With potential changes to tax rates on the horizon, both individuals and business owners are encouraged to undertake a thorough review of their tax positions before the December 31, 2025, deadline. Proactive planning can help identify opportunities to optimize tax outcomes and manage obligations effectively.
Alternative Minimum Tax
The Alternative Minimum Tax (AMT) system ensures that taxpayers who claim significant deductions, exemptions, or credits pay at least a minimum amount of tax. Under this parallel tax system, fewer deductions and credits are permitted than under the regular income tax calculation. If the AMT amount exceeds the tax payable under the regular system, the difference becomes payable as AMT for the year.
In 2025, AMT may apply where taxable income exceeds $177,882 and the taxpayer benefits from lower-taxed income sources or deductions and credits such as:
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Capital gains
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Stock options
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Canadian dividends
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Unused non-capital losses, net capital losses, or limited partnership losses from prior years
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Non-refundable tax credits, including charitable donation credits
Further details are available in the CIBC report The New Alternative Minimum Tax (AMT).
Individuals Facing Changes in Tax Rates
Individuals expecting significant changes in income tax rates between 2025 and 2026 may benefit from strategically shifting income and expenses across tax years.
For example, those anticipating higher income or tax rates in 2026—such as individuals starting or returning to work in 2025—might consider accelerating income into 2025 by realizing capital gains, exercising stock options, or receiving bonuses before year-end. Conversely, deductions could be deferred to 2026 where possible.
If lower tax rates are anticipated in 2026, perhaps due to retirement or a one-time capital transaction in 2025, deferring income may be advantageous. This could include delaying investment sales, option exercises, or dividend distributions until 2026.
Business Owners and Employers
Compensation Planning for Incorporated Business Owners
Owners of incorporated businesses can receive corporate income as either salary or dividends.
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Salary (or bonus): Deductible to the corporation, reducing taxable income. The recipient includes the amount in personal income and pays tax at graduated rates.
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Dividends: Paid from after-tax corporate income and taxed at preferential personal rates due to the dividend tax credit. Capital dividends, which are not taxable to Canadian residents, may be paid from a positive Capital Dividend Account (CDA) balance.
As a general guideline, withdrawing salary can create Registered Retirement Savings Plan (RRSP) contribution room—up to $33,810 in 2026 if salary of $187,833 is received in 2025. Where corporate funds are not required personally, retaining after-tax income in the corporation may allow for long-term tax deferral and enhanced investment growth.
Additional resources include CIBC reports RRSPs and TFSAs: Smart Choices for Business Owners, Bye-Bye Bonus! Why Business Owners May Prefer Dividends Over a Bonus, and The Compensation Conundrum: Will It Be Salary or Dividends?
Corporate Loss Planning
Tax-Free Dividends
Before realizing capital losses, corporations should review their CDA balance. Paying out capital dividends prior to realizing losses may preserve the ability to distribute tax-free amounts, as subsequent losses reduce the CDA balance.
Loss Consolidation
Related corporations may consolidate losses through structures permitted by the Canada Revenue Agency, such as intercompany share subscriptions and loans. As these reorganizations are complex, professional tax and legal advice should be obtained before implementation.
Business Transition Planning
Owners considering transferring ownership may wish to assess strategies such as estate freezes or refreezes if the business value has recently declined. Additional details are available in the CIBC report Tax and Estate Planning in Uncertain Times.
Income Splitting
The Tax on Split Income (TOSI) rules may apply where individuals receive dividends, interest, or capital gains from a corporation in which a related person is actively involved or holds at least 10% equity. When TOSI applies, affected income is taxed at the highest marginal rate. Corporations with family shareholders should assess the impact of these rules before paying dividends in 2025.
Passive Investment Income
Canadian-Controlled Private Corporations (CCPCs) generally benefit from the Small Business Deduction (SBD) on up to $500,000 of active business income, reducing corporate tax rates by 12 to 21 percentage points, depending on jurisdiction.
The SBD is gradually reduced once passive investment income exceeds $50,000 in the prior year and is fully eliminated when passive income reaches $150,000. Strategies such as deferring capital gains (“buy and hold”) or using Individual Pension Plans and corporately owned exempt life insurance may help manage exposure to these limits.
Provincial variations apply—Ontario and New Brunswick, for example, have not adopted the federal SBD reduction rules.
Sale of an Incorporated Business
Canadian Entrepreneurs’ Incentive (CEI)
Effective 2026, the CEI will reduce the capital gains inclusion rate on qualifying shares, up to a lifetime limit of $2 million, phased in between 2026 and 2029. The incentive will not apply to shares of professional corporations or businesses primarily engaged in specific sectors, including financial, insurance, real estate, and certain service industries.
Employee Ownership Trusts (EOTs)
As of 2025, sales to qualifying Employee Ownership Trusts may be eligible for a tax exemption on up to $10 million of capital gains (per business, not per shareholder).
Worker Cooperatives
A separate incentive exempts the first $10 million in capital gains from tax when shares of qualifying corporations are sold to worker cooperatives between 2024 and 2026, subject to specific eligibility conditions.
This article is meant to provide only high-level insights as a Canadian taxpayer approaches the end of the calendar year and does not constitute, nor is a substitute for, professional tax advice. Please contact our office so that we may optimize your year-end tax position while considering all elements of your financial plan.