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4 new year’s financial resolutions for 2024


Includes some new financial considerations for Canadians

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There are several new financial considerations for Canadians this year, ranging from a recently introduced investment account to a new tax filing obligation to a reversal of past thinking about debt.

Let’s look at three of them, plus re-examine a timeless resolution about registered retirement savings plans (RRSPs).

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Open an FHSA

The first home savings account (FHSA) was introduced in the 2023 federal budget. Financial institutions have been rolling them out with surprisingly little fanfare. Many people are unaware of these new accounts, and some who are familiar are not sure how best to leverage them.

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An FHSA can be used by any Canadian resident between age 18 and 71 who has not lived in a home owned by them or their spouse or common-law partner in the current year or previous four years.

Up to $8,000 of annual contributions can be made to an FHSA, up to a total of $40,000. Contributions are tax deductible and though you report them in the year they are made, the deduction can be carried forward to use in a future higher income tax year. However, you can only have $8,000 of cumulative room carried forward at any time, so be careful about making multiple years of low contributions and limiting how much you can deposit to the account.

You can use existing RRSP savings to transfer funds on a tax-deferred basis to an FHSA. The annual and lifetime limits still apply on a transfer. Because a contributor received a tax deduction on their initial RRSP contribution, they do not get a second tax deduction upon transferring funds to an FHSA.

Eligible withdrawals must be made within 15 years of opening an FHSA and are tax free when used for the purchase of an eligible owner-occupied home.

FHSAs are like an RRSP on the way in (tax-deductible contributions with tax-deferred growth), and like a tax-free savings account (TFSA) on the way out (tax-free withdrawals). This makes FHSAs superior to an RRSP or a TFSA for funds that are specifically meant to buy a home.

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Trust tax returns

Most people who have a trust know they have to file a tax return. Formal trusts are often used by business owners or wealthy investors, or to hold an inheritance for minor children or grandchildren after someone has passed away. For 2023 onward, a whole new group of taxpayers with informal trusts or bare trusts will be required to file T3 trust tax returns by March 31 each year.

Trusts may be subject to a tax on the annual income they earn. They generally allocate their income to beneficiaries so the income is instead taxable to them, but to do so, the trustees must prepare T3 tax forms called Statement of Trust Income Allocations and Designations slips.

One example of an informal trust is an investment account opened for a minor child or grandchild by a parent or grandparent. The good news is these trusts do not need to file unless the fair market value of their assets exceeds $50,000.

A more common trust arrangement that is likelier to be subject to the new rules is when a parent adds their child jointly to a bank or investment account. An elderly parent’s account is also more likely to have a balance that exceeds the $50,000 threshold.

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Another example of an informal trust may be when a home is owned by both a parent and a child. If the parent and the child live in that home together and genuinely own it jointly, this may not be a trust. But if a parent co-signs for a child’s mortgage and is, say, a one per cent owner, this may be considered a trust arrangement.

A trust may also exist when a parent adds their child jointly on the title of their home as an estate-planning strategy to try to avoid probate.

These situations may constitute a trust because legal ownership may include multiple parties, but beneficial ownership — who the asset truly belongs to — may only include one or some of those on the title. The other legal owners who do not really own the assets may be considered trustees holding a share of the assets in trust for the beneficial owners or beneficiaries.

Pay down high-interest debt

The prime rate is used by banks for most variable-rate lending products such as lines of credit or variable mortgages. Right now, that rate stands at 7.2 per cent. Most home equity lines of credit are at prime plus 0.5 per cent or one per cent, meaning a borrower is paying 7.7 per cent to 8.2 per cent interest on any balance.

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If you have a savings account, taxable non-registered investments or TFSA, you should consider paying down your debt. Unless you can earn an after-tax rate of return higher than your interest rate, you will fall behind by not paying down your debt.

As an example, if you are in a 30 per cent tax bracket and earning five per cent interest on a savings account, $10,000 will provide after-tax interest of only $350 per year. A $10,000 home equity line of credit balance will cost you around $800 in interest. Using your $10,000 savings to pay down $10,000 of debt is like earning $800 of after-tax income by avoiding that $800 cost. You would need to earn a rate of return of around 11.4 per cent on your savings to come out ahead.

TFSA savings are tax free, so it is an easier comparison. You will need an eight per cent TFSA return to be better off than paying down an eight per cent interest rate debt. That is a high threshold, especially for a conservative investor.

If your debt is unsecured, such as a line of credit not secured by your home, or especially a credit card, your double-digit interest rate is a compelling target for paying down with your savings.

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Contributing to an RRSP

The months of January and February are typically known as RRSP season. This is because RRSP contributions can be made in the first 60 days of the year and still be deducted on your tax return for the previous year. This allows time for taxpayers to determine their income for the past year and consider an RRSP contribution to reduce their tax payable.

Taxpayers should be careful about focusing on saving tax at all costs. RRSPs are generally beneficial if you can contribute at a higher tax rate today than the tax rate you expect to pay when you withdraw from your RRSP. If your income is below $53,359 for 2023, or RRSP contributions or other deductions bring your income below this threshold, you will be in the lowest federal tax bracket. For 2024, the lowest federal bracket applies to income of less than $55,867.

Provincial tax brackets are also a consideration, but generally, taxpayers with incomes below $60,000 should think twice about contributing to RRSPs. They may pay more tax in the long run and be better off investing in a TFSA or taxable investment account instead, especially considering future government means-tested benefits in retirement.

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One exception is if your employer matches your contributions, which generally makes contributing to an RRSP beneficial at any level of income.

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Remember that when you are being encouraged to contribute to your RRSP, the person encouraging it may be focused on a sales quota as opposed to your long-term tax and retirement planning. Paying less lifetime tax may be better than saving tax in April.

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. He can be reached at jheath@objectivecfp.com.

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