You’ve probably heard of the well-known book How to Win Friends and Influence People by Dale Carnegie. Honestly, I might be tempted to write my own take titled How to Lose Friends and Bore People. The premise is pretty straightforward: if you drone on about a certain subject long enough, well, good luck getting invited to social gatherings. And what’s that subject? Tax brackets.
Now, I know this might test your patience, but let’s dive into it anyway. Understanding your tax brackets could save you a considerable amount of money, potentially putting a nice sum back in your wallet by 2025. The catch is, you need to act now, before the year wraps up. Let’s break it down.
Concept
Canada operates on a progressive tax system. This essentially means that as your income rises, so does the percentage you pay in taxes. The rate applied to that last dollar of income is referred to as your marginal tax rate, and it’s quite significant.
Take someone earning a taxable income of $50,000, for instance. This individual falls into the second tier of federal tax and pays 20.5 percent on their last dollar of regular income, whereas the top tier sees that rate soar to 33 percent.
Of course, provincial tax will come into play too. Depending on where you live, the lowest tier might be around 10 percent, while the highest can go up to 18 percent.
The objective here is straightforward: manage your tax classification to control your marginal tax rate and potentially climb to a more favorable category.
Lever
There are mainly three approaches to achieving this: (1) Timing your income, (2) Adjusting the type of income, and (3) Reassessing where your income is generated. Let’s explore some practical tips for 2025.
1. Timing of Income
If you suspect your taxes will be lighter next year, think about pushing your income to 2026. Got a year-end bonus coming? See if it can be postponed to January instead of December. If you’re self-employed, consider delaying some projects or invoices until the new year.
If your marginal rate is steep, you could also expedite deductions. For example, contributing to your RRSP or FHSA might be a wise choice this year. However, if you think you might be in a higher bracket next year, consider donating now and waiting to claim that deduction later.
The same reasoning applies to capital gains and losses. If you’ve got losses to offset, cash in on some profits this year. If your tax rate will be the same or lower, you might want to hold off until 2026 for those gains.
Also, for those on the brink of retirement, a small withdrawal from your RRSP now might make sense, allowing you to lower your RRSP balance before CPP or OAS benefits kick in, which could push you into a higher bracket later.
2. Type of Income
Not all income carries the same weight. Capital gains and Canadian dividends tend to be taxed more favorably compared to regular income like salaries, freelancing income, or rental proceeds.
If it aligns with your risk comfort, consider leaning your non-registered portfolio towards growth-oriented investments—those primarily yielding capital gains.
Another smart strategy? Donate valuable securities to charities. You can avoid capital gains taxes and benefit from a charitable tax deduction that offsets other income. Just make sure to do this by year-end.
If you have interest-bearing investments, think about transferring them to your spouse or family trust with a fixed-rate loan. This could potentially shift some of that income into lower tax tiers.
And if you’re a business owner, consider whether it would be more beneficial to take a salary or dividends as you enter 2025.
3. Location of Income
The source of your income also matters. Is it personal, corporate, in a trust, or within a registered plan? Choosing wisely can help lower your marginal tax rate.
For instance, contributing to a TFSA takes your earnings into a tax-sheltered account, so they don’t appear on your personal tax return, potentially reducing your bracket.
And don’t overlook your RRSP contributions. In high-income years, RRSP deductions can push you down to a lower bracket. Be cautious though—overdoing it can result in wasted deductions if your taxable income dips below $16,129 in 2025.
Finally, try to keep interest-bearing investments within a registered plan for protection. For non-registered investments, aim for tax efficiency, favoring growth investments that yield capital gains. Ensure your overall asset mix aligns with your financial goals and risk appetite.
