Year-end is a crucial time for whole mortgage loan investors in Canada to review and adjust their financial strategies to optimize investment outcomes and tax positions. In this comprehensive guide, we aim to provide essential reminders and strategies for year-end financial planning, focusing on mortgage investments in the Canadian market.
Review changes to federal and provincial tax brackets
Based on the Government of Canada’s indexation (i.e. adjust for inflation) of the personal income tax system, federal tax brackets and personal tax credits for 2024 will increase by 4.7%. At the federal level, the highest tax bracket will increase to $246,752 and over from $235,675 in 2023. The second-highest bracket increases to $111,733-$173,205 from $106,717-$165,430. All other tax brackets, including the federal basic personal minimum amount, currently $15,000, also increase by the same percentage.
In Ontario, tax brackets and personal tax credit amounts will increase by 4.5%, except for the $150,000 and $220,000 bracket amounts, which are not indexed for inflation. Changes in tax brackets and personal credit amounts for other provinces are as follows: Alberta (4.2%), British Columbia (5%), Manitoba (5.2%), and New Brunswick (4.7%).
Individuals who invest in private mortgages should always report interest earnings to the Canada Revenue Agency (CRA).
Reduce your taxes owing through the Small Business Deduction benefit
Introduced by the federal government in December 2022, the Small Business Deduction (SBD) is a tax benefit that aims to minimize the tax burden on eligible Canadian-Controlled Private Corporations (CCPCs). Corporations that qualify for SBD can deduct up to $500,000 from their taxable income, effectively reducing their federal tax rate to 9% depending on the province, compared to the general corporate tax rate of 28%.
To qualify for the SBD program, corporations must be privately owned, incorporated in Canada, and not controlled by non-residents or public entities. Following new tax changes, SBD program eligibility has expanded to companies with up to $50 million in taxable capital from $15 million previously. Corporations involved in whole mortgage investing could qualify for this program.
Claim travel and temporary relocation expenses as a tradesperson
The Labour Mobility Deduction was introduced in the 2022 tax year to provide tax relief to tradespeople and apprentices who require relocation assistance for work. The deduction allows these professionals to claim up to $4,000 in temporary relocation expenses. The deduction provides up to $4,000 annually for temporary relocation expenses, including eligible out-of-pocket long-distance travel expenses. The temporary work location must be in Canada and have a minimum duration of 36 hours.
The 2023 federal Budget proposed to double the maximum employment deduction for tradespeople’s tools to $1,000, effective for 2023. However, those changes have not been confirmed.
Increase savings for a down payment on a home
In 2023, the federal government introduced the new tax-free First Home Savings Account (FHSA), which is a registered savings account that helps first-time buyers purchase a home. The program allows first-time buyers to contribute up to $8,000 per year until they reach a maximum contribution limit of $40,000 within 15 years of opening their account.
The savings account is intended to help first-time buyers accrue enough capital for a down payment on a home while providing tax relief. Up to $8,000 in unused contribution room can be carried forward until the maximum threshold ($40,000) is reached. It can be combined with the existing Home Buyers’ Plan (HBP), which allows buyers to withdraw up to $35,000 from their RRSPs toward a home purchase.
To qualify for a First Home Savings Account, individuals must be Canadian residents aged 18-71.
The First-Time Home Buyers’ Tax Credit (HBTC) is another program designed to help Canadians who buy a house for the first time. A first-time buyer or their spouse/common law partner can claim up to $10,000 on their tax return, which would result in a rebate of up to $1,500. Prior to 2022, the maximum HBTC was $750. The HBTC is a non-refundable tax credit.
Receive tax incentives for home renovations
Homeowners now have several tax incentives for home renovations. The Multigenerational Home Renovation Tax Credit (MHRTC) is a refundable tax credit that was introduced in the 2023 tax year. Under the program, homeowners can claim up to $50,000 in qualifying expenditures for each renovation. The tax credit covers 15% of renovation costs, up to a maximum of $7,500 for each eligible claim.
Meanwhile, the Home Accessibility Tax Credit (HATC) provides a non-refundable tax credit worth up to $3,000 for home renovations up to a maximum amount of $20,000. Eligible expenses include labour costs and goods acquired for renovations that improve mobility or functionality for eligible dwellers.
See if you qualify for tax relief for transferring a business to a family member
The 2023 federal budget introduced new tax relief measures for intergenerational business transfers, or business owners who want to transfer their business to family members and employees. The new rules alter how family businesses are taxed when transferred from one family member to another. Under previous rules, the difference between the original price of the business and the sale price was taxed as a dividend. However, if sold to a non-family member, the difference would be a capital gain and taxed at a lower rate. Effectively, this made it more advantageous to transfer the business to a stranger than a family member. The changes should make it easier for business owners to transfer their businesses to family members by removing the dividend treatment in certain cases.
To qualify for the tax benefits, business transfers need to be “immediate transfers” initiated within 36 months or “gradual transfers” made over five to ten years.
Are you considered a “house flipper”? Check the penalty
Individuals who purchase residential property (including rental property) and then sell it within a year may be considered “home flippers” by the Canada Revenue Agency. If so, the profits on the home sale may be fully taxed as business profit rather than capital gains (where only half the profits are taxable). You may be exempt from this punitive rule if you sell your home due to certain life circumstances, such as death, disability, the birth of a child, a divorce, or moving for a new job.
If you receive stock options, check the new tax rules
Employees who receive stock options from their employers have a $200,000 annual limit on deductions. This is the maximum amount that employees may vest to continue qualifying for the current 50% stock option deduction. These rules apply to employers that are corporations or mutual fund trusts. Canadian-controlled private corporations (CCPCs) or non-CCPCs with revenues of less than $500 million are not subject to these rules.
Generally, there are no tax consequences until the employee exercises the option — i.e. when they buy the shares at the exercise price in the option contract. Given the complexity, it is best to consult a tax advisor to determine if the stock option deduction is available in your particular circumstances.
Claim work-from-home expenses
Although the COVID-19 public health emergency has ended, employees who work from home can still claim expenses. If you work from home as a salaried or commission-based employee, you can claim certain expenses related to electricity, heat, water, utilities, rent, or office supplies.
The Importance of Financial Planning
A year-end financial plan can help you create a more resilient investment portfolio. Personal financial planning allows investors to define their goals, establish or calculate a timeline for reaching them, and operate within their pre-defined risk parameters. Efficient tax planning ensures you make the most out of your deductions to maximize your investment dollars – and keep more of your money.
Mortgage investment portfolios can greatly benefit from financial planning, as these assets are TFSA- and RRSP- and RRIF-eligible. A well-structured mortgage investment strategy maximizes TFSA and RRSP contribution room to help you grow your wealth in a tax-deferred way. Mortgage investments are income-producing assets and have certain tax-reporting obligations. Investors looking to build wealth with whole mortgages should seek professional advice to navigate the complexities of financial and tax planning.
CMI Financial Group is a leader in the mortgage industry, with over $2 billion in successful mortgage placements across Canada. Contact us today to learn more about optimizing your investment portfolio with mortgages.