Get ready for 2025 tax season

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Want to get a head start on a year of tax savings? Now is the time to start preparing. So, whether you are sipping eggnog by the open fire, or spinning your dreidel as you devour latkes, take advantage of some downtime this holiday season to get yourself ready for 2025. Here are three easy things you can do to save on your taxes next year.

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1. Reduce tax at source

If you’re an employee who gets a substantial tax refund each year, now is the perfect time to revisit your annual tax strategy. As I’ve said numerous times, a tax refund is essentially an interest-free loan to the government, for up to sixteen months. It typically arises when the amount of tax owing on your return is less than the amount of tax withheld during the year.

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For employees, the amount of tax withheld is calculated by your employer by taking into account various credits to which you are entitled, but without taking into account a slew of other deductions and credits you may ultimately claim when you file your return.

The first way to reduce your taxes withheld by your employer is to revisit Form TD1, Personal Tax Credits Return, along with its provincial (or territorial) equivalent, which you would have filled out when you first started working. This form lists the various credits to which you are entitled, such as the basic personal amount, the disability amount and the spouse or common-law partner amount, among others. If your personal situation has changed since you joined your employer, making you eligible for additional credits, consider updating your TD1 forms for 2025, and submitting them to your company’s payroll department so your tax deductions at source can be reduced for 2025.

But, for most employees, it is other tax deductions and credits we claim when we file our return that generate a refund. The most common among them are Registered Retirement Savings Plan (RRSP) contributions, deductible spousal support payments, interest on money borrowed for investment or business purposes, child-care expenses, and charitable donations.

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If you expect to have any of these large deductions or credits in 2025, you may want to complete Canada Revenue Agency Form T1213, Request to Reduce Tax Deductions at Source. Send it in and, once approved, you’ll receive an authorization letter to give to your payroll department that will authorize your employer to reduce tax withheld at source for the 2025 tax year, taking into account the deductions and credits listed on the T1213. Then, instead of waiting until May 2026 to get your 2025 tax refund, you can effectively begin receiving it via each paycheque through reduced tax withholding.

2. Get a head start on 2025 registered plan contributions

A new year means a new set of annual registered plan contributions. Ideally, if you have any cash left over after paying down your holiday spending, contributing it early in the new year can provide a year of tax-free or tax-deferred growth, depending on the plan.

If you had (self-)employment or rental income in 2024, you can make a tax deductible RRSP contribution of up to 18 per cent of your 2024 earned income, up to a maximum contribution of $32,490 for 2025, plus any unused contribution room from prior years (check your 2023 Notice of Assessment). For employees who belong to a registered pension plan, you may want to wait until you receive your 2024 T4 Slip (by the end of February) before contributing, as that’s where your pension adjustment (PA) will be reported. The PA reduces how much you can contribute this year.

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The tax free savings account (TFSA) limit has remained at $7,000 for 2025, so beginning January 1, every Canadian resident 18 years of age or older can contribute another $7,000 to this tax-free plan. Some parents and grandparents make it a habit of gifting each child or grandchild (once they are at least the age of majority) $7,000 each January as a way of tax-free intergenerational wealth transfer. Think of it as an advanced inheritance, invested tax-free.

And, if you have kids (or grandkids) under 18, you can contribute another $2,500 to their registered education savings plan (RESP) for 2025, allowing each child to potentially receive the 20 per cent matching Canada Education Savings Grant (CESG) available on the first $2,500 annually (up to $1,000 if CESG carryforward room exists), up to a lifetime maximum of $7,200 per (grand)child.

If your kids are already attending postsecondary education, January is also the time to plan your annual RESP withdrawals for 2025, taking into account each child’s projected income. Keep in mind that educational assistance payments (EAPs), which include the income, gains and CESGs in the RESP, are taxable to the student when withdrawn. But for 2025, the basic personal amount will be $16,129, meaning that a student with no other income in 2025 can receive this amount of EAPs effectively tax-free from their RESP.

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3. Save for a down payment

If you’re a first time home buyer who is a resident of Canada and at least 18, the first home savings account (FHSA) allows you to save on a tax-free basis toward the purchase of your first home. Starting in the year that you open an FHSA, you can contribute (or transfer from your RRSP) $8,000 annually, and up to $40,000 during your lifetime. You get a tax deduction for your contribution, and there’s no tax on the income or growth for up to 15 years. And, when the funds come out to buy your first home, they come out tax free.

Finally, if you’re reading this before Jan. 1, you may wish to open up an FHSA by Dec. 31 because FHSA room only begins accumulating once the account is open. By merely opening up an FHSA in the final days of 2024, you will generate $8,000 of FHSA contribution room for 2024, and on Jan. 1, 2025, generate a further $8,000 of room, meaning that you could contribute up to $16,000 in 2025.

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Parents or grandparents of kids over the age of majority may also wish to consider gifting $8,000 to each (grand)child so that they can open up their own FHSAs. And if they don’t need the tax deduction immediately, they can save it for a future year when their income is higher.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.

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