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Tax Changes Coming in 2025: What Canadians Need to Know

Tax Changes Coming in 2025: What Canadians Need to Know

As Canadians begin 2025, many are looking for ways to manage their finances amidst rising costs of living. This year brings several tax changes that could impact people’s pocketbooks, including new tax filing rules, updated government benefits, and revised savings contribution limits. Here’s what Canadians need to know about these changes to make informed decisions for the upcoming tax season.

Capital Gains Tax Changes

One of the most anticipated changes is the adjustment to capital gains tax. Earlier in 2024, the federal government proposed an increase to the inclusion rate for taxable capital gains. This change, still pending approval in Parliament, would raise the inclusion rate from 50% to 67% for individuals whose gains exceed $250,000 annually. Although the legislation has not been finalized, the Canada Revenue Agency (CRA) has indicated that tax filings for 2025 will be based on the proposal, allowing Canadians to prepare for the new rules.

Capital gains refer to the profits made from the sale of assets like stocks or investment properties. The inclusion rate dictates what portion of the gain is added to taxable income for the year. Under the proposed changes, Canadians earning more than $250,000 in capital gains will be taxed at a higher rate, but gains on principal residences will remain exempt. The government also introduced a threshold of $250,000 to ensure that individuals with more modest capital gains will continue to benefit from the lower inclusion rate of 50%.

Tax Holiday on Essential Goods

Canadians will also see a temporary “tax holiday” on several items until February 15, 2025. This tax break exempts certain goods from the GST/HST, offering relief on everyday purchases. Items affected by this tax holiday include prepared foods, restaurant meals, takeout or delivery, snacks, alcoholic beverages, and children’s clothing.

This initiative is expected to save taxpayers approximately $1.5 billion. The government hopes this temporary measure will help alleviate some of the financial pressure Canadians face due to high inflation and rising costs of living. As a result, consumers will not pay GST/HST on these goods for the duration of the tax holiday, making it a welcome relief for many families.

Increased Government Benefits

Many government benefits will also be adjusted for 2025, based on inflation. For instance, the Canada Child Benefit (CCB) and Old Age Security (OAS) payments are designed to reflect changes in the cost of living, as measured by the Consumer Price Index (CPI). As a result, Canadians can expect an increase in these benefits to keep pace with rising prices.

However, for the first quarter of 2025, OAS payments will remain unchanged since the CPI did not show any increase over the previous three-month period. OAS benefits are reviewed quarterly, so changes may occur later in the year depending on inflation trends. CCB payments, which are recalculated annually in July, are based on a family’s net income from the previous year and inflation rates. Meanwhile, the GST/HST credit will continue to be paid quarterly, providing relief for low- and modest-income families.

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Higher Contribution Limits for Savings

In 2025, Canadians will have the opportunity to contribute more money to tax-exempt savings accounts, helping them prepare for the future. The contribution limit for the Registered Retirement Savings Plan (RRSP) is increasing to $32,490, up from $31,560 in 2024. This allows individuals to save more for retirement while reducing their taxable income.

Additionally, the Year’s Maximum Pensionable Earnings (YMPE) will increase to $71,300 in 2025, up from $68,500 in 2024, allowing Canadians to contribute more to their Canada Pension Plan (CPP). Employee and employer contribution rates for the CPP will remain unchanged at 5.95%, but the maximum contribution limit will rise to $4,034.10 per person, an increase from $3,867.50 in 2024.

The tax-free savings account (TFSA) contribution limit will stay the same at $7,000, following two consecutive years of increases. However, Canadians can continue to benefit from this tax-free option to grow their savings without incurring taxes on interest or gains.

Vehicle Deduction Limits

For businesses leasing vehicles, the tax-deductible leasing costs will increase starting January 1, 2025. The new monthly tax deduction limit will rise from $1,050 to $1,100 for leased vehicles. Additionally, the ceiling for capital cost allowances (CCA) for new and used Class 10.1 passenger vehicles will increase from $37,000 to $38,000.

There are also changes to the vehicle deduction rates for employees who use their personal vehicles for business purposes. The rate will increase by two cents per kilometer, reaching 72 cents for the first 5,000 kilometers driven in most provinces and 76 cents in the territories.

Bare Trust Reporting Exemption

The CRA has extended an exemption for the reporting of bare trusts for the 2024 tax year. Canadians who hold bare trusts will not be required to file T3 or Schedule 15 documentation when completing their tax returns unless specifically requested by the CRA. However, trusts with a December 31, 2024, tax year-end will still need to file a T3 return by March 31, 2025.

Tax Filing Updates for 2025

Taxpayers should also be aware of several updates to the online filing process for 2025. The CRA will require Canadians to use an updated T619 electronic transmittal record when filing their returns. Submissions will now be limited to a single return type, and new online validation checks will help ensure the accuracy of filings.

In addition, the CRA is expanding its pilot program for automatic tax filing. By 2025, up to 2 million Canadians will be invited to use the SimpleFile by Phone service, allowing them to file their taxes automatically.

Conclusion

As Canadians prepare for tax season, these changes will require careful attention to ensure proper filing and to take advantage of available benefits. With adjustments to tax rates, contributions, and various deductions, taxpayers will need to stay informed to optimize their financial planning for the year ahead.

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