Achieve better tax results in 2024 with strategic year-end planning

Tax loss selling involves selling investments in your non-registered accounts that have accrued losses to offset capital gains realized elsewhere in your portfolio. Any net capital losses that cannot currently be used may either be carried back three years or carried forward indefinitely to offset net capital gains in other years.

In order for your loss to be immediately available for 2024 or one of the prior three years, the settlement must take place in 2024. The trade date must be no later than Monday, December 30 to complete settlement by the December 31 year end since, newly for 2024, there’s a one-day settlement period for stock trades.

If you purchased securities in a foreign currency, such as in U.S. dollars, the gain or loss may be larger or smaller than you anticipated once you take the foreign exchange component into account, especially if you purchased those securities a while ago.

For example, a decade ago, the U.S. dollar was trading for around $1.05, while today it’s hovering around $1.39. A security purchased 10 years ago in U.S. dollars could therefore have a significant embedded currency gain, which could more than offset what at first glance might appear to be an accrued loss.

As of June 25, 2024, the capital gains inclusion rate is now 66.67%. Individuals, however, are still entitled to the 50% inclusion rate on the first $250,000 of capital gains annually, but for corporations and trusts — other than graduated rate estates and qualified disability trusts — the higher 66.67% inclusion rate applies to all gains realized on or after June 25.

In terms of real tax cost, the actual increase in the tax rate on capital gains over $250,000 is around nine percentage points, depending on your income level and province or territory of residence. For example, a British Columbia investor who is in the top marginal tax bracket currently pays capital gains tax of 26.75% on any capital gains under $250,000. But with the new 66.67% inclusion rate, that BC investor is now looking at a capital gains tax rate of 35.67% on gains over $250,000, an increase of 8.92 percentage points.

So, if you’ve got considerable gains in your non-registered portfolio, consider tax gain selling in 2024, to take advantage of the lower 50% inclusion rate on the first $250,000 of capital gains realized between June 25 and December 31. For publicly-traded shares, it’s as easy as selling the shares on the open market and immediately buying them back, to “crystallize” the gain. And, unlike tax-loss selling, there’s no equivalent superficial gain rule, so you don’t need to wait 30 days to buy back the stock.

Deciding whether to realize up to $250,000 in gains now and pay the capital gains tax for the 2024 tax year — due on April 30, 2025 — or to sell the asset at some later time and pay the tax then, will depend on your expected returns and investment timeline. For example, if you don’t sell now, and your investments grow at 6% per year, it would take about 8 years for the investment growth to outweigh the tax savings from the lower inclusion rate.

If you’re a first-time homebuyer — no home in the current year or prior four calendar years — who is a resident of Canada and at least 18 years of age, the FHSA allows you to save on a tax-free basis towards the purchase of a home.

You can contribute up to $8,000 per year, up to a lifetime limit of $40,000, towards saving for your first down payment. Even if you can’t put in the whole $8,000 this year, it’s still wise to open an account in 2024 with some level of contribution, as any unused room will carry forward to next year. But if you don’t open an account this year, FHSA room doesn’t start to accumulate.

You can claim a tax deduction for contributions you make by December 31 on your 2024 tax return, or you might choose to claim it in any future year when perhaps you’re in a higher tax bracket. Note, however, that unlike RRSPs, contributions you make within the first 60 days of 2025 can’t be deducted on your 2024 return.

Withdrawals to purchase a qualifying home, including withdrawals of any investment income or growth earned in the account, are non-taxable, just like they are with a TFSA (tax-free savings account). If you end up not being able to use the FHSA to buy a first home, you have the option — until age 71 or 15 years after opening an FHSA, whichever comes first — of transferring funds from an FHSA to your RRSP or RRIF (registered retirement income fund) on a tax-free basis. These transfers won’t affect your RRSP contribution room. Funds in your RRSP or RRIF will be taxed upon ultimate withdrawal.