2025: How Small Businesses Can Minimize Tax Liabilities

There is a specific feeling every business owner knows. It’s that moment in April (or June, if you’re incorporated) when you look at your net profit, feel a surge of pride, and then look at the estimated tax bill and feel… mostly pain.

In 2025, that feeling is becoming more common.

Margins are tighter, costs are higher, and CRA scrutiny continues to increase. For many small businesses, tax is now one of the largest expenses on the income statement. Strategies that worked years ago may no longer be sufficient, and a purely reactive approach often results in overpaying.

Minimizing your tax liability is not about hiding income. That is tax evasion, and it carries serious consequences. Instead, it is about tax efficiency: using the tools already built into the Canadian tax system to keep more of what you earn, while remaining fully compliant.

Here is how we are advising our small business clients at Madan CPA to approach tax planning in 2025.

1. The Context: Tax Planning Is a Business Decision, Not a Filing Exercise

For many small business owners, tax planning starts and ends with filing the return. Once the numbers are finalized, attention shifts back to operations, sales, and growth.

That mindset quietly costs money.

Taxes are not just a by-product of profit. They are the result of decisions made throughout the year: how income is earned, how it is paid out, what assets are held inside the corporation, and when major purchases or transactions occur. By the time the tax return is prepared, most of those decisions are already locked in.

In 2025, the gap between reactive compliance and proactive planning is wider than ever. Businesses that treat tax as an after-the-fact calculation often overpay, while those that integrate tax planning into their business decisions retain more capital to reinvest, pay down debt, or distribute to shareholders.

The strategies below are not loopholes. They are established planning tools that require advance coordination, proper documentation, and ongoing review. When applied correctly, they can significantly reduce tax while keeping you onside with the CRA.

2. Capital Gains Planning for Small Business Owners

For incorporated business owners, minimizing capital gains tax is less about guessing future tax rates and more about using the tools already available.

A key opportunity is the Lifetime Capital Gains Exemption (LCGE). When you sell shares of a Qualified Small Business Corporation (QSBC), you may be able to shelter up to $1.25 million (indexed) of capital gains per individual from tax. This exemption applies only to share sales, and only if strict QSBC conditions are met. Excess cash, investments, or real estate inside the company can jeopardize eligibility if not addressed in advance.

The Strategy

• Plan Early: LCGE planning often needs to start 12–24 months before a sale to ensure QSBC eligibility.
• Harvest Capital Losses: Realizing capital losses on underperforming investments can offset capital gains and reduce overall tax.
• Capital Dividend Account (CDA): The non-taxable portion of capital gains increases the CDA, allowing funds to be paid out to shareholders tax-free. Precise tracking and timely elections are critical.

For business owners planning an exit, proactive capital gains planning can mean the difference between paying full tax and extracting a significant portion of the sale proceeds tax-free.

3. Sprinkle the Income

Income splitting used to be the golden ticket, paying your spouse or children a salary or dividends to lower your overall family tax bracket.

Then the CRA introduced TOSI (Tax on Split Income) rules, which largely put a stop to paying dividends to family members who don’t actually do work in the business.

The Strategy

You can still split income, but it has to be real—and you need timesheets.

If your spouse handles your bookkeeping, manages the website, or answers phones, you can pay them. But the work must be legitimate, and the pay must be reasonable and reflect market rates. The CRA wants to see what work was done and how many hours were worked.

If you pay your spouse $50,000 to file papers once a month, the CRA will audit you.

But if your spouse works 10 hours a week doing legitimate admin and bookkeeping, keeps weekly timesheets, and is paid $25 per hour, that’s about $13,000 per year. This is a valid, deductible business expense that shifts income to a lower tax bracket—without tripping TOSI.

Dividends, on the other hand, are where TOSI bites hardest. Paying dividends to family members who don’t meaningfully work in the business is exactly what these rules were designed to stop.

4. Time Your Capital Purchases

If you are planning to buy business assets such as a laptop, office furniture, or machinery, timing matters.

Under Canada’s Capital Cost Allowance (CCA) rules, you can generally claim depreciation in the year an asset is acquired, even if it’s purchased late in the year. In most cases, the half-year rule applies, meaning you can deduct half of the normal CCA in the year of purchase.

Example

Suppose you buy a $3,000 laptop for your business. Computers fall into CCA Class 50 (55%).

• Buy on December 31, 2025: you can claim approximately $825 of CCA on your 2025 tax return.
• Buy on January 1, 2026: you claim nothing in 2025, and that same $825 deduction is deferred to 2026.

The Strategy

If 2025 is a high-profit year, consider pulling planned 2026 purchases forward. While you don’t get a full write-off right away, buying that $3,000 MacBook in December instead of January lets you accelerate a meaningful tax deduction into the current year, improving cash flow and reducing taxable income sooner rather than later.

5. Don’t Ignore the “Boring” Deductions

Finally, don’t overlook the basics. We often see clients chasing complex tax strategies while missing the low-hanging fruit.

• Home Office Expenses: If you use a dedicated space in your home for business, a portion of heat, hydro, and insurance may be deductible.
• Vehicle Expenses: The CRA is strict here, but with a proper mileage log, a significant portion of vehicle costs can be claimed.
• Health Spending Accounts (HSA): A Private Health Services Plan (PHSP) allows medical and dental expenses to be paid using pre-tax corporate dollars instead of after-tax personal income.

If you want help identifying or tracking these deductions, take a look at our small business bookkeeping services.

Don’t DIY Your Corporate Return

For many small businesses, the largest tax savings do not come from one-off deductions. They come from coordinated, year-round planning.

Minimizing tax is not about finding loopholes. It requires structure, documentation, and timing. If you wait until the filing deadline to ask, “How can I save tax?”, the opportunity has usually already passed.

If you have a tax question or would like Madan CPA to prepare your corporate tax return, we recommend booking a consultation so planning can be done properly and proactively.

FAQ: Minimizing Business Taxes in 2025