1. Tax rates are significantly more favourable for dividend income than interest income. The top personal tax rates in Ontario for 2024 are as follows:
Consider reevaluating your investment strategy by comparing the pre-tax dividend rates with the pre-tax interest rates using the chart provided in the Investment Income - A Closer Look section at the end of this stellar segment.
2. Defer tax on interest to the following year by investing funds for a one-year term ending in the next calendar year.
3. Defer purchases of mutual funds until early in the next calendar year to minimize taxable income allocated in the current year from the mutual fund.
4. Existing companies that have built up refundable dividend tax on hand (RDTOH) may consider paying dividends to recover this tax. Depending on its year-end, the company may have up to 24 months to enjoy the benefits of the tax refund before the shareholder is required to pay personal tax on the dividend. The individual circumstances should be reviewed, including the marginal tax rate applicable to the recipient shareholder as compared to the dividend refund rate in the corporation (38.33 per cent).
5. Individuals who own qualified small business corporation (QSBC) shares or qualified farm and fishing property, may benefit from the lifetime capital gains exemption of $971,190 for 2023 (to be announced for 2024) on the gain realized on the sale of these types of assets. The exemption is indexed to inflation annually.
The Government has maintained the exemption of $1,000,000 for qualified farm and fishing property. The exemption is available on dispositions made on or after April 21, 2015.
6. Consider realizing accrued losses on investments to shelter capital gains realized this year and/or in the previous three years.
Note that a loss realized from the disposition of an investment may be denied if you or your spouse or common-law partner repurchase the investment within a short period of time.
7. Should your trading activities be substantial, the handling of your securities may be considered a business for income tax purposes.
If your disposition of securities is considered a business, your profits will be fully taxable as income (instead of being considered capital gains taxable at 50 per cent), and your losses will be fully deductible against any source of income.
To address concerns about your securities disposition being labeled as a business, you can consider filing a one-time, non-revocable election with the Canada Revenue Agency (CRA).
This election will treat all your gains from dispositions of Canadian securities as capital gains (and all your losses as capital losses) for the current year and all future years.
8. Canadian residents 18 years of age and older can contribute up to $6,000 annually (plus any unused contribution from previous years) to a tax-free savings account. Starting in 2023, the contribution limit is indexed to inflation and rounded to the nearest $500. The annual limit for 2023 is $6,500 and the annual limit for 2024 is $7,000.
For someone who has never contributed and has been eligible for the TFSA since its introduction in 2009, they will be allowed to contribute up to $95,000 in 2024.
Contributions to TFSAs are not deductible for income tax purposes.
Interest on money borrowed to invest in a TFSA is not tax deductible.
Both contributions to and income earned in a TFSA and withdrawals from a TFSA are tax-free.
You can give money to your spouse for a TFSA contribution, and the income earned on the contributions in your spouse’s TFSA will not be attributed back to you.
You cannot contribute more than your TFSA contribution room in a given year, even if you make withdrawals from the account during the year. If you do so, you may be subject to a penalty tax for each month that you are in an excess contribution position.
9. As of April 1, 2023, Canadian residents 18 years of age and older who have not owned a home (and who have a spouse that has not owned a home) in the last four years can open an FHSA to assist them with saving to buy their first home in Canada. Individuals can contribute up to $8,000 per year or $40,000 during their lifetime. Contributions are tax deductible and the income earned in the account is tax-free. Withdrawals will be tax-free if they are made to purchase a qualifying home.
For a withdrawal to be tax-free, the individual must be a first-time home buyer, and there must be a written agreement confirming the purchase or construction of a qualifying home before October 1st of the year following the withdrawal. Within one year of purchasing or constructing the home, you must have the intention to establish it as your primary residence.
Any remaining funds after making the withdrawal can be transferred to an RRSP or RRIF with no penalty or reduction in contribution room if the transfer is made by December 31st of the year following the withdrawal. The account must also be closed by December 31st of the year following the withdrawal.
10. Consider donating publicly-traded securities instead of cash.
A tax-advantaged gift of securities can be made to a private foundation as well as to public charities. Generally, an appreciation in the value of the securities will not be subject to capital gains tax if the securities are donated to:
However, be aware that alternative minimum tax (AMT) may apply to donations of securities (made by you as an individual taxpayer or through a trust) beginning in 2024 due to the proposed AMT changes announced in the 2023 Federal Budget.
The donation credit (for individuals) or deduction (for corporations) continues to be available for the fair market value of the securities donated.
To avoid capital gains tax on the appreciated securities, the securities themselves must be transferred to the charity or foundation.
Similar rules will apply to a capital gain on ecologically-sensitive land donated to a conservation charity (other than a private foundation).
The donation of flow-through securities may trigger a capital gain to the donor.
It may be a strategic time for you to consider whether your investment income is tax efficient and consider investment alternatives.
The table below has been prepared to assist you in this matter. It assumes that your investment goal is to earn an after-tax rate of return of five per cent.
It compares the pre-tax yield required to achieve a five per cent after-tax rate of return through earning:
Contribute to your tax-free savings account or first home savings account as an investment tool.
Use your available lifetime capital gains exemption to shelter your capital gains, where possible.
Consider realizing accrued losses on investments to shelter capital gains realized this year and/or in the previous three years.
This article has been prepared for the general information of our clients. Please note that this publication should not be considered a substitute for personalized advice related to your situation.
Tax Season Odyssey 2024