Tax planning becomes more critical as income and assets grow. Once you’ve covered the basics—like RRSP contributions, TFSA investments, and claiming common deductions—advanced strategies can make a substantial difference. In this part, we’ll explore tax credits, deductions often overlooked, planning for corporations and business owners, and wealth transfer strategies that apply to 2025.
1. Maximizing Deductions Beyond the Basics
Many Canadians focus only on well-known deductions (RRSPs, childcare, and moving expenses). However, additional deductions can lower your taxable income in 2025:
a. Carrying Charges and Investment Fees
Deductible: Interest paid on money borrowed to invest (excluding RRSP/TFSA loans).
Example: If you borrow $50,000 at 6% interest to invest in dividend-paying stocks, the $3,000 annual interest may be deductible against investment income.
This works best if the investments generate taxable income (interest, dividends, capital gains).
b. Employment Expenses
Employees who are required to pay for tools, home office, or certain supplies may claim them.
Home office example:
If you work from home and use 15% of your home for employment purposes, and annual housing costs are $24,000, you can claim:24,000×0.15=3,600 deduction24,000×0.15=3,600deduction
c. Support Payments
Spousal support payments (but not child support) are deductible for the payer and taxable for the recipient.
2. Key Tax Credits for 2025
Credits reduce tax payable rather than taxable income. They are powerful tools in planning.
a. Basic Personal Amount (BPA)
In 2025, the BPA is approximately $15,000 (indexed to inflation).
Everyone gets this non-refundable credit, reducing taxes by about $2,250 federally.
b. Medical Expenses
You can claim eligible medical expenses exceeding the lesser of 3% of net income or $2,759 (approx. 2025 threshold).
Example: If your net income is $60,000, 3% = $1,800.
If your medical expenses are $4,000, you can claim:
4,000−1,800=2,200 eligible credit4,000−1,800=2,200eligible credit
c. First-Time Home Buyers’ Tax Credit (HBTC)
Value: $10,000 non-refundable credit = $1,500 in tax savings.
If you’re buying your first home in 2025, combine this with the Home Buyers’ Plan (HBP), where you can withdraw up to $60,000 (as of 2025 updates) from your RRSP without penalty.
d. Canada Training Credit (CTC)
Annual limit: $250 credit accumulation, lifetime maximum $5,000.
Great for those investing in new skills or certifications.
3. Income Splitting Opportunities
Though formal “income splitting” is restricted, certain methods still work in 2025:
a. Spousal RRSP
If one spouse earns much more, contribute to a Spousal RRSP.
Example:
High-income spouse (marginal rate 45%) contributes $10,000.
Deduction saves $4,500.
In retirement, lower-income spouse (marginal rate 20%) withdraws and pays $2,000 tax.
Net family savings = $2,500 annually.
b. Pension Income Splitting
Retirees can split up to 50% of eligible pension income with a spouse, potentially reducing combined taxes by thousands.
c. Prescribed Rate Loans (for High Net Worth Families)
CRA’s prescribed interest rate (Q1 2025 forecast: 5%) applies to loans between spouses or family trusts.
Strategy: Higher-income spouse lends money at 5% to a lower-income spouse who invests and pays tax at a lower rate.
4. Corporate Tax Planning Strategies (for Business Owners)
If you own an incorporated business, 2025 brings opportunities and rules to consider.
a. Small Business Deduction (SBD)
First $500,000 of active business income qualifies for the 9% federal small business tax rate (plus provincial rates).
Example:
Ontario combined small business tax rate: ~12.2%.
On $500,000 income, tax = $61,000.
If taxed personally at 45%, the tax would be $225,000.
Deferral advantage: $164,000.
b. Paying Yourself: Salary vs. Dividends
Salary: Creates RRSP contribution room and CPP contributions.
Dividends: Lower personal taxes in certain brackets; no CPP but reduces RRSP room.
In 2025, many owners use a blend.
c. Passive Investment Rules
If your corporation earns more than $50,000 in passive investment income, the SBD starts to erode.
Example: At $150,000 passive income, your SBD limit drops to $0.
Solution: Move investments into a holding company or use a corporately-owned life insurance policy.
5. Wealth Transfer and Estate Planning
Planning for wealth transfer is part of advanced tax strategy.
a. Capital Gains on Death
On death, all assets are “deemed disposed.”
Example: If you bought shares at $100,000 and they’re worth $500,000 at death, a $400,000 capital gain applies.
50% taxable = $200,000 added to final return.
b. Principal Residence Exemption
Can shield the gain on your home from tax when sold or transferred.
c. Use of Trusts
Family trusts can help split income and defer taxes.
Example: Setting up a trust to hold corporate shares can allow beneficiaries to use their $1 million lifetime capital gains exemption on qualifying small business shares.
6. Charitable Giving
Charitable donations provide one of the most generous tax credits:
Federal credit: 15% on the first $200, 29–33% on amounts above.
Example: Donation of $10,000:
First $200 = $30 federal credit.
Next $9,800 = $2,842 federal credit.
Plus provincial credits (Ontario ~11%).
Total savings = ~$4,200.
Planned giving (through insurance or securities donations) can amplify benefits:
Donating publicly traded securities eliminates capital gains tax entirely.