Higher personal income is taxed at higher rates, while lower income is taxed at lower rates. Therefore, individuals may want to, where possible, shift income from high-income years to low-income years. This is particularly useful if the taxpayer is expecting a large fluctuation in income due to, for example, an impending:
- maternity/paternity leave;
- large bonus/dividend; or
- sale of a company or investment assets.
In addition to increases in marginal tax rates, individuals should consider other costs of additional income. For example, an individual with a child may receive reduced Canada child benefit (CCB) payments. Likewise, excessive personal income may reduce the receipt of OAS, GIS, GST/HST credit and other provincial/ territorial programs.
There are various ways to smooth income over several years to ensure an individual is maximizing access to the lowest marginal tax rates. They include:
- taking more or less earnings out of the corporation (in respect of owner-managed companies);
- realizing capital gains/losses by selling investments;
- deciding whether to claim RRSP contributions made in the current year or carry forward the contributions;
- withdrawing funds from an RRSP to increase income (however, care should be given to the loss in the RRSP room based on the withdrawal); and
- deciding whether to claim CCA on assets used to earn rental/business income.
Note that dividends paid to shareholders of a corporation that do not meaningfully contribute to the business may result in higher taxes due to the “tax on split income” rules.
Year-end planning considerations not specifically related to changes in income levels and marginal tax rates include:
1) Corporate earnings in excess of personal requirements could be left in the corporation to obtain a tax deferral (the personal tax is paid when cash is withdrawn from the company).
The effect on the qualified small business corporation status should be reviewed before selling the shares where large amounts of capital have accumulated.
2) Access to the corporate federal small business deduction is reduced where more than $50,000 of passive income is earned in the corporation. Consider whether it is appropriate to remove passive income-generating assets from the corporation and whether a shift in the types of passive assets held is appropriate. In some provinces, it may actually be beneficial to have access to the federal small business deduction reduced. As many variables affect these decisions, consultation with a professional advisor is suggested.
3) If dividends are paid out of a struggling business with a tax debt that cannot be paid, the recipient could be held liable for a portion of the corporation’s tax debt up to the value of the dividend.
4) Individuals who wish to contribute to the CPP or an RRSP may require a salary to generate earned income. RRSP contribution room increases by 18% of the previous year’s earned income, up to a yearly prescribed maximum ($32,490 for 2025).
5) Consider paying taxable dividends to obtain a refund from the refundable dividend tax on hand account in the corporation. The refund amount may be restricted if eligible dividends are paid. Eligible dividends are subject to lower personal tax rates.
6) If you provide services to a small number of clients through a corporation (that would otherwise be considered your employer), CRA could classify the business as a personal services business. There are significant negative tax implications of such a classification. In Budget 2025, the federal government indicated that an enforcement project on these situations, starting with the trucking industry, would be commenced. Consider discussing risk and exposure minimization strategies (such as paying a salary to the incorporated worker) with a professional advisor in such scenarios.
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