024.

For individuals who anticipate their income being taxed in a higher tax bracket in a subsequent year, it may be worthwhile delaying the RRSP deduction to that subsequent year.

The amount of RRSP over-contributions must not exceed the RRSP contribution limit by more than $2,000 at any time, otherwise a penalty will be imposed on the excess amount.

RRSP contributions should, when possible, be made early in the year to benefit from the longer period that income is earned on a tax-sheltered basis within the RRSP.

Interest paid on a loan contracted to contribute to an RRSP is not tax deductible. RRSP management fees are also not deductible.

Tax-Free Savings Account (TFSA) 

A TFSA allows investment income, including capital gains, to accumulate on a tax-free basis, rather than only defer taxation as is the case with an RRSP. Canadian residents aged 18 or older are able to contribute $7,000 in 2024 to a TFSA. Unused contribution room is carried forward to a subsequent year. The cumulative contribution limit in 2024 is $95,000. Unlike an RRSP, no deduction is available for contributions made to a TFSA. 

Individual Pension Plan (IPP)

An IPP is an option for owners of incorporated businesses who wish to enhance the amount of their retirement savings. Contributions are made by reference to the owner's salary and the pension benefit desired. This can significantly exceed RRSP contribution limits, including a potentially large past-service contribution (and deduction) by the corporate employer. Minimum annual withdrawals are required once a plan member reaches age 72, similar to the rules for RRIFs.

Government Pensions 

Individuals who have turned or are about to turn 65 should file their Old Age Security (OAS) and Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) retirement applications. Old age spousal or widow(er)'s allowances may also be available. Reduced CPP/QPP retirement benefits may be available to persons between ages 60 to 65. Enhanced CPP/QPP benefits and OAS pensions are available if the application is delayed until after age 65 (up to age 70). 

Taxpayers must repay their OAS at the rate of 15% of 2024 net income in excess of $90,997. The entire OAS amount must be repaid if a taxpayer has net income in excess of $148,451 and is between ages 65 to 74 or if a taxpayer has net income in excess of $154,196 and is age 75 or older. 

Registered Education Savings Plan (RESP) 

An RESP can assist individual contributors achieve tax-free growth on the funds they will use to pay for the post-secondary education of designated beneficiaries, usually their children or grandchildren. The lifetime contribution limit that may be contributed to all RESPs of a beneficiary is $50,000, with no annual limit. No deduction is available for contributions made to an RESP.

An RESP is also entitled to government assistance. The federal government awards the Canada Education Savings Grant (CESG). The current annual maximum CESG per beneficiary is $500 (i.e. 20% of the first $2,500 of contributions paid annually). Each child is entitled to a cumulative limit of $7,200. A family that has not contributed to their child’s RESP for one or more years can receive a grant of not more than $1,000 as a CESG in a year (i.e. on a maximum contribution of $5,000).

Quebec also provides assistance in the form of the Québec Education Savings Incentive (QESI), under which it grants an annual maximum of 10% of RESP contributions up to a maximum annual incentive amount of $250. 

The beneficiaries of an RESP will not be taxed on the withdrawal of the contributions but will be taxed on the withdrawal of accumulated income, including government assistance, which they will receive in the form of Educational Assistance Payments (EAP). Initial contributions may either be paid to the beneficiary or returned to the subscriber. 

To learn more about how to optimize tax-efficient withdrawals from your RESP, contact your Crowe BGK advisor. 

Form T1135 Foreign Income Verification Statement 

Taxpayers who hold foreign property with a total cost greater than CAD $100,000 at any point in the year are required to provide detailed information regarding each specified foreign property owned during the taxation year. 

Significant penalties may apply to a taxpayer that fails to report or inaccurately reports the information respecting any specified foreign property. 

US Citizens in Canada 

A US citizen resident in Canada must file Canadian and US income tax returns, reporting worldwide income. We recommend that the US tax returns be prepared by a US tax advisor due to the complex interplay of foreign tax credits. 

US citizens who may not be compliant with US filing requirements should be aware that the U.S. Internal Revenue Service (IRS) has an amnesty program for Americans living in Canada and abroad. The IRS may waive significant penalties for certain “low compliance risk” taxpayers who opt to be compliant. 

*Deadlines falling on holidays or Sundays may be extended to the next business day.

The matters described herein, as well as other techniques used in tax planning, should be subject to ongoing review and analysis. It may be more appropriate to implement some decisions earlier, rather than later, in the year.