March 2024 LifeSpring Insights

When it comes to tax season, most people keep two dates in mind: the deadline for contributing to their Registered Retirement Savings Plans (RRSPs) – at the end of February – and the deadline for most people to file their tax returns at the end of April.

While in between those two dates, it’s too late to make an RRSP contribution and deduct it from your previous year’s income, it’s never too late to review your personal situation and make sure your investment strategy is as tax-efficient as you can make it.

Here are five strategies to help you do just that. Most will set your investments up for next year’s tax season (and beyond), but if you think you might fall under the new rules around “bare” trusts (see point #2 below), you may need to act before early April.

1. Consider an FHSA contribution, even if you might not buy a qualifying home

The new First Home Savings Account (FHSA) is a great way to save for a first home, but it has other, often overlooked benefits, too. For example, you could use it to give yourself a bit of “extra” contribution room in your Registered Retirement Savings Plan (RRSP).

More on that in a moment. First, a quick review of how the FHSA, which was launched in April 2023, works: As with an RRSP, you can deduct your FHSA contributions from your income in the year in which you make them. In the case of the FHSA, you can contribute up to $8,000 a year, to a lifetime maximum of $40,000. And you can carry forward up to $8,000 of room to the next year.

Funds you hold in your FHSA grow tax-free. And you can withdraw them without claiming them as income so long as you do so to buy a qualifying home.

Having that extra RRSP room comes in handy in one very useful way. If you don’t end up using FHSA funds to buy a first home, you have another option besides simply withdrawing the money and having to report it as income – you can roll the money into your RRSP. You can do so even if you don’t have RRSP contribution room to accommodate the funds in your FHSA.

In other words, you’re basically giving yourself extra RRSP room, which really is the worst-case scenario when contributing to an FHSA. Discuss with your advisor to see if this is an option for you. 

2. Mind the new rules around bare trusts

Most people have never heard of bare trusts, but they’re actually quite common, and you may have created one without even realizing it.

A bare trust mainly consists of two parties. The trustee is responsible for administering a property (think a sum of money held for a child, being the co-signer on a child’s mortgage – and appearing on the title of the home – or becoming a signatory on an elderly parent’s bank account). The beneficiary is the person who eventually receives that property (in the case of, say, a sum of money) or controls it (in the case of a home).

In previous years, these trusts didn’t need to be reported to the CRA, but under recent rule changes, trustees must file a yearly T3 return. There are a lot of moving parts here, given how recent this change is, but if you’re in this situation, you may have to file your T3 on or before April 2 this year. Failing to do so could result in a penalty. If you think you may hold a bare trust, talk to your financial advisor or tax expert.

3. Lower deductions on your paycheck to get your tax refund throughout the year

Let’s face it, we all love the feeling of relief that comes with getting a large tax refund. But the truth is, it really is better to get no refund at all. That’s because a refund is basically the tax that you’ve overpaid through the year being returned to you, after sitting inactive with tax authorities and earning no investment income.

There is a way to get this money returned to you sooner. If you automatically contribute to an RRSP, for example, you can file form T1213 with the Canada Revenue Agency (CRA) and ask them to let your employer reduce the tax deducted from your pay to account for your RRSP contribution. 

Let’s say, for example, you automatically contribute $500 a month to your RRSP, or $6,000 a year. If you file form T1213, along with proof of your contributions, and the CRA approves it, you’ll get a letter of authority you can give to your HR department authorizing the lower deduction.  

That will reduce, or possibly, eliminate your yearly tax refund, but you’ll get that money throughout the year instead – and you can put it to work faster, perhaps by reinvesting it in your RRSP, your TFSA, an FHSA or any other way you wish.

4. Reconsider borrowing to invest in RRSPs

Even though this year’s RRSP deadline has passed, it’s still worth talking about a strategy that used to be a common move for some people but may not make sense now: borrowing to invest in your RRSP.

That’s because today’s higher interest rates have changed things dramatically. For example, say you’re in the third-highest federal/provincial blended marginal tax bracket in B.C., which is 46.12% for the 2024 tax year. 

Now let’s say you expect to be in a lower bracket in retirement, perhaps the fourth-lowest, of 31%. That’s an ideal setup for an RRSP, because you’re getting the tax deduction in higher-tax years and you’re withdrawing the money (which is taxable on withdrawal) in lower-tax years.

Let’s also assume that in 2024 you take out a loan with an interest rate of around 8% and contribute the borrowed funds to your RRSP. You then pay off the loan in one lump sum two years later. In that case, you’ve paid around 16% of the principal in interest, essentially negating the tax savings that come in from the difference between the two tax brackets.

The bottom line? Borrowing to invest in your RRSP isn’t necessarily a poor strategy, but it’ll likely only be effective if you repay the loan quickly – ideally in a year or less.  

5. When it comes to taxes, think family, not individual

Our final tip isn’t so much a strategy but a mindset to employ when making tax and investment plans: that is to think as a family, rather than looking as an individual. 

For example, do you have children over 18? If so, they’ve been acquiring TFSA contribution room yearly (you can contribute $7,000 to your TFSA in 2024). So if you and your spouse have maxed out your TFSAs, consider giving funds to them to put in their TFSAs. 

The trade-off here is that you’re giving up control of these funds to your child. But the upside is you’ll be making the most of everyone’s contribution room – and letting more of your family’s wealth grow tax-free.

Your advisor can keep you ahead of (ever-changing) rules

When it comes to tax and investment planning, it always pays to be proactive, and not simply responding to events as they happen. By staying ahead of the game, you can make sure you’re taking advantage of every strategy and tax deduction available to you.

Your advisor can help you build a financial plan that matches your needs and goals, while helping you build a portfolio that’s as tax-efficient as possible. Make an appointment today.