Year-end tax and financial planning considerations

RESP contributions and withdrawals

Registered education savings plans (RESPs) are used to save for a child’s post-secondary education. Contributing to an RESP can give you access to government grants, including up to $7,200 in Canada Education Savings Grants (CESGs), typically requiring $36,000 of eligible contributions. The federal government provides matching grants of 20% on the first $2,500 in annual contributions. You can catch up on shortfalls from previous years, to a maximum of $2,500 of annual catch-up contributions. But there is a lifetime limit of $50,000 for contributions for a beneficiary.

If a child is a teenager and there are a lot of missed contributions, the year-end could be a prompt to catch up before it’s too late. The deadline to contribute and be eligible for government grants is December 31 of the year that a child turns 17. And you need at least $2,000 of lifetime contributions, or at least four years with contributions of at least $100 by the end of the year a beneficiary turns 15, to receive CESGs in years that the beneficiary is 16 or 17.

Year-end may also be a prompt for withdrawals. The original contributions to an RESP can be withdrawn tax-free by taking post-secondary education (PSE) withdrawals. When investment growth and government grants are withdrawn for a child enrolled in eligible post-secondary schooling, they are called educational assistance payments (EAPs) and are taxable. If a child has a low income this year, taking additional EAP withdrawals from a large RESP may be a good way to use up their tax-free basic personal amount.

RRSP withdrawals, or RRSP-to-RRIF conversion

If you’re considering registered retirement savings plan (RRSP) contributions to bring down your taxable income, year-end does not bring any urgency. You have 60 days after the end of the year to make contributions that can be deducted on your tax return for the previous year.

If you are retired or semi-retired, year-end is a time to consider additional RRSP or registered retirement income fund (RRIF) withdrawals. If you are in a low tax bracket, and you expect to be in a higher tax bracket in the future, you could consider taking more RRSP or RRIF withdrawals before year-end.

If you are 64, you may want to consider converting your RRSP to a RRIF so that withdrawals in the year you turn 65 can be eligible for pension income splitting. This allows you to move up to 50% of your withdrawals onto your spouse’s or common-law partner’s tax return. If you are still working or you have variable income, this approach may not be best, since RRIF withdrawals are required every year thereafter.

If you are 71, the end of the year does bring some urgency, because your RRSP needs to be converted to a RRIF by the end of the year you turn 71. You can also buy an annuity from an insurance company. You will typically be contacted before year-end by the financial institution where your RRSP is held to open a RRIF.

TFSA contributions

For those investing or saving in a tax-free savings account (TFSA), year-end is not a significant event. TFSA room carries forward to the following year, so if you do not contribute by year-end, you can contribute the unused amount next year.

However, year-end does bring new TFSA contribution room. On January 1 of each year, Canadians get additional contribution room, which includes the maximum TFSA room for that year, plus room carried forward, which includes any withdrawals taken the previous year.

It usually makes sense to contribute to your TFSA promptly in the new year to get that money growing tax-free as early as possible.

FHSA contributions and withdrawals

For someone who has not owned a home in the previous four years, or lived in a home owned by their spouse or common-law partner in the previous four years, a first home savings account (FHSA) is a great way to save for a home purchase. Unlike with an RRSP, there is no 60-day extension after year-end to contribute. So, year-end could be a prompt to try to maximize FHSA contributions. It may also be advantageous to open the account before year-end, even if you don’t intend to contribute right away.

The FHSA annual contribution limit is $8,000, but you can also catch up on up to $8,000 of missed contributions from previous years, subject to the lifetime maximum of $40,000 for the account. Contribution room only begins to accumulate once you’ve opened the account.

A contributor may have a tight window to take advantage of FHSA contributions, which are tax-deductible, and FHSA withdrawals, which are tax-free when used to buy an eligible first home. FHSA account holders who become home owners and remain so for the rest of their lives may not get a chance to use an FHSA in the future.

An FHSA can remain open until the first of these occurs: the account is open for 15 years, the end of the year you turn 71, or the end of the year following the year in which you make a qualifying home purchase. You can transfer unused FHSA funds to an RRSP or a RRIF without being penalized or affecting your RRSP contribution room.

Tax installments

If you are a quarterly income tax installment remitter, year-end should be a time to revisit your installments. This may apply to self-employed taxpayers, retirees or those with significant untaxed investment income.

If you have not paid the installments requested by the Canada Revenue Agency and you expect to owe tax, a shortfall could result in installment interest and penalties when you file your tax return. The current prescribed rate charged on underpaid installments is a relatively high 9%.

On the other hand, if you have a December 15 installment still to pay, you may be able to estimate your income for the year given the proximity to year-end. If you do a pro-forma tax return—meaning one that is based on your own preliminary calculations—and find paying your December 15 installment in full could lead to a tax refund, you may be able to remit a lower amount or skip the payment altogether.

Capital gains and losses

Tax-loss selling is a common year-end strategy. It involves selling investments in taxable accounts that have gone down in value. Doing so can trigger a capital loss that can be used to offset capital gains realized that year. This can save you on tax. If you end the year with a net capital loss, you can carry that loss back to offset capital gains taxed in the previous three years. You can also carry forward the net capital loss indefinitely to use against future capital gains.

You can also consider capital gains planning at year-end. If you have a low income for the year and a low tax rate, especially if you anticipate selling an investment in the not-too-distant future, you can consider selling it before year-end. This can allow you to take advantage of a low tax bracket and save future tax despite conceding some tax today.

Deductions and credits

If you are self-employed and anticipate a business expense you will need to incur in the new year, you could accelerate the purchase to claim the deduction (or partial deduction, in the case of capital expenditures) on the current year’s tax return.

Tax credits like donations and medical expenses that may be incurred in the new year are also good year-end expenses to consider so you can benefit from the tax savings a year earlier.

Corporate planning

If you are an incorporated business owner, you should consider year-end planning for your compensation. You may have the ability to increase or decrease your income by paying dividends, declaring a bonus or repaying a shareholder loan.

This may require payroll remittances on January 15 or T-slips to be prepared in February. It may also impact personal tax owing in the spring or corporate tax owing for your next year-end.

Start planning now for next year

Tax planning should ideally be a year-round affair. But there are year-end considerations to be mindful of in order to prepare for a good tax and financial year ahead.

Talk to your accountant or financial planner about them, or if you are managing your own tax filings and finances, make sure you consider how some of these things might impact you.

Read more about tax planning:

• Do you have to make quarterly tax remittances in Canada?
• How to consolidate your registered accounts for retirement income in Canada
• Is it better to be an employee or self-employed?
• Update on bare trust tax filing rules for 2024 and beyond

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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