1. Deductions: Reducing Your Taxable Income
Deductions are your first line of defense in tax planning. By lowering your taxable income, you reduce the amount of money subject to tax before applying credits.
a) RRSP Contributions
Registered Retirement Savings Plans (RRSPs) remain one of the most effective tax planning tools in 2025.
Your contribution room = 18% of your previous year’s earned income, up to the 2025 annual limit of $32,490.
Contributions can be made until March 2, 2026 and applied against your 2025 income.
Unused contribution room carries forward indefinitely.
Example: RRSP Tax Savings
If you earn $90,000 in Ontario in 2025 and contribute $10,000 to your RRSP:
Without RRSP: taxable income = $90,000
With RRSP: taxable income = $80,000
At your marginal tax rate (≈31%), you save about:
$10,000 × 31% = $3,100 in taxes.
Plus, the money grows tax-deferred until withdrawal (ideally in retirement at a lower tax rate).
👉 Planning tip: If you expect higher income in the future, you can contribute now but carry forward the deduction to use in a higher-income year for bigger savings.
b) Childcare Expenses
Parents can claim childcare expenses (daycare, babysitting, after-school programs) if they are necessary for earning income.
Claimable by the lower-income spouse (with exceptions).
Maximum annual limits (per child):
$8,000 for children under 7
$5,000 for children aged 7–16
$11,000 for children with disabilities
Example: Childcare Deduction
If you spent $7,500 on daycare for your 4-year-old in 2025, you can deduct the full $7,500 from taxable income.
At a 30% marginal tax rate, that saves:
$7,500 × 30% = $2,250 in taxes.
c) Moving Expenses
If you moved at least 40 km closer to work, school, or business in 2025, you can deduct eligible moving expenses, such as:
Transportation & storage costs
Temporary living expenses (up to 15 days)
Real estate commissions & legal fees
Example: Moving Deduction
Suppose you moved for a new job and had $8,000 in eligible moving costs. If you earned $70,000, you could deduct the $8,000, lowering taxable income to $62,000.
At an average tax rate of ~25%, this saves about $2,000.
d) Other Deductions to Consider
Union/professional dues
Spousal support payments
Interest on student loans (claimed as a credit, but often overlooked)
Home office expenses (if you worked remotely)
2. Tax Credits: Directly Reducing Your Taxes Owed
Unlike deductions, credits reduce your actual tax bill, dollar-for-dollar (though most are non-refundable).
a) Basic Personal Amount (BPA)
For 2025, every Canadian can claim $15,705 federally.
This means you can earn up to $15,705 before paying any federal income tax.
Value: $15,705 × 15% = $2,355.75 tax savings.
b) Canada Employment Amount
A credit for employment-related expenses.
For 2025, the max claim is $1,450, which translates to $1,450 × 15% = $217.50 in tax savings.
c) Medical Expenses Credit
You can claim eligible medical costs that exceed the lesser of:
3% of net income, or
$2,759 (2025 threshold).
Example: If your net income = $60,000 and you had $4,500 in medical expenses:
Threshold = 3% × $60,000 = $1,800.
Eligible claim = $4,500 – $1,800 = $2,700.
Credit value = $2,700 × 15% = $405.
d) Charitable Donations Credit
First $200 = 15% credit
Amounts over $200 = 29% (or 33% if you’re in the top bracket).
Example: If you donated $1,000 in 2025:
First $200 @ 15% = $30
Next $800 @ 29% = $232
Total credit = $262
e) Tuition and Education Credits
Post-secondary students can claim tuition fees paid to eligible institutions.
Unused amounts can be carried forward or transferred to a spouse/parent.
3. TFSA vs. RRSP: Which to Choose in 2025?
Both TFSAs and RRSPs offer powerful tax advantages, but they work differently.
TFSA (Tax-Free Savings Account)
2025 contribution limit = $7,500 (cumulative limit since 2009 ≈ $103,500 if never contributed).
Contributions are not deductible, but growth and withdrawals are tax-free.
RRSP (Registered Retirement Savings Plan)
Contributions reduce taxable income.
Withdrawals are fully taxable.
Example Comparison: $6,000 Contribution
If your income = $70,000 (marginal tax ≈ 30%):
RRSP:
Contribute $6,000 → reduce taxes by $6,000 × 30% = $1,800 now.
But withdrawals later are taxable.
TFSA:
Contribute $6,000 → no immediate deduction.
But $6,000 grows tax-free and withdrawals are tax-free.
👉 Rule of Thumb:
If you expect your retirement income to be lower than today, prioritize RRSP.
If you expect retirement income to be equal or higher, prioritize TFSA.
4. Family & Household Tax Planning Strategies
Planning as a family can unlock even greater tax savings.
a) Spousal RRSPs
Higher-income spouse contributes to lower-income spouse’s RRSP.
Deduction claimed by contributor, but withdrawals in retirement taxed to lower-income spouse.
Great for income splitting in retirement.
b) Income Splitting with Pension Income
Canadians 65+ can split up to 50% of eligible pension income with their spouse, potentially saving thousands in taxes.
c) Canada Child Benefit (CCB)
Tax-free monthly payment to families with children under 18.
Based on adjusted family net income.
Example: A family with two kids under 6 and income of $70,000 could receive about $6,800 annually in CCB.
d) Registered Education Savings Plan (RESP)
Contributions are not deductible, but government adds a 20% grant (up to $500/year per child).
Growth is tax-deferred, and withdrawals are taxed in the child’s lower income.
Example: Contribute $2,500 in 2025 → receive $500 CESG grant.
e) Family Medical Pooling
Combine medical expenses for the entire family and claim under the lower-income spouse (threshold is 3% of income, so lower income = bigger claim).
5. Worked Example: Family with Kids
Let’s say:
Household income: $110,000 (two spouses, Ontario).
Childcare: $12,000
RRSP contributions: $12,000
Charitable donations: $1,500
Medical expenses: $4,000
Step 1: Income split → Assume $60k + $50k.
Step 2: Deductions
RRSP ($12k) → taxable income drops to $98,000.
Childcare ($12k claimed by lower earner) → further reduction.
Step 3: Credits
Basic Personal Amount (×2) = $31,410 → $4,711 federal tax savings.
Charitable donation ($1,500) → ~$407 tax credit.
Medical expense credit → $4,000 – $1,500 (3% of $50k) = $2,500 × 15% = $375.
Finally: The family saves thousands through combined strategies, plus receives CCB payments.