May 2024 LifeSpring Insights

If you’re like many people, once your taxes are filed, you take a bit of a breather from financial matters. It’s understandable – healthy even. But there have been some recent changes in the financial world that you should be thinking about. By dealing with them now, you can save yourself time and money in the months and years ahead.

With that in mind, we’ve set up this month’s LifeSpring Insights as a “financial spring tune-up plan.” It’s broken into six tips, including a rarely discussed strategy for parents (see point #6 below).

1. Why June 25, 2024, could be the new “tax deadline” (and how to respond)

To start with, the biggest change since the April edition of LifeSpring Insights came in the middle of the month: The new capital gains tax inclusion rate proposed in the latest federal budget on April 16, 2024.

Before discussing how to manage this shift, take a look at how the inclusion rate might work, how it might change, and why June 25 could become a key date for those with an asset – be it an investment or a second home – that’s grown in value.

Under the current rules, 50% of your capital gain (or profit, in other words) on the sale is subject to tax – that’s where the name “inclusion rate” comes from. And that 50% is taxed as regular income. Note that you can offset capital gains with capital losses, but we’ll leave that aside.

Under the proposed rules, which could come into force on June 25, the inclusion rate rises to 67% for individuals for all gains above $250,000 (but only for individuals – corporations’ gains fall entirely under the new rate). In other words, if your gain is $250,000 or less, the current 50% inclusion rate would apply, moving to 67% for amounts beyond that.

So who will this affect, and what’s the right response? First, know that any investments in registered plans, such as registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs) and the new first-home savings account (FHSA), aren’t affected, as these plans are tax-sheltered. Gains on the sale of your principal residence remain tax-free, too.

However, if you’re selling a second property, say, or another asset that’s risen sharply over the years, you could be affected. You could also have to deal with the higher inclusion rate if you invest through a corporation.

The key to dealing with this change is to look at the investment(s) in question and ask yourself two things:

1. When do I need the cash from this investment?
2. Does it still make sense for me to own it?

If your timeline is long and the answer to No. 2 is “yes,” don’t feel pressure to sell. Bear in mind, too, that the inclusion rate has changed in the past and could change again.

This is an evolving scenario pending a final decision from the federal government, so here again, it’s best to work with your advisor to build a plan that helps you meet your goals and navigate the changing tax landscape.

2. Stay nimble as the rate picture grows cloudier

Interest rates always play a key role in financial planning, especially since early 2022, when the Bank of Canada's latest rate-hike cycle began. 

Today, the focus is more on rate cuts, with speculation on when they’ll start and how far rates will fall.

There are signs that cuts are near: Canadian inflation, as measured by the consumer price index (CPI), was up 2.9% in March from a year earlier, not far from the Bank of Canada’s 2% target. And the economy grew by just 0.2% in February, below analysts’ estimates.

But March CPI was up slightly from February. And in the US – whose moves heavily influence ours – “sticky” inflation has put rate cuts on hold, possibly until 2025.

The takeaway: Be ready for the possibility that rates will remain elevated for the medium term, at least, especially if you have a mortgage renewal coming up in the next year.

Even if rates do decline – an expectation from many with signals from the Bank of Canada as inflation cools – your payments will still be higher on renewal, given the rate hikes we’ve seen already. There may be other options (such as a fixed-rate mortgage with a shorter term) to help mitigate that and set you up for lower payments down the road, when rates are expected to be lower.

No one can predict the future, of course, but it’s never too early to get informed on your options. The best way to do so is to meet with your advisor.

3. Your estate plan – now is the time to review your beneficiaries

Before backing away from financial matters for the summer, it’s a good idea to take a quick look at the beneficiaries for your life insurance policies and your investments – particularly your RRSP.

First off, you’ll want to ensure you name your spouse as the beneficiary for these plans, if appropriate. That way, if they survive you, they can roll your RRSP into their own. Once the surviving spouse passes, the total amount is added to a final tax return, making it taxable and likely at a high rate.

Many people consider using insurance to pay any final taxes as it allows for families to retain assets, such as a recreational property, at a lower cost or having to sell assets to pay the tax.  See an advisor for advice if you are unsure how this might apply to you.

And if you do plan to meet with your advisor before the summer (a move we recommend) put a review of your beneficiaries on the list of things to discuss. It’ll only take a moment, and it could mean a lot to your loved ones down the road.

4. Do this now to dodge the 2025 “RRSP scramble”

If you find you’re always rushing to put together an RRSP contribution in the first couple months of the year, you’re far from alone – many people do so. And it makes sense to do so, as you can use contributions in the first 60 days of the year to lower your tax payable in the previous tax year.

Of course, with the February 29 RRSP contribution deadline (and the April 30 tax deadline) well behind us, it’s too late to make any contribution count for 2023. But you can save yourself the scramble (and the stress) next year by setting up an automatic monthly contribution to your RRSP, or increase yours if you already have one.

That way, you’ll be less tempted to spend any excess cash, and you’ll make the first couple of months of 2025 much easier on your cash flow – a move your future self will thank you for, especially after the holiday season.

5. Bare-trust rules are the Terminator of the tax world: They’ll be back

The other issue hanging over tax planning these days is the new framework around “bare trusts,” which was discussed in the March 2024 LifeSpring Insights.

A quick refresher: There are two parties to these trusts: The trustee looks after an asset (examples include a sum of money held for a child, say). The beneficiary eventually receives that asset, or has control of it.

The tricky thing about bare trusts is they can be formed without the trustee or the beneficiary even realizing it (for example, if you are given cheque-signing authority on an elderly parent’s bank account).

So when the Canada Revenue Agency (CRA) required trustees to file a yearly T3 return, starting with the 2023 tax year, it sparked a lot of confusion. That prompted the CRA to suspend the new rules in April. But some reporting will likely be needed at some point, so it’s worth discussing this with your advisor if you think it might affect you.

6. Parents: Use the summer to teach children about money

Finally, let’s shift from your finances to another type of investment: the value of financial literacy. Truth is, it’s never too early to teach kids about money, and the summer, when they have more free time, is the perfect time to do so.

Some strategies include opening an account and gifting your kids a small amount – a key first step in helping them take control of their financial futures. Or take them shopping with you, taking the time to show them how to compare prices and explain the value of doing so.

An allowance? That’s another possibility. It doesn’t have to be a lot – the key benefit for the kiddos, after all, is to introduce them to the exchange of money, the value of saving and dealing with expenses.

Spring forward on your goals with expert advice

Looking to tune up your financial plan for the season and beyond? Your advisor is here to help with expert advice, personalized service and insights on how to apply these tips and more. Reach out today to discuss your goals and how you can keep working towards achieving your financial wellness.