It is important to think about the impact an economic downturn may have on individuals’ personal tax situation. Doing so may help confirm that the tax planning and practices individuals have used in the past are still relevant. It may also help determine whether there are tax planning ideas that can be used to optimize tax results during these challenging times.
This article reviews key tax planning ideas for individuals during an economic decline. These comments are general in nature, and individuals will need to work with their tax advisor to implement any of the ideas discussed.
If an investor decides to sell and realize capital losses on an investment, they should know that when the capital losses triggered in 2025 exceed capital gains realized in 2025, the resulting net capital loss can be carried back to reduce capital gains realized in 2022, 2023, and 2024 to recover taxes previously paid. Alternatively, it can be carried forward to future years.
When an individual has borrowed to purchase investments, they can continue to deduct interest on the loan even if that investment is sold at a loss. To maintain full interest deductibility, the individual must reinvest the proceeds received for the loss investment in a new investment if the proceeds are not used to repay the investment loan.
Taxpayers who have a mortgage on a home should consider reorganizing their finances so that they can borrow to invest. Mortgage interest is not deductible because it was not incurred to earn income. It may be possible to pay off a mortgage with a sale of investments and then borrow to repurchase those investments. The interest on the loan taken out to invest would be deductible. Careful planning is required to ensure a direct linkage between the borrowing and income-earning investment, as well as to make sure that the superficial loss rules would not apply.
RRSPs are a powerful tool to save for retirement, particularly for individuals in the upper income tax brackets, because RRSP contributions are deductible and can be used to reduce taxable income. However, if cash is tight or an individual’s income is expected to decline in 2025, then the individual should consider whether to contribute to the RRSP and how much. Any unused contribution room can be carried forward to future years, providing flexibility to contribute more in years when income may be higher and the tax deduction will be more valuable.
If a taxpayer needs to withdraw funds from an RRSP before retirement, the withdrawal will be taxed and the contribution room used for the original contribution will be effectively lost.
The Tax-Free Savings Account (TFSA) allows individuals to contribute an amount up to the TFSA contribution room for the year. While contributions to a TFSA are not deductible, any income earned will not be subject to tax.
If cash is needed to meet short-term needs, taking funds from a TFSA is a better option than withdrawing funds from an RRSP, because TFSA withdrawals are tax-free and the amount will be added back to the TFSA contribution room at the beginning of the following year.
The Canada Revenue Agency (CRA) requires individuals who earn income with no tax withheld -- or insufficient tax withheld -- to make income tax payments in instalments throughout the year. If an individual’s total tax liability, minus the portion that was withheld at source, is greater than $3,000 for both the current year and either of the two preceding years, the individual is required to make instalments for the current year. In Quebec, where provincial tax is collected by the province, the threshold is $1,800 for both federal and Quebec tax.
However, when paying instalments, it is possible to base the 2025 income tax instalments on an estimate of what the final tax obligation will be for 2025. If the estimate is correct and the individual pays ¼ of the estimate on or before the 15th day of March, June, September, and December, no instalment interest will be charged. It is important to keep in mind that if the individual pays less than the instalments that the Canada Revenue Agency requires and the final tax obligation is higher than the estimate, instalment interest and penalties can arise.
In times of economic uncertainty, your BDO advisor is ready to provide expertise to help you navigate changing circumstances. Please contact one of our trusted BDO advisors.
Debra Moses
Christopher Ng
BDO in Canada
This article reviews key tax planning ideas for individuals during an economic decline. These comments are general in nature, and individuals will need to work with their tax advisor to implement any of the ideas discussed.
Consider Capital Loss Planning
With the recent volatility in capital markets, investment portfolios may have significantly decreased in value. In this situation, investors should review whether it makes sense to trigger capital losses. Deciding whether to sell or continue to hold investments should be discussed with a financial advisor.If an investor decides to sell and realize capital losses on an investment, they should know that when the capital losses triggered in 2025 exceed capital gains realized in 2025, the resulting net capital loss can be carried back to reduce capital gains realized in 2022, 2023, and 2024 to recover taxes previously paid. Alternatively, it can be carried forward to future years.
Understand Interest Deductibility
When an individual has borrowed to purchase investments, they can continue to deduct interest on the loan even if that investment is sold at a loss. To maintain full interest deductibility, the individual must reinvest the proceeds received for the loss investment in a new investment if the proceeds are not used to repay the investment loan.Taxpayers who have a mortgage on a home should consider reorganizing their finances so that they can borrow to invest. Mortgage interest is not deductible because it was not incurred to earn income. It may be possible to pay off a mortgage with a sale of investments and then borrow to repurchase those investments. The interest on the loan taken out to invest would be deductible. Careful planning is required to ensure a direct linkage between the borrowing and income-earning investment, as well as to make sure that the superficial loss rules would not apply.
Consider Contributions to a Registered Retirement Savings Plan (RRSP)
RRSPs are a powerful tool to save for retirement, particularly for individuals in the upper income tax brackets, because RRSP contributions are deductible and can be used to reduce taxable income. However, if cash is tight or an individual’s income is expected to decline in 2025, then the individual should consider whether to contribute to the RRSP and how much. Any unused contribution room can be carried forward to future years, providing flexibility to contribute more in years when income may be higher and the tax deduction will be more valuable.If a taxpayer needs to withdraw funds from an RRSP before retirement, the withdrawal will be taxed and the contribution room used for the original contribution will be effectively lost.
Consider a Tax-Free Savings Account
The Tax-Free Savings Account (TFSA) allows individuals to contribute an amount up to the TFSA contribution room for the year. While contributions to a TFSA are not deductible, any income earned will not be subject to tax.If cash is needed to meet short-term needs, taking funds from a TFSA is a better option than withdrawing funds from an RRSP, because TFSA withdrawals are tax-free and the amount will be added back to the TFSA contribution room at the beginning of the following year.
Review Tax Instalment Payment Obligations
The Canada Revenue Agency (CRA) requires individuals who earn income with no tax withheld -- or insufficient tax withheld -- to make income tax payments in instalments throughout the year. If an individual’s total tax liability, minus the portion that was withheld at source, is greater than $3,000 for both the current year and either of the two preceding years, the individual is required to make instalments for the current year. In Quebec, where provincial tax is collected by the province, the threshold is $1,800 for both federal and Quebec tax.However, when paying instalments, it is possible to base the 2025 income tax instalments on an estimate of what the final tax obligation will be for 2025. If the estimate is correct and the individual pays ¼ of the estimate on or before the 15th day of March, June, September, and December, no instalment interest will be charged. It is important to keep in mind that if the individual pays less than the instalments that the Canada Revenue Agency requires and the final tax obligation is higher than the estimate, instalment interest and penalties can arise.
How BDO Can Help
In times of economic uncertainty, your BDO advisor is ready to provide expertise to help you navigate changing circumstances. Please contact one of our trusted BDO advisors.Debra Moses
Christopher Ng
BDO in Canada