2025 Tax Planning in Canada (Part 3)
Advanced Business, Investment & Retirement Strategies
1. Tax Planning for Small Business Owners & Self-Employed
Canadians running a small business, side hustle, or working as independent contractors face unique tax challenges—but also enjoy some of the largest planning opportunities.
a) Business Expense Deductions
As a self-employed individual, you can deduct reasonable business expenses that help you earn income, such as:
Office supplies, equipment, and software
Business-use-of-home expenses (portion of rent, mortgage interest, utilities, internet)
Vehicle expenses (fuel, insurance, repairs, lease payments, CCA depreciation)
Advertising & marketing costs
Professional fees (accountants, consultants, legal)
Example: Business Deduction Impact
Suppose you earn $80,000 in freelance consulting income in 2025 and spend $20,000 on deductible business expenses.
Gross income = $80,000
Less expenses = $20,000
Net business income = $60,000
You only pay tax on $60,000, saving thousands.
At a marginal tax rate of ~30%, the $20,000 in deductions translates into approx. $6,000 tax savings.
b) Incorporation vs Sole Proprietorship
At higher income levels, incorporating can reduce your taxes by allowing income splitting, tax deferral, and access to the small business deduction (SBD).
Federal small business tax rate = 9% on the first $500,000 of active business income.
Combined federal + provincial rates range from 12–15% (much lower than personal tax rates of up to 53%).
Planning Tip:
Leave earnings inside the corporation to defer taxes.
Pay yourself via dividends, salary, or a mix depending on your income planning.
c) GST/HST Obligations
If your business earns over $30,000 annually, you must register and collect GST/HST. However, you can also claim Input Tax Credits (ITCs) for HST paid on business purchases.
2. Real Estate & Rental Property Tax Planning
With real estate being a major part of Canadians’ wealth, tax planning for property is essential.
a) Principal Residence Exemption
When you sell your principal residence, the capital gain is tax-free.
Ensure you designate the correct property if you own multiple homes.
b) Rental Property Income & Deductions
Rental income is taxable, but you can deduct expenses like:
Mortgage interest
Property taxes
Insurance
Repairs and maintenance
Property management fees
Example: Rental Deduction
Rental income = $20,000
Expenses = $8,000
Net rental income = $12,000 (taxable).
If you’re in the 30% bracket, tax owing ≈ $3,600.
c) Capital Gains on Property Sales
Selling a rental or investment property triggers capital gains tax.
50% of the gain is taxable.
Example: Capital Gain on Property
Purchase price: $400,000
Sale price: $600,000
Gain = $200,000
Taxable portion = 50% × $200,000 = $100,000
If marginal rate = 35%, tax owing = $35,000.
👉 Planning Strategy:
Time the sale in a year with lower income.
Use capital losses from other investments to offset.
Consider spousal ownership structures to split income.
3. Investment & Capital Gains Planning
Investments are a powerful wealth-building tool, but the tax treatment varies by type of income.
a) Types of Investment Income
Interest income – Fully taxable at marginal rates.
Dividends – Eligible for the Dividend Tax Credit (lower effective tax rate).
Capital gains – Only 50% taxable.
b) Example: $10,000 of Investment Income
Assume you’re in the 30% tax bracket.
Interest income ($10,000) → fully taxable = $3,000 tax
Capital gain ($10,000) → 50% taxable = $5,000 × 30% = $1,500 tax
Eligible dividends ($10,000) → effective tax ≈ $1,000 (after gross-up & credit)
👉 Clearly, capital gains and dividends are more tax-efficient than interest.
c) Tax-Loss Harvesting
If your investments dropped in value in 2025, you can sell them to realize a capital loss. This loss can offset:
Current year capital gains
Gains from the past 3 years (carry back)
Future gains (carry forward indefinitely)
Example:
$20,000 capital gains this year.
$7,000 capital loss realized.
Net taxable gain = $13,000.
At 30% tax, you save $2,100.
d) Asset Location Strategy
Hold interest-bearing investments (bonds, GICs) inside RRSP or TFSA.
Hold dividend-paying stocks in taxable accounts (benefit from dividend tax credit).
Hold high-growth equities in TFSA for tax-free growth.
4. Retirement Planning (2025 & Beyond)
a) RRSP vs RRIF
At age 71, RRSPs must be converted to a RRIF (Registered Retirement Income Fund).
You must withdraw a minimum % each year, which is fully taxable.
👉 Planning tip: Consider withdrawing small amounts earlier (before 71) if in a lower bracket, instead of waiting until forced withdrawals at higher rates.
b) CPP (Canada Pension Plan)
Normal age to take CPP = 65.
Can start as early as 60 (reduced by 0.6% per month) or delay until 70 (increased by 0.7% per month).
Example:
CPP entitlement at 65 = $1,000/month.
At 60 = $640/month.
At 70 = $1,420/month.
👉 Tax planning involves timing your CPP based on income needs and tax brackets.
c) OAS (Old Age Security) & Clawback
OAS is taxable.
Clawback (reduction) begins when income exceeds ~$95,000 (2025 threshold).
👉 Planning strategy: Keep taxable income below clawback threshold by using TFSA withdrawals instead of RRIF.
d) Pension Income Splitting
Couples can split up to 50% of eligible pension/RRIF income, saving thousands if one spouse is in a lower bracket.
Example:
Spouse A income = $80,000
Spouse B income = $30,000
By splitting $20,000 pension, incomes become $60k and $50k.
Combined savings = ~$3,000.
5. Year-End Tax Planning Checklist for 2025
Here’s a practical list to review before December 31, 2025:
✅ Contribute to your RRSP (before March 2, 2026, but plan now).
✅ Maximize TFSA contributions ($7,500 limit).
✅ Top up RESP to get full government grants.
✅ Review capital gains/losses and do tax-loss harvesting.
✅ Make charitable donations before year-end.
✅ Pay medical expenses before December 31 if you’re near the threshold.
✅ Self-employed: prepay business expenses (software, supplies, etc.) to claim in 2025.
✅ Consider income splitting opportunities (spousal RRSP, pension splitting).
✅ Check eligibility for government benefits (CCB, GST/HST, CWB).