Tax Changes Canada 2025

In this article we’re diving into the Canadian tax changes for the year 2025. It's important to stay informed, especially with how rapidly our economic landscape is evolving.

We'll discuss annual RRSP and TFSA contribution limits, updates to last year’s big CPP changes and we’ll talk about the proposed changes to capital gains in Canada.

RRSP Contribution Limit Increase

Let's start with one of the most valuable savings tools for Canadians: the Registered Retirement Savings Plan, or RRSP. If you’re new to this, check out our full guide to RRSPs for a comprehensive overview.

For 2025, the maximum RRSP contribution limit has risen to $32,490.

That’s an increase of $930 from the previous year, providing more room to save for retirement in a tax-efficient way.

This adjustment is particularly beneficial for higher-income earners, as the increased limit enables them to shelter more of their income from immediate taxation, a boost for long-term wealth-building.

In light of current economic shifts, this move also recognizes the need for Canadians to build robust retirement savings. For many, this additional contribution room can mean added financial security when they retire.

TFSA Contribution Limit Increase

Now let’s turn to another essential personal finance tool for Canadians: the Tax-Free Savings Account, or TFSA. TFSAs are government-provided accounts available to Canadians 18 and older, offering a flexible way to save and invest.

Unlike the RRSP, contributions to a TFSA don’t provide an upfront tax deduction. However, any growth within the account is tax-free, and withdrawals are also tax-exempt.

This makes TFSAs ideal for both short-term savings and long-term investment strategies.

In 2025, Canadians can contribute up to $7,000 to their TFSA.

This new limit provides an extra $7,000 of tax-free contribution room, building on past increases. For example, the limit was $7,000 in 2024 and $6,500 in 2023. 

Each year the contribution room is indexed to inflation to create opportunity for Canadians to grow their investments and savings tax-free.

For those who were 18 years old in 2009, when the TFSA was introduced, the total maximum lifetime contribution limit will reach $102,000 as of 2025.

For more on the benefits of TFSAs and how they differ from RRSPs, check out our full article covering TFSAs vs RRSPs.

First Home Savings Account (FHSA)

Now let’s revisit a relatively new tool in Canadian financial planning, the First Home Savings Account, or FHSA. Launched in 2024, the FHSA is designed specifically to help Canadians save for their first home purchase.

The FHSA combines features of both the RRSP and TFSA, making it an effective and tax-advantaged way to build up a home down payment.

The FHSA allows contributions that are tax-deductible, similar to an RRSP, meaning they reduce your taxable income. Like a TFSA, however, the investment growth within the account is tax-free, and withdrawals remain tax-free as long as they’re used for buying your first home.

For the FHSA, the rules remain unchanged for 2025:

• Lifetime contribution cap: $40,000
• Annual contribution limit: $8,000

These limits allow for a substantial amount to be saved over time, making homeownership more attainable for Canadians.

Eligibility is straightforward: you must be a Canadian resident, at least 18 years old, and classified as a “first-time homebuyer.” This includes anyone who hasn’t lived in a home they owned in the last five years, which extends the benefits of the FHSA to a wider range of Canadians.

To preserve the tax-free withdrawal status, the funds must go toward an eligible home purchase. This condition is essential for the FHSA to achieve its goal of supporting first-time homebuyers.

For more details on how the FHSA can help you reach your homeownership goals, check out our comprehensive guide on the First Home Savings Account.

CPP Contribution Rate Update and CPP 2.0 Changes

The Canada Pension Plan (CPP) plays a major role in supporting Canadians in retirement, and there are updates to both regular CPP contributions and the newer "CPP 2.0" or second additional component for 2025.

The original CPP contribution rate for both employees and employers remains at 5.95%, but with an increased maximum contribution limit due to the rise in yearly maximum pensionable earnings (YMPE) to $71,300 for 2025. This means:

• Maximum Contribution for Employees and Employers: Each will contribute up to $4,034.10 in 2025, up from $3,867.50 in 2024.
• Self-Employed Individuals: Those who are self-employed pay both the employee and employer portions, totaling 11.9%, with a maximum contribution of $8,068.20 in 2025, up from $7,735.00 in 2024.

Introducing CPP 2.0

CPP 2.0, introduced as part of a multi-year enhancement plan, adds a second layer of contributions on higher earnings to boost future retirement benefits.

This second component, known as the Yearly Additional Maximum Pensionable Earnings (YAMPE), applies to earnings above the YMPE and is meant to help Canadians save more for retirement.

In 2025, YAMPE has increased to $81,200, up from $73,200 in 2024. 

Contributions to CPP 2.0 apply only to income earned between the YMPE ($71,300) and the YAMPE ($81,200).

Here’s what CPP 2.0 contributions look like in 2025:

• Employee and Employer Contributions: Each contributes 4% on earnings between $71,300 and $81,200. This means a maximum CPP 2.0 contribution of $396.00 each for employees and employers, up from $188.00 in 2024.
• Self-Employed Individuals: For self-employed Canadians, who pay both portions, the total CPP 2.0 contribution is 8%, resulting in a maximum contribution of $792.00 in 2025, up from $376.00 in 2024.

These changes reflect ongoing efforts to enhance the CPP, providing Canadians with a more robust retirement income over time. Both employers and self-employed individuals should account for these additional costs in their budgeting for 2025.

Total CPP Contribution Costs for 2025 vs. 2024

When considering both regular CPP and CPP 2.0, the maximum total CPP contribution for employees in 2025 is $4,430.10, an increase from $4,055.50 in 2024. 

Employers will also see this increase per employee, raising payroll costs to match.

For self-employed individuals, who cover both the employee and employer portions, the total maximum CPP cost will be $8,860.20 in 2025, up from $8,111.00 in 2024. 

This increase reflects ongoing CPP enhancements aimed at providing greater retirement security, though it does mean higher contributions year over year.

Understanding these annual adjustments can help employees, employers, and self-employed Canadians prepare for the full cost of CPP contributions as they plan for retirement and budget for the coming year.

Federal Tax Bracket Changes for 2025

In 2025, adjustments to Canada’s federal income tax brackets offer some relief by shifting income thresholds upwards to account for inflation and economic changes.

Let’s start with a quick review: federal tax brackets are ranges of income that are taxed at progressively higher rates. As your income rises, only the income within each range is taxed at that bracket's rate, making the system progressive.

For 2025, while tax rates themselves remain unchanged, the income thresholds for each bracket have increased, meaning more of your income will be taxed at lower rates compared to previous years.

This adjustment can reduce your overall tax burden slightly by allowing a larger portion of your earnings to fall within lower tax brackets.

For example, the lowest tax bracket, taxed at 15%, now applies to income up to $57,375, up from $55,867 in 2024.

Similar inflation-based adjustments have been made to the other brackets, giving Canadians the opportunity to retain a bit more of their income before moving into higher tax brackets.

This update provides modest relief to taxpayers as they navigate the increasing cost of living.

Basic Personal Amount Increase for 2025

The Basic Personal Amount (BPA) is a non-refundable tax credit available to all Canadian taxpayers. It represents a portion of income that’s not subject to federal income tax, helping to reduce the tax burden on low-income earners by ensuring they don’t pay federal tax on a set minimum amount of earnings.

In 2025, the BPA has increased to $16,129, up from $15,705 in 2024.

This increase means a greater portion of each taxpayer’s income will fall within the tax-free range, providing extra relief, particularly for those in lower income brackets. The annual adjustment of the BPA helps to keep pace with inflation and the rising cost of living, ensuring that more income remains untaxed year over year.

Proposed Capital Gains Changes for 2025

In 2025, Canada’s capital gains tax rules may see some significant updates. Although these changes are still proposed, they are moving through the legislative process and seem likely to proceed. Here’s what could be coming:

1. Higher Lifetime Capital Gains Exemption (LCGE):
   • The LCGE may increase to $1.25 million (up from $1,016,836 in 2024) for selling small business shares or eligible farm and fishing properties.
   • Starting in 2026, this exemption would also be indexed to inflation.
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2. Increased Capital Gains Inclusion Rate:
   • For individuals, the inclusion rate could rise from 50% to 66.7% on capital gains above $250,000.
   • For corporations, the proposed 66.7% inclusion rate would apply to all capital gains, without a reduced rate for the first $250,000.
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3. Canadian Entrepreneurs’ Incentive (CEI):
   • This new incentive would allow qualifying business owners a reduced 33.3% inclusion rate on up to $200,000 in capital gains from the sale of eligible small business shares, with this limit increasing each year until it reaches $2 million in 2034.
   • Only certain sectors are expected to qualify, with exclusions for sectors like finance, real estate, and professional services.

These proposed changes would allow higher tax-free gains on business sales but could also mean a larger taxable portion for other capital gains. 

What These Changes Could Mean for Business Owners

If these proposed capital gains changes take effect, they would impact both individual and corporate business owners in Canada, especially those planning to sell a business, investments, or property. Here’s how they might affect you:

1. For Individual Business Owners:
   • Higher Exemption: The increase in the LCGE to $1.25 million means that individual business owners could sell more of their business assets without triggering capital gains tax, providing more tax-free retirement income.
   • Increased Inclusion Rate: The hike to a 66.7% inclusion rate above $250,000 means any gains over the first $250,000 would be more heavily taxed than in previous years. This could reduce net profits on larger business sales.
   • Entrepreneurs’ Incentive: If eligible, small business owners in qualifying sectors (e.g., agriculture, manufacturing) may see tax relief with the CEI, allowing them to access a lower tax rate on up to $200,000 of their gains annually—making it easier to keep more from a business sale.
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2. For Corporate Business Owners:
   • Higher Tax on Investment Gains: Corporate-owned investments or properties would face the higher 66.7% inclusion rate on all capital gains, meaning greater tax exposure for corporate investment strategies.
   • Strategic Planning for Business Sales: Corporations planning to sell all or part of their business would not have access to the initial $250,000 at a reduced inclusion rate, so it may be more beneficial to plan around other exemptions, like the LCGE, if possible.

These proposed changes could mean a larger tax bill for some, so we recommend consulting a tax advisor to explore options for structuring business sales efficiently.

Avalon Can Help

Tax rules change every year, and staying proactive can save you time and money. 

Avalon Accounting offers comprehensive support to help you navigate tax updates and make informed financial decisions. 

👉Reach out to Avalon here to get started!

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