Santa’s Not the Only One Making a List—Business Owners Should Too!2025 Year-End Tax Planning Newsletter

A Quiet Budget Season… for Once

In more than 40 years of publishing client newsletters, this is only the third or fourth time that I did not circulate a Federal Budget newsletter, simply because there were not enough meaningful measures to warrant one.

It is now looking increasingly likely that the 2024 Federal Budget may not be passed before the House of Commons rises for the year. As a result, a number of proposed measures remain uncertain as we approach December 31.

Capital Gains Inclusion Rate — Cancelled

The Liberal Government has cancelled the proposed increase to the capital gains inclusion rate. All capital gains will continue to be included in income at 50%.

Unfortunately, the cancellation comes after substantial tax planning efforts had already been undertaken. Across the country, taxpayers accelerated gains — often at considerable cost — in anticipation of the planned increase. Professional fees were incurred, internal property transfers were completed, and in many cases, significant Land Transfer Tax was paid on real estate dispositions or rollovers.

With the benefit of hindsight, these tax costs and fees are not recoverable, and many gains were triggered prematurely based on a policy that ultimately did not proceed. It is a frustrating outcome for many taxpayers and advisors who acted prudently based on the information available at the time.

Lifetime Capital Gains Exemption (LCGE)

The Lifetime Capital Gains Exemption has increased to $1,250,000 per individual.  This is for the disposition of shares of a Qualified Small Business Corporation, or a farming or fishing business.

For a detailed discussion of Qualified Small Business Corporation shares, see my newsletter: A Penny Saved is Worth Two Pennies Earned — After Taxes

Because the exemption is so valuable, it is essential to ensure that corporations continue to meet the QSBC asset tests. This often requires removing surplus cash or investments from an operating company on a tax-deferred basis.

Automatic Federal Benefits for Lower-Income Individuals (Ultra-Simple Version)

The Government is proposing to allow the CRA to automatically file tax returns for individuals with very low income, using only information the CRA already has.

Before doing so, the CRA would provide a summary to the individual for review. If no response is received within 90 days, the CRA could file the return so that federal benefits can be paid.

Individuals would still be free to file their own tax returns if they prefer. This proposal could apply as early as 2026 for the 2025 tax year.

Alternative Minimum Tax (AMT)

The receipt of certain types of income, or the claiming of such things as the capital gains exemption, will likely trigger the imposition of the Alternative Minimum Tax (AMT). The AMT is exactly as it sounds – it is an alternative method to calculate your taxes owing.

Each year, your tax owing is calculated under the normal method, which considers the preferential tax deductions and credits. This number is then compared to a second calculation where you don’t receive these same deductions and credits, but your tax is calculated at a lower tax rate. For most instances, the normal calculation will result in more tax owing. When the second calculation results in a higher amount owing, you will pay this higher amount. The difference between the regular tax owing and the second calculation is the AMT.

When you are subject to the AMT, this can be viewed as a prepayment of future tax. Over the next seven years, you can recover this amount paid against your regular tax. In order to recover this AMT in the future, you would have to be taxable in future years, thus if you do not have income in these years, or are not otherwise taxable, this AMT will be lost. As long as you have taxable income in the following seven taxation years, the AMT may not be an absolute cost, but an advance payment. In more and more situations, a taxpayer does not generate enough “ordinary” income to recoup the full AMT, making it a permanent tax.

Although the Government did not increase the capital gains inclusion rate (see above) the imposition of the new AMT rules can effectively act as an inclusion rate increase. 

AMT does not apply to a person for the year of death. However, the deceased may have paid AMT in one or more of the seven years before the year of death. If this is the case, you may be able to deduct part or all of the AMT the deceased paid in those years from the tax owing for the year of death.

Gifts to Employees

As we approach the end of the year, it is important to note the Canada Revenue Agency (CRA) administrative policy regarding non-cash gifts to employees. 

Employers can give their employees up to two non-cash gifts per year, on a tax-free basis, for special occasions such as Christmas, Hanukkah, birthdays, and marriages. As long as the total cost of the gifts to the employer, including taxes, is not more than $500 per year, the employer can deduct the cost of the gifts, even though the employee is not taxable on the value of the gift.

This does not apply to cash or near-cash gifts and awards. The value of such gifts and awards will be considered a taxable employment benefit. I would be happy to provide more detail about the

Income Splitting with Low Prescribed Rate Loans

This isn’t really a year end issue, but is an important consideration in one’s overall planning.  I have written about this many times.

The prescribed rate is currently 3% and will remain at that rate for the first quarter of 2026.

Aside from the need to have proper paperwork to document the loan, the interest has to be payable, and actually be paid, no later than 30 days after the end of the taxation year. No matter how insignificant, this interest must be paid by January 30th, not January 31^st.

On older loans, made when the prescribed rate was only 1% or 2%, many ignored the requirements for payment, thinking it insignificant, but failing to make the interest payment every year can result in huge tax costs to the lender. 

Not only should paperwork be kept to show the payment, but the lender should be including the interest received in his or her tax return for the year of receipt of the interest. A lot of good, and expensive, tax planning could go out the window because the interest was paid 1 day too late, or because the lender neglected to include the interest payment in his or her income.

Once the loan is in place, the prescribed rate at the time of the loan will continue to be applicable to the outstanding balance of the loan, even if the prescribed rate increases in the future. If the rate drops significantly, steps can be taken to change the terms of the loan to a lower rate of interest, but it must be done carefully and not without professional advice.

Closing Notes

Despite an unusually quiet legislative year, year-end remains an important time to review corporate, personal, and estate tax planning. As always, I would be pleased to work with you and your advisors on any of these issues.

--Chuck