Year-end tax planning is an opportunity to consider how investment decisions, income, charitable giving and financial obligations fit together.
As the year draws to a close, investors may be considering several financial decisions at once. Perhaps an investment has increased significantly in value, another has declined, or a charitable donation is planned before December 31. There might also be upcoming expenses or changes in income to consider.
Each decision can have tax implications, but the combined effect is different from considering them individually. Understanding how these decisions interact can help investors and their advisors identify planning opportunities while remaining mindful of cash flow, investment objectives and longer-term priorities.
Impact of Policy Clarity on Decision-making
One significant source of uncertainty in recent years has been resolved. In March 2025, the federal government cancelled its proposed increase in the capital gains inclusion rate from one-half to two-thirds. The general inclusion rate therefore remained 50%. ¹
La higher Lifetime Capital Gains Exemption (LCGE) for qualifying small business shares and certain farming or fishing property was retained, et increases annually with inflation starting in 2026. The exemption may be relevant to business owners considering a sale or succession, although eligibility requirements and the amount available depend on individual circumstances.
These developments provide greater clarity, but tax policy is only one consideration. La timing of a sale, the availability of investment losses and other financial priorities can also influence planning decisions.
When One Tax Decision Changes Another
A useful example is tax-loss harvesting. Investors with unrealized losses in non-registered accounts may consider selling certain holdings to offset realized capital gains. Net capital losses can generally be carried back three years or forward indefinitely, subject to applicable rules. ²
Selling a security at a loss and immediately repurchasing identical property may trigger the superficial-loss rule, preventing the capital loss from being used to offset capital gains at that time. The rule can also apply when an affiliated person or entity acquires the identical property within the relevant period and continues to hold it 30 days after the sale.
Charitable giving introduces another interaction. Donating eligible appreciated publicly traded securities directly to a qualified donee can result in a zero capital-gains inclusion rate for regular income-tax purposes, meaning the investor generally would not pay capital gains tax on the appreciation. The donation may also generate a charitable donation tax credit.³
Likewise, the Alternative Minimum Tax (AMT) is a separate tax calculation that may apply when certain deductions, exemptions or credits reduce an investor’s regular income tax. It uses different rules for calculating taxable income and recognizing certain tax benefits.
For example, donating eligible appreciated publicly traded securities directly to a qualified donee may provide favourable treatment under the regular income tax rules. However, the AMT calculation may recognize a portion of the capital gain and apply different rules to the donation tax credit. The treatment of carried-forward capital losses can also differ.
As a result, an investor who realizes significant capital gains, applies available losses and makes a charitable donation in the same year could face an AMT liability, even when the individual transactions appear tax-efficient under the regular calculation.
AMT paid may be recoverable against regular income tax over the following seven years, subject to applicable rules. However, recovery depends on future tax circumstances and is not guaranteed. This makes it important to consider both the immediate tax liability and its potential longer-term implications.
Liquidity is another important consideration, since a tax liability can create a future need for cash, even when some of the tax paid could potentially be recovered in subsequent years. Upcoming expenses, investment commitments and other financial obligations could therefore influence the timing of planned transactions.
For business owners considering a share sale, eligibility for the LCGE and related legal or corporate requirements may introduce additional considerations. Coordinating these decisions with appropriate professional advice can help identify potential tax consequences while accounting for broader financial priorities.
A Coordinated Process fou the Final Quarter
A coordinated approach to year-end planning helps ensure that tax considerations are evaluated alongside broader financial objectives. This could begin with a review of projected income, realized and unrealized gains, available losses, anticipated expenses and any significant transactions being considered.
As your investment advisor, we can coordinate with your accountant and legal counsel to evaluate how each scenario affects regular income tax, AMT, portfolio exposure, liquidity and any corporate or trust arrangements. Our individual roles remain distinct, but the analysis should use the same assumptions and transaction sequence.
Some activities, including in-kind charitable donations, securities transfers and certain corporate transactions, may require documentation and processing before December 31. Early coordination can help account for deadlines, required approvals and decisions that warrant additional review.
Exhibit: Year-End Planning Process
|
Stage |
Focus |
|
Assess the Current Position |
Income, gains and losses, holdings, financial obligations and planned transactions |
|
Compare Scenarios |
Regular tax, AMT, liquidity and portfolio implications |
|
Coordinate and Execute |
Donations, transfers, legal and corporate steps, approvals and deadlines |
Year-end planning is most valuable when decisions are considered together rather than as separate opportunities to reduce taxes. A coordinated conversation with your financial and tax advisors can help ensure these considerations are reflected in your overall financial plan as you prepare for the year ahead.
Sources
1. Government of Canada, press release
2. Canada Revenue Agency, Capital Losses
3. Canada Revenue Agency, Gifts and Income Tax
4. Department of Finance Canada, press release
