Six Tax Savings Actions You Can Take Now
There are several actions you can take in early 2024 to start saving on taxes now instead of waiting until you file your tax return next year. Here are some strategies to push your investment income-producing assets into your tax-free and tax-deferred accounts and reduce income tax you pay on your salary throughout the year.
1. The First-Home Savings Account (FHSA) is a new triple benefit investment account introduced in 2023 for eligible individuals. Canadian residents of legal age who are first-time home buyers can contribute up to $8,000 per year from the date of opening the account up to a lifetime maximum of $40,000. The triple benefits are:
- FHSA contributions are tax deductible,
- FHSA earnings grow tax-deferred, and
- FHSA withdrawals of contributions and earnings are tax-free when used to purchase a qualifying home.
If your adult child does not own their home, consider giving them the funds to open their FHSA to save up for their first home with this new tax- efficient investment account. The earnings are not subject to tax attribution. FHSA contribution room does not automatically accumulate like TFSA contribution room for Canadians. An eligible individual must first open the FHSA to start earning FHSA room. Only up to $8,000 of unused room is eligible to be carried forward for a year after the account is opened. The sooner you open an FHSA, the sooner you can accumulate more investment savings. The FHSA owner can claim the tax deduction in the current tax year or carry forward the tax deduction to a future tax year indefinitely.
2. Make your 2024 RRSP contribution in early 2024 rather than waiting until the first 60 days of 2025. If you have the funds, maximize the contribution to ensure your money is making tax-deferred income for as long as possible instead of generating taxable income outside the RRSP. Consider contributing securities in-kind to your RRSP. Securities contributed in-kind will trigger a disposition at fair market value and a capital gain. Avoid contributing securities in a loss position because the capital loss is not claimable. Note that dividends from U.S. domiciled shares are exempt from U.S. withholding tax inside your RRSP if you live in Canada, unlike the TFSA. If you have neither the cash nor the securities to fund your RRSP, set up automatic contributions with your advisor to invest a portion of every paycheque for retirement savings. Remember, every dollar you contribute is tax deductible. It is better to start small than to not start at all.
3. If you expect a tax refund on your T1 return due to your RRSP contributions, it is more cash flow efficient to reduce your payroll income tax during the year instead of receiving a tax refund. After making your 2024 RRSP contribution during 2024, complete and file form T1213 with CRA to request a tax reduction at source. If CRA approves the request, you will receive a letter confirming an entitlement to a reduction of income tax during the 2024 tax year. Give the letter to your employer’s payroll department to reduce income tax withholdings and increase your after-tax paycheque. You can also complete the T1213 for other expected deductions such as support payments, childcare expenses, employment expenses, carrying charges, medical expenses, donations, and foreign tax credits. Using form T1213 will prevent you from waiting a year for a refund of tax on your T1 return. You do not want to make interest free loans to CRA!
4. Like the above, ensure you complete 2024 federal and provincial forms TD1 if you expect to claim tax credits in addition to the basic personal amount. Examples of TD1 tax credit claims are the age amount, pension amount, caregiver amounts, tuition, disability amount, spouse or common-law partner amount, and dependent amounts. Provide these forms to your employer’s payroll department to reduce your income tax withholdings.
5. If you have minor children, contribute at least $2,500 per child to an RESP account to maximize the annual matching government grant of $500. Not only are you taking taxable investment capital out of your hands and putting it into a tax-deferred account, but you are also making an automatic 20% return on your investment and likely creating tax-free investment income for the beneficiary student.
6. Contribute the maximum amount to your TFSA. The 2024 TFSA contribution amount for 2024 is $7,000. If you have additional contribution room available from prior year TFSA withdrawals, replace those withdrawals as soon as you are able. If you do not have cash available to contribute, consider moving securities in kind from your taxable portfolio up to the value of your TFSA contribution room. Choose the highest yielding securities with the least tax efficiency to reduce your taxable investment income for 2024. Securities contributed in-kind will trigger a disposition at fair market value and a capital gain. Avoid contributing securities in a loss position because the capital loss is not claimable. Choose Canadian securities and other securities not subject to foreign withholding tax since foreign withholding tax would continue to apply inside a TFSA, and consequently would not be tax-free income.
Ideally, Canadians should use all the tax savings strategies above applicable to their situation if they can afford to fund them. Speak to your Raymond James advisor to implement your tax savings action plan.
This has been prepared by the Total Wealth Solutions Group of Raymond James Ltd. (RJL). Statistics and factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities nor is it meant to replace legal, accounting, taxation or other professional advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The information is furnished on the basis and understanding that RJL is to be under no liability whatsoever in respect thereof. This is intended for distribution only in those jurisdictions where RJL and the author are registered. Securities-related products and services are offered through Raymond James Ltd., Member - Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd. (“RJFP”), a subsidiary of Raymond James Ltd., which is not a Member - Canadian Investor Protection Fund. When providing life insurance products, Financial Advisors are acting as Insurance Representatives of RJFP. Raymond James Trust Services are offered by Raymond James Trust (Canada) in the provinces of British Columbia, Alberta, Saskatchewan, and Ontario, and by Raymond James Trust (Québec) Ltd. in the province of Québec. Trust Services are not covered by the Canadian Investor Protection Fund. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
