As we enter the new year, several changes in federal policies may impact Canadians' finances. Brian Quinlan, a chartered professional accountant with Allay LLP, notes that many of these changes are routine, including inflation-based adjustments to tax brackets. Here’s a list of important changes to be aware of:
Tax Brackets
In 2025, income tax brackets will increase by 2.7% to prevent inflation from pushing Canadians into higher tax brackets. This follows a 4.7% increase in 2024.
For 2025, the federal tax rates are as follows:
- 15% for earnings up to $57,375
- 20.5% for earnings between $57,375.01 and $114,750
- 26% for earnings between $114,750.01 and $177,882
- 29% for earnings between $177,882.01 and $253,414
- 33% for earnings above $253,414
Quinlan emphasizes, "You're not paying more tax simply because of inflation, so this adjustment is good news for us all." He explains that even if your income remains the same in 2024 compared to 2023, you will pay less tax because less of your income will be taxed at a higher rate.
Basic Personal Amount
For the 2025 tax year, the basic personal amount—on which federal income tax is not payable—ranges from $14,538 to $16,129, depending on overall income. This represents an increase from 2024, where the range was $14,256 to $15,705. Individuals with lower incomes will benefit from a higher basic personal tax credit.
Canada Pension Plan (CPP)
Some Canadian workers may see a slight increase in deductions from their paychecks due to a rising CPP contribution amount. This adjustment is part of a multi-year pension overhaul that began in 2019. Both the Quebec Pension Plan and CPP are phasing in enhanced benefits to provide more financial support for retirees. With the ongoing implementation, individual contributions (along with the employer's matching portion) have gradually increased.
Starting in 2024, there are two new earnings ceilings beyond the base level. The first-tier earning ceiling will rise from $68,500 to $71,300 in the new year, while the second earnings ceiling will increase from $73,200 to $81,200. After 2025, the program will be fully implemented, and the base, first-tier, and second-tier limits will adjust with wage growth instead of the larger increases seen in previous years. Anyone who contributed to CPP from 2019 onward will qualify for a higher CPP payout upon retirement based on their income during that period.
Capital Gains Tax
While proposed changes to the capital gains tax are still pending legislation, they could have significant implications. Quinlan advises careful consideration for those planning to sell assets in the upcoming year, as 2025 may be the first full year the higher tax rate for gains over $250,000 takes effect. He suggests timing your asset sales strategically. "Instead of selling assets with a huge $300,000 gain all in one year, you may want to sell some in one year and some in the following year," he notes.
Once implemented, these new rules will apply to any capital gains realized from June 24, 2024. Under the proposed changes, a larger portion of an individual's capital gains—the profit from asset sales—will be taxable. The government currently taxes 50% of capital gains, but the tax rate for gains exceeding $250,000 will increase to two-thirds.
Registered Retirement Savings Plans (RRSPs)
For the 2024 fiscal year, Canadians can contribute to their registered retirement savings accounts until March 3. The contribution limit for registered retirement savings plans will rise to $32,490, up from $31,560 in the previous year, plus any unused contribution room from earlier years. Individuals can find the amount of their unused contribution room on last year’s notice of assessment from the Canada Revenue Agency or through their CRA online account.
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