Episode #81: 2025 Year-End Tax Planning

• INTRODUCTION

François Doyon La Rochelle:

You’re listening to Capital Topics, episode #81!

This is a monthly podcast about passive asset management and financial and tax planning ideas for the long-term investor.

Your hosts for this podcast are James Parkyn and me François Doyon La Rochelle, both portfolio managers with PWL Capital.

In our podcast today we will review Year-end Tax Planning Strategies for Investors in Capital Market Securities.

Enjoy!

• 2025 YEAR-END TAX PLANNING:

François Doyon La Rochelle:

Well, it’s that time of the year again when we cover Year-end Tax Planning Strategies for Investors in Capital Market Securities. As our regular listeners know, this is an annual tradition on our Podcast to cover this topic at year’s end.  We had originally planned to publish this Podcast in October, but the Liberal government decided to table its 2025 Budget on November 4th.  This is a major change, as historically, the Federal Government Budgets were presented in February or March, and the provincial Budgets followed shortly after.  So, James, what were the new measures announced in the recent Federal Budget for Investors?

James Parkyn:

Francois, to answer your question, not much at all.  Most of the measures applicable to individuals were pre-announced in May 2024, when the Federal government announced the middle-class tax cut, which reduces the tax rate on the first income bracket to 14.5% this year, from 15%. To ensure individuals will not end up paying more tax, the budget introduced a new non-refundable Top-Up Tax Credit.

The budget also targeted trust planning around the 21-year rule, which deems trusts to dispose of property every 21 years to prevent indefinite tax deferral.  Some strategies allowed property to move from one trust to another to sidestep anti-avoidance rules.

There are other minor tax rule changes, but as I said earlier, there wasn’t much in this budget for Investors.

François Doyon La Rochelle:

I guess in some ways that’s good news, especially after last year’s disastrous budget that proposed new Capital Gains Tax Inclusion Rules that were never implemented.  James, as usual, we need to remind our Listeners that the insights and advice we will be sharing will be general in nature. We need a more detailed understanding of an investor’s tax and financial situation to give specific recommendations.  Listeners should consult their tax advisors, portfolio managers, and financial planners for personal recommendations.

Ok, James, so let’s get into today’s Topic of Year-end Tax Planning.  Where do you want to start?

James Parkyn:

Well, Francois, I want to remind our listeners that when we talk about taxes, we adopt the Optimizing Mindset, which is a very different concept from minimizing your taxes. By Optimize we mean you need to think not just about the current tax year but how your assets will evolve over the longer term. Listeners need to tax plan for both their current and future personal income.

I have often highlighted on our Podcast that Investors should consider that they are building assets in 3 Buckets:

1. Tax-deferred Registered Accounts like RRSPs and RRIFs. Our Listeners can visualize these assets in the left bucket. Withdrawals from RRSP and RRIF accounts are fully taxed at your marginal tax rate.
2. The second bucket is assets held in Investment Holding Company accounts. Visualize these assets in the right-side bucket. These accounts most often result from Entrepreneurs transferring profits from their operating companies into their Holding Company. Withdrawals can be in the form of taxable dividends or tax-free dividends from their Capital Dividend Account. Taxable dividends can be eligible or ineligible dividends and are taxed at different rates.
3. And finally, the middle bucket, which includes TFSAs and Personal taxable accounts. These accounts have the lowest tax impact when withdrawing funds.

François Doyon La Rochelle:

James, this is helpful.  We know this works well for our clients.  Now, James, what should taxpayers do to optimize their 2025 personal income taxes? 

James Parkyn:

Francois, I would like to list the year-end tax planning areas we will cover today:

1. Capital Gains and Losses planning.
2. RRSP contributions
3. Tax Free Savings Accounts (TFSA’s)
4. First Home Savings accounts (FHSA’s)
5. RESP contributions and withdrawals
6. Income Splitting Strategies.
7. Loan Interest Deductibility
8. Tax installments

François Doyon La Rochelle:

OK, James, let’s start with Capital Gains and losses planning.  For our Listeners, this is probably their biggest area of concern for optimizing their 2025 taxes.

James Parkyn:

I agree, Francois. In our practice, our clients are now sitting on significant unrealized capital gains.  I remind our Listeners that Capital Gains realized are taxed at 50% in both personal accounts and in Holding companies. Capital Gains realized in their RRSPs, RRIFs, and RESPs are deferred until funds are withdrawn.  And of course, there is no tax on Capital Gains realized in TFSAs & FHSAs.

As the end of the year approaches, our Listeners should keep in mind that if the markets maintain their current levels to year-end, this will be the third consecutive year of double-digit returns. If they have not done it already, now is a good time to review their current portfolio asset mix to confirm how it aligns with your long-term strategic asset mix.

François Doyon La Rochelle:

James, Listeners are likely to find that their current Portfolio Asset Mix is significantly overweight in stocks after the large gains generated since the lows of September 2022.  Some investors may not want to pay the capital gains tax and will simply change their Long-Term Asset Mix to match their current allocation. I would caution our listeners; this also changes the risk profile of their portfolios.

James Parkyn:

I think, Francois, that is a really important point. Listeners should look at their asset mix in terms of what is in their safe bucket invested in Bonds, and second, what is in the volatile bucket assets like Stocks (Canadian, American, and International) and REITS.   Your long-term strategic asset mix should be driven largely by your tolerance and your capacity for risk. Each asset class has returns that may be treated differently for tax purposes, so if you’re investing outside of a registered plan, you need to think about taxes. Highly taxed income is best earned in a registered plan, where the income is sheltered from tax annually. This is what we call tax location planning.

François Doyon La Rochelle:

Listeners should make sure that if they have capital loss carry-forward amounts, they can use these to offset any realized capital gains if they sell.  They can find this information about their capital loss carry-forward amounts on their latest CRA Notice of Assessment or from the CRA website.

James Parkyn:

Francois, let’s get into the specifics of how to trade smartly to optimize taxable capital gains or losses in your taxable accounts. Listeners will need to know their 2025 history of Capital Gains and Losses: Start with getting the Realized Capital Gains and Losses Report for YTD 2025 for your personal taxable accounts. For your Holding Company, the Realized Gains & Losses Report should be based on the company’s Fiscal Year End.

François Doyon La Rochelle:

James, as you said earlier, many of our clients are sitting on very large unrealized gains in their portfolios.  For our clients who have been with us for many years, they have benefited from the Deferral power of the Passive Strategies, where we optimized the realization of Capital Gains on the Equity side of the Portfolio.  But I remind our Listeners that Investment Decisions must take precedence over tax considerations.

James Parkyn:

I absolutely agree, Francois.  This means getting back to the engineering of your Portfolio.  It’s always important to make sure that your current asset allocation is in line with your long-term target asset allocation. The main reason for rebalancing is to bring your portfolio back to its long-term target asset allocation. In a rising Stock Market, if you don’t rebalance your portfolio, you will always end up with a higher percentage of your portfolio in equities, therefore with a riskier, more volatile portfolio. It’s always better to rebalance your portfolio regularly and to take profits off the table instead of waiting for a market sell-off to do it for you.

So, François, where do you start the rebalancing process?

François Doyon La Rochelle:

Well, James, you should always start your rebalancing process in your registered accounts because selling the position that has gained will not have any tax consequences. By contrast, rebalancing in a taxable account may trigger a capital gain and taxes payable. For investors who need to make their annual RRIF withdrawal before year-end, take the opportunity of this rebalancing exercise to raise the cash for your withdrawal.

James Parkyn:

Investors also need to be on the lookout for ETFs and mutual funds’ year-end capital gains distributions, which normally occur in December. These distributions are the result of fund managers selling some of their holdings during the year, and if you hold your ETF or mutual fund in a taxable account, you will have to pay taxes on these distributions.

François Doyon La Rochelle:

The thing with year-end capital gains distribution is that, contrary to monthly or quarterly distributions that are paid in cash, the capital gains distributed in December are paid as a reinvested distribution, so no cash is distributed to you. For an investor who holds the position in a non-registered or taxable account, taxes will need to be paid even if you haven’t received any cash.

James Parkyn:

Passively managed ETFs and mutual funds don’t usually distribute large year-end capital gains, but it is always a good idea to look at your ETF or mutual fund provider’s website in November since estimates of annual capital gains are published.

François Doyon La Rochelle:

In some cases, if the fund is distributing a large capital gain, it could make sense to sell it to avoid the distribution. Before you go ahead and sell your position, make sure you are not triggering an even larger gain on your transaction. Also, if you are implementing a portfolio close to year-end, you may want to wait for the ex-dividend date before buying into a fund that will make a capital gains distribution.

James Parkyn:

So now, Francois, what else would you like to share about year-end portfolio rebalancing with our Listeners?

François Doyon La Rochelle:

Another key year-end tip is tax-loss selling, which is the opportunity to realize capital losses that you might have in a non-registered portfolio and then use that loss to offset any other capital gains that you realized this year, or in the prior three years. This strategy can offer a valuable refund if you’ve paid taxes on gains in the last three years.

I would advise our Listeners to consider 3 things before trading in their portfolios:

• Beware of the Superficial Loss Rules
• Don’t forget the currency impact on the sale of a security held in a foreign currency.
• Be mindful of the last trading day for settlement in 2025, which is Tuesday, December 30th.

James Parkyn:

Now, Francois, let’s share some specifics on Tax loss selling for our Listeners.  The tax rule is that any losses you have not used in the current year can be carried back 3 years or carried forward indefinitely. To be able to use a loss in the current year, the trade must settle prior to year-end. Remember to avoid the loss being considered “superficial.” It is important that you or an affiliated individual doesn’t repurchase an identical position 30 days before or after the sale.

Any other rebalancing ideas, Francois?

François Doyon La Rochelle:

Yes, if an investor feels that they have already triggered a lot of gains in 2025, you can still delay, triggering more gains in 2026, if you’re comfortable with the current level of risk in your portfolio. We generally don’t like deferring gains to another tax year because markets can turn quickly. But then again, if you’re a couple of days away from year-end, you can probably wait till next year.

Now, James, let’s look at the strategy of gifting shares. What would our listeners need to know before Dec 31st?

James Parkyn:

Well, Francois, for many high-income earners, gifting publicly traded securities with large, accrued capital gains “in-kind” to a registered charity or a foundation is a favourite year-end tax planning strategy. Our listeners will also need to be careful if they are planning donations so that they won’t run afoul of the AMT rules.

François Doyon La Rochelle:

This year-end tax planning strategy is attractive as you get a tax receipt for the fair market value of the securities being donated.

James Parkyn:

Yes, we do this for many of our clients. Taxpayers should plan gifting in-kind well before year-end to allow for sufficient time to execute this type of donation.

And as you stated, Francois, if you donate publicly traded securities or mutual funds to charity, you’ll receive not only a donation receipt for the fair market value of the gift, but any capital gain on the security will be subject to a zero-inclusion rate, eliminating the tax on the capital gain to boot.

François Doyon La Rochelle:

James, it would be helpful for our listeners to know about the Alternative Minimum Tax or AMT rules and how they impact large donations.

James Parkyn:

Yes, indeed, Francois, we will cover AMT a bit late in our Podcast.

RRSPs

François Doyon La Rochelle:

For our second tax planning topic, let’s tackle RRSPs.

James Parkyn:

The current year maximum RRSP contribution room for 2025 is $32,490.  Listeners can find their RRSP room on their 2024 Federal Notice of Assessment (NOA).  This number will include unused contribution room carried forward from prior years.

The 2026 maximum RRSP contribution room will be $33,810. For those Listeners who like to make early bird contributions in January.

For Business Owners, consider declaring a T4 salary of at least $187,833 for the calendar year ending December 31, 2025. This will create the maximum RRSP contribution room of $33,810 for 2026.

RRIF Withdrawals

François Doyon La Rochelle:

I would add that if you have turned 71 in 2025, you must convert your RRSP to a RRIF, and you have until December 31 to do so. But don’t forget to make your final RRSP contribution before converting it.

Tax Free Savings Accounts TFSAs

François Doyon La Rochelle:

What do you have to share about TFSA’s James?

James Parkyn:

First thing I would say is make sure to use your TFSA properly. We see many new clients with no tax-free savings account, or they’ve used it as a short-term savings account. You really need to think of your tax-free savings account as a long-term wealth accumulation vehicle. So now let’s look at the contribution rules. If you have a tax-free savings account (TFSA), you can contribute up to $7,000 for 2025. If you’ve never contributed to a TFSA, you may be able to contribute up to $102,000. Make these contributions before year-end to get your money working for you, tax-free, as soon as possible. There is no deadline for making a TFSA contribution.  Unused contribution room is carried forward.

On the other hand, if you plan to make a withdrawal from your TFSA, consider making the withdrawal before year-end so that you’ll be able to recontribute those funds as early as January 2026. If you wait until early 2026 to make your withdrawal, you won’t be able to recontribute those funds until 2027. Be careful, however, if you have already withdrawn funds from your TFSA in 2025, you must wait until next year to recontribute the amount withdrawn.

François Doyon La Rochelle:

I would add that the CRA has announced the limit for the TFSA next year. The dollar limit will NOT be increased and will remain at $7,000. Best to make your contribution as early as possible in January 2026.

First Home Savings Accounts FHSAs

François Doyon La Rochelle:   

Now let’s talk about FHSA’s. This program was launched in 2023, so this is the third year for contributions for those early birds who started their plan in that year.

James Parkyn:

Maybe, Francois, we should explain the contribution rules.  The First Home Savings Account, or FHSA, is for individuals who are saving for a first home. You can put in $8,000 for a year, to a maximum of $40,000 during your lifetime. The money is generally tax-deductible when you contribute and, for up to 15 years, grows completely tax sheltered. And if you make a qualifying home purchase within 15 years, the money comes out tax-free.  Even if you don’t make a contribution right away, simply opening an FHSA before December 31 will give you $8,000 of contribution room for 2025, which you can use either this year or in the future. For those who intend to purchase a home, we recommend starting early.

François Doyon La Rochelle:

The FHSA rules are complicated.  The 2025 Contribution must be made before December 31 to be deductible in 2025.  It’s best to seek out expert advice to assess the relative advantages of contributing to an FHSA versus your TFSA or RRSP.

Now let’s talk about Registered Education Savings Plans or RESPs. So, James, what do you have to share?

RESP contributions and withdrawals

James Parkyn:

Francois, I will summarize the key year-end RESP planning strategies.

So let’s start with RESP contributions. They are subject to a $5,000 limit or $2,500 for the current year and $2,500 for one catch-up year. Contributions attract a Federal grant of 20% and in Quebec, a provincial grant of 10%. You can contribute to a beneficiary child up until the year they turn 17. If you have less than seven years before your beneficiary child turns 17 and haven’t maximized RESP contributions, consider contributing by December 31, because otherwise, you will not be able to claim the maximum of $7,200 in Federal government grants.

Now, let’s look at RESP withdrawal planning. When it comes to saving for education, many parents focus on contributions to RESPs but overlook the best way to withdraw funds. If the students are currently attending post-secondary school, there’s an opportunity to optimize those withdrawals by taking advantage of all the students’ personal credits, including the basic personal amount and their tuition credit. Reviewing a student’s expected income and credits for 2025 can help you withdraw RESP funds in the most tax-efficient way.

Income Splitting Strategies

François Doyon La Rochelle:

Now, James, what would you recommend for our listeners regarding income splitting strategies?

James Parkyn:

I recommend taking advantage of lower CRA-prescribed rates. The current prescribed rate is 3%. We, over the years, when the prescribed rate was 1 to 2 %, implemented a large number of spousal loans, to take advantage of lower tax rates paid by the spouse. We feel that the strategy is still not optimal at the lower 3% rate. I would add that for those listeners who did implement spousal loans, then the borrower must repay the lending spouse the interest before the end of January 2026.

Interest Deductibility

François Doyon La Rochelle:

Our next tax planning topic is discussing how to make your interest tax-deductible. If you’ve borrowed money, try to make your interest costs deductible for tax purposes.

James Parkyn:

If you borrow for business or investment purposes, then you can generally deduct your interest. If you have cash or investments along with non-deductible interest costs, consider using your cash or investments to pay down that debt, then reborrow to replace your investments. This way, you’ll be able to deduct the interest on your new debt. Also, consider paying down your non-deductible debt first.

AMT rules

François Doyon La Rochelle:

As you mentioned a little earlier, it would be good to share with our Listeners the Alternative Minimum Tax (AMT) rules that came into effect in the 2024 tax year.  James, could you briefly summarize how AMT works?

James Parkyn:

First off, Francois, the Alternative Minimum Tax (AMT) system imposes a minimum level of 20% tax on taxpayers who claim certain tax deductions, exemptions, or credits to reduce the tax that they owe to very low levels. Under the AMT system, there is a parallel tax calculation that allows fewer deductions, exemptions, and credits than under the regular income tax calculation. If the amount of tax calculated under the AMT system is more than the amount of tax owing under the regular tax system, the difference owing is the AMT payable for the year.

I would like to point out that AMT affects very few taxpayers. For 2025, AMT will apply to taxpayers who generate more than $177,882 in taxable income.  For investors, AMT really applies if they are planning to make large charitable donations or if they are triggering very large capital gains that will be much larger than their other income, taxed at the regular rates.

François Doyon La Rochelle:

If a taxpayer plans to make significant charitable donations, only 50% of the donation tax credit would be allowed when calculating AMT. Secondly, if you make in-kind donations of publicly listed securities, 30% of the capital gain on those securities will be included when calculating AMT.

We recommend that our listeners consult with their tax advisor well before year-end to determine strategies that may help to reduce their exposure to AMT.

So, James, what about tax instalments for 2025? What is your advice for our listeners?

James Parkyn:

The big question is: have you made enough quarterly tax installments in 2025?  The final tax instalments are due on December 15th.  Now that you have a pretty good idea of your total income for 2025, you can decide if you need to pay the final installment. A word of caution: If you have not made the amounts requested and you end up owing significant tax on April 30th , you may be subject to penalty interest for underpaid amounts. It is always safer to pay the amount requested unless there are major changes to your 2025 income vs the prior year 2024.

François Doyon La Rochelle:

Do you have any other year-end suggestions for our Listeners?

James Parkyn:

Yes, I have a few:

1. Pay investment expenses to claim a tax deduction or credit in 2025. This includes interest paid on money borrowed for investing and investment counseling fees incurred for managing non-registered accounts.
2. For our Retiree listeners, the dreaded OAS claw back is always a big concern. The threshold for 2025 is set at $93,454, an increase from $90,997 in 2024. You need to make sure that your income does not exceed the recovery thresholds.  Otherwise, taxpayers must repay their OAS at the rate of 15% of 2025 net income above $93,454. In other words, for every dollar above this threshold, you must repay 15 cents of your OAS. The entire OAS amount must be repaid if a taxpayer has a net income of more than $151,668 for taxpayers between the ages of 65 to 74 or if a taxpayer has a net income of more than $157,490 and their age is 75 and over.  This is a means test that also amounts to a form of double taxation. Because OAS is an individual benefit, it is not impacted by family income but instead is clawed back based on an individual’s taxable income.

François Doyon La Rochelle:

How would you like to conclude today’s Podcast, James?

James Parkyn:

Francois, as we have said many times before in our Podcast, Tax Planning should be done all year long. Do not wait for year-end to optimize your taxes.

François Doyon La Rochelle:

Indeed, James, and I hope our listeners do.  I believe we have covered a lot of ground, and hopefully, our Listeners will find this update very useful.  I also want to remind our listeners that our comments and Advice on this Podcast are generic in nature, and all our Listeners should consult their tax and financial advisors.

• CONCLUSION

François Doyon La Rochelle:

Thank you, James Parkyn for sharing your thoughts and expertise again today.

James Parkyn:

You are welcome, François.

François Doyon La Rochelle:

That’s it for episode #81 of Capital Topics!

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