Don’t Overlook These Year-End Tax Planning Strategies

At year-end, tax planning strategies to reduce taxes for the current year are often considered. Some strategies are complex, while others are simpler in nature. Below are three often overlooked year-end tax planning strategies for individuals and families that can be easily implemented to save taxes for year-end and beyond.

1. Make TFSA Withdrawals Before Year-End

The Tax-free Savings Account (TFSA) offers a number of benefits, including tax-free income and withdrawals. Once a TFSA withdrawal is made, the plan holder can recontribute the amount withdrawn to a TFSA as early as the following calendar year without requiring additional TFSA contribution room. More specifically, the amount of the TFSA withdrawal is added to TFSA contribution room for the following year, allowing the plan holder to return the withdrawn amount to their TFSA without requiring “new” contribution room.

The year-end tax planning strategy is, to the extent a TFSA withdrawal is required, for plan holders to consider their withdrawals before year-end as opposed to waiting until the new year. Doing so will allow for a recontribution of the withdrawn amount twelve months earlier than would otherwise be the case. Consider the following example:

Stacey has maximized her TFSA contributions for 2024. Needing cash for an emergency, she is considering a $10,000 withdrawal from the same account. What is the impact of a December 2024 versus January 2025 withdrawal?

*Assumes the TFSA dollar limit for 2025 and 2026 will be $7,000 and no other carry forward room from prior years.

A December withdrawal will allow Stacey to recontribute the $10,000 to her TFSA as early as January 2025, in addition to newly acquired TFSA contribution room ($7,000) for that year. On the other hand, a January 2025 withdrawal would not be available for recontribution until January 2026.

2. Consider “Remainder of the Year” Spousal RRSP Contributions         

Spousal RRSPs are commonly used to split income within a family. Individuals can make a contribution to a spousal RRSP of which their spouse or common-law partner (CLP) is annuitant, allowing the individual to claim a tax deduction for the year with future withdrawals from the RRSP being taxed to the annuitant-spouse, often at lower tax rates. There is, however, a spousal RRSP attribution rule that would prevent this income-splitting opportunity where the plan is being used for short-term benefit. Specifically, when a withdrawal is made from a spousal RRSP, and contributions were made to a spousal RRSP owned by the annuitant by a spouse or CLP in the year of withdrawal or previous two calendar years, the withdrawal would be taxed to the contributing spouse and not the spousal RRSP annuitant, up to the amount contributed in the above period. Exceptions apply in cases of death and relationship breakdown.

RRSP contributions are generally tax-deductible for a given year if contributed to an RRSP from March to December of the year (i.e., a “remainder of the year” contribution) or within 60 days of the following year (i.e., a “first 60-day” contribution).

Where spousal RRSP contributions are made in the remainder of the year (instead of a first 60-day contribution), the spousal RRSP attribution period is accelerated by a year, allowing the couple to income-split sooner.

Sherril is considering a contribution to a spousal RRSP for the 2024 tax year. It is her intention to make a first 60-day contribution in January 2025, but has the flexibility to make the contribution in December instead. If Sherril makes the contribution in December 2024, the contribution would be free from attribution upon withdrawal in 2027. If the contribution is made in January, the attribution-free period would begin in 2028.

3. Create RRIF Income for Income-Splitting Purposes

Up to 50% of eligible pension income (EPI) can be split between spouses and common-law partners. Where a tax bracket differential exists between the spouses, tax savings for the couple can be achieved. EPI depends on the age of the income recipient and the type of income received. For taxpayers of any age, eligible pension income generally includes:

• Periodic pension payments from a registered pension plan (RPP) ¹
• Successor annuitant payments from a registered retirement income fund (RRIF) ¹

For taxpayers age 65 and older (refers to the transferring spouse; the transferee spouse can be any age), eligible pension income normally includes:

• RRIF payments
• Certain annuity payments (e.g., deferred profit sharing plan (DPSP), registered retirement savings plan (RRSP) and non-registered)²
• Certain retirement compensation arrangement (RCA) payments

Eligible taxpayers (i.e., those age 65 or older) can consider creating EPI before year-end, perhaps by converting RRSPs to RRIFs to receive splitable RRIF income. In addition to savings from their tax rate differential, the couple may benefit from access to (and the potential doubling of) the pension income tax credit (worth approximately $300 federally³) and preservation of the age credit (worth approximately $1,320 federally (2024) and clawed back gradually once a taxpayer’s net income reaches $44,325 (2024)). Also, for seniors who are receiving Old Age Security (OAS) benefits, the splitting of EPI can preserve this benefit which, for 2024, is fully clawed back once net income reaches $148,451 (for those between the ages of 65 and 74) and $154,196 for those age 75+.

Against these benefits, the couple should consider if the transferring spouse is eligible for the spousal credit which is available when a spouse’s income is below a certain amount (i.e., the transferring spouse’s basic personal amount plus an amount if the transferee spouse is dependent due to a mental or physical impairment). Where eligible for the spousal credit, splitting EPI would add taxable income to the transferee spouse, resulting in a potential clawback of the spousal credit. The same is true for the age credit and OAS benefits to which the transferee spouse may be entitled.

Of course, if a taxpayer has already received eligible pension income for the year, perhaps from periodic payments from a registered pension plan, adding RRIF income may not be a priority depending on the income and tax bracket levels of the spouses.

Year-end tax planning doesn’t have to be complex. Sometimes simple strategies can deliver value and maximize wealth.

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¹ Age 65 is required for purposes of the Quebec Taxation Act.
² Splitable at any age if received due to spouse’s death, other than in Quebec where age 65 is required.
³ Plus a provincial/territorial credit.