Start 2024 on the Right Fiscal Foot with These Tax Tips

It’s a new year and anything you do going forward in financial terms will impact your 2024 tax bill.

While you still have one piece of 2023 business to address – you can still make an RRSP contribution between now and February 29, 2024, that is deductible for 2023 tax purposes – January is a good time to review your circumstances in the new year.

With holiday-season spending in the rear-view mirror, it’s an opportune time to review your personal budget and set financial goals for the year. Part of this process should be a careful review of the types of income you receive and making any adjustments that will reduce your tax burden for 2024. Consider the following tax-planning elements when looking to trim your tax bill:

Start by Comparing Your Investment Tax Rates

The main types of investment income (interest, dividends and capital gains) are taxed at different levels. Over the long term especially, it can pay to consider how much tax you will owe on a particular deposit, bond, stock, mutual fund, or real-estate holding.

A key consideration is that capital gains generally are taxed at a lower rate than other forms of income. However, the discrepancies vary according to your tax bracket and province of residence. In most cases, dividends from Canadian sources also are favourably taxed. In addition to generating investment dividend income, if possible, you may be able to take some employment income in the form of dividends. Salaries and wages, along with interest paid by bonds and cash deposits, are the most heavily taxed forms of income.

Tackle Your Tax-Assisted Plans Now

While there are relatively few tax shelters available to the average individual Canadian, most people do have access to two valuable ones: the registered retirement savings plan (RRSP) and the tax-free savings account (TFSA).

The RRSP offers a combination of tax-deductible contributions and long-term tax deferral. As mentioned above, while you can still contribute to an RRSP until February 29 and gain a deduction for 2023 tax purposes; the dollar limit is $30,780 – plus the amount of unused contributions from previous years. But it’s equally important to get a head start on your contribution for the 2024 tax year. By making the maximum contribution for 2024 – $31,560 or 18% of your earned income, plus any unused contribution room – you will increase the amount of your retirement savings that is benefiting from the RRSP’s tax deferral.

It's also important to take full advantage of a Tax-Free Savings Account. You can invest $7,000 in a TFSA during 2024, in addition to any contribution room. This includes the cumulative amount of unused TFSA contributions in past years. As well, you are allowed to replace any withdrawals made last year or in previous years to your plan. This is because TFSA contribution room is restored to the extent of any withdrawals made.

Another tax-assisted vehicle for parents or grandparents to consider is the registered education savings plan. The sooner you start an RESP, the greater the savings for a child’s eventual post-secondary education. There are several types of plans available, with varying degrees of investment options and flexibility as to how the savings eventually can be used.

Keep Track of Your Tax-Deductible Debt

Interest paid on investment loan or business-related debt is tax-deductible, whereas debt service on a home mortgage or a personal loan is not. If you are planning to purchase securities or other investments, consider borrowing the money to do so (and deduct the interest) and using the cash you might otherwise have used to pay down a mortgage or buy a car.

Seek professional advice before you act, though, as there are tight rules on investment loan eligibility. Moreover, leveraging investments can be risky business, such as what happens if your investment loses a lot of value.

Spouses: Split Your Income  

Spreading income around family members, a strategy known as income splitting can provide substantial tax savings by having income taxed at lower rates applicable to a spouse or children. Assuming there is a significant difference between spouses’ incomes, arrange to have more income received by the lower-income spouse (at a lower tax rate) that otherwise would be earned by the higher-income spouse.

If you have a family business, salaries can be paid to your spouse and children, as long as they perform legitimate tasks for the business and the amounts are reasonable. A more basic form of income splitting is where mortgage payments and other household bills are paid by the higher-income spouse, while the lower-income spouse makes investments in her or his name and subsequently pays tax at their lower marginal rate on income and capital gains.

Bear in mind, though, that if you transfer existing investments to your spouse, any income or capital gains will be attributed back to you and taxed in your hands. Thus, if you sell an investment to him or her at its fair market value, tax on the capital gain will be payable by you. However, any future gains or income from the investment after it is transferred will be taxed in your spouse’s hands. You can lend money to your spouse for an investment without triggering the attribution rules, as long as you charge realistic interest.

Be Wise with Tax Installments

Employees usually pay income tax on payday as a deduction at source. But for many others -- including self-employed people, investors and for the most part anyone who does not have tax withheld at source – they most likely are required to pay tax in quarterly instalments.

If your net tax payable will be $3,000 or greater for 2024 – as well as in either 2022 or 2023 – you will be required to pay instalments this year. (In Quebec, instalments are payable when federal or provincial tax-payable amounts, individually, are $1,800 or greater.) Instalment payments are due on the 15^th of the month in March, June, September and December.

Taxpayers identified by the CRA as probably having to pay instalments during 2024 will be sent a reminder notice in February for payments due in March and June. The amounts calculated by the tax department are based on your tax payable for 2023. A second reminder is sent in August for September and December instalments, with amounts based on your tax liability during 2024.

The amounts specified in the reminder notices are the easiest way to meet your periodic tax obligations and avoid late-payment penalties – even if the actual amount owing turns out to be greater on the 2024 tax-return assessment. You can instead opt to base the payments on either your estimated 2024 tax payable, or on what you paid for 2023. Ensure, however, that these alternative amounts will prove to be a true reflection of what you end up owing.

Note: An earlier version of this article mentioned the RRSP contribution deadline for 2023 as March 1, 2024. It is updated to February 29, 2024.