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In recent months, the housing market pendulum has swung more toward affordability for first-time home buyers than it has in several years, for two reasons. First, after years of price increases, the average cost of a home in Canada has (according to the Canadian Real Estate Association) declined by about 3.4% over the past year. At the same time, cuts made by the Bank of Canada in interest rates have resulted in lower mortgage lending costs. In July of 2023, the Bank Rate (from which all other lending rates are derived) stood at 5.25%; as of the end of October 2025, it was 2.5%. While getting into the position of being able to purchase a first home is still a formidable task, that goal is now somewhat more accessible than it has been for some time.

In recent months, the housing market pendulum has swung more toward affordability for first-time home buyers than it has in several years, for two reasons. First, after years of price increases, the average cost of a home in Canada has (according to the Canadian Real Estate Association) declined by about 3.4% over the past year. At the same time, cuts made by the Bank of Canada in interest rates have resulted in lower mortgage lending costs. In July of 2023, the Bank Rate (from which all other lending rates are derived) stood at 5.25%; as of the end of October 2025, it was 2.5%. While getting into the position of being able to purchase a first home is still a formidable task, that goal is now somewhat more accessible than it has been for some time.

Before a first home can be purchased, however, buyers must qualify for a mortgage. The rules governing mortgage approvals in Canada require prospective homeowners to show both that they have accumulated a sufficient down payment and that they will be able to manage the amount of mortgage debt they are taking on, now and in the future. To do so, mortgage financing applicants are required to establish that they can manage that mortgage debt not just at current interest rates, but at higher rates that might be imposed over the life of the mortgage – the so-called “mortgage stress test”.

The process used by a mortgage lender in assessing a mortgage financing application has, essentially, three steps, as follows.

• Does the applicant have a sufficient down payment?

In order to purchase any home in Canada, it’s necessary to make a down payment, and the amount of required down payment depends on the purchase price of the home, as shown in the following table.

•  What are the applicant’s GDS and TDS ratios?

Once the mortgage lender establishes that the prospective homeowner is able to make at least the minimum down payment, the next step is to determine whether they have sufficient income to manage ongoing mortgage payments.

That ability to manage such payments on an ongoing basis is determined by measuring the applicant’s income relative to their mortgage and non-mortgage debt obligations – in other words, by calculating what percentage of the applicant’s income must be allocated to debt repayment.

The first formula used to determine that percentage is what’s called the Gross Debt Service (GDS) ratio. For any mortgage financing applicant, the GDS is arrived at by adding together mortgage payments, property taxes, heating costs, and (where applicable) 50% of any condominium fees. The total of those costs should be no more than 39% of the applicant’s total income (or total family income for a couple).

Of course, most Canadians don’t have only mortgage debt – often, there are car loans, lines of credit, credit card balances, spousal or child support obligations, and, for younger Canadians, student loan debt. Consequently, the second formula used by the lender determines what percentage of the applicant’s total income is required to meet all of those debt obligations on an ongoing basis – known as the Total Debt Service (TDS) ratio. For TDS, what the lender wants to see is that the total cost of servicing all debts (including the housing costs listed above) is no more than 44% of the applicant’s total income.

• Can the applicant pass the mortgage stress test?

Most would-be homeowners who have saved to put together a sufficient down payment and whose income amount and debt obligations enable them to satisfy both the GDS and TDS debt servicing ratios would conclude that they should have no trouble in being approved for mortgage financing. However, there is one further hurdle to overcome, and it is that hurdle that can derail a mortgage financing application, particularly for first time homebuyers.

That hurdle is the mortgage stress test, which was first introduced by the federal government in 2018, and is intended to ensure that prospective homeowners will be able to continue to meet their mortgage payment obligations even when the interest rate levied on those obligations increases.

Interest rates are, of course, not static, and the range of interest rates which might be imposed over the typical 25-year life of a mortgage can be significant. For example, a homeowner who took out a mortgage in 2005 could, in the years between 2005 and 2025, been subject to interest rates on a five-year fixed rate mortgage ranging from 3.20% to 6.81%.

While no-one knows where interest rates are headed at any given time, what the mortgage stress test attempts to do is measure a borrower’s ability to absorb an increase in their mortgage interest rate and, consequently, their required mortgage payments. In order to do so, lenders must measure the applicant’s ability to meet the required GDS and TDS ratios, not just at the interest rate which will actually be levied on the mortgage, but (as part of the mortgage stress test) at the higher of the following rates: 5.25%, or the interest rate the applicant negotiated with their lender plus 2%.

As of the end of October 2025, the interest rate on an average five-year fixed rate mortgage is around 4.5%, meaning that a mortgage financing applicant will be required to meet the GDS and TDS ratios using a notional mortgage lending rate of 6.5% (being the higher of 5.25% and the actual mortgage lending rate plus 2%).

The impact that the mortgage stress test can have is illustrated in the following example.

A couple wants to purchase a home for $750,000, and have saved the required minimum down payment of $50,000. They have a car loan of $400 per month, but no other debts, and their combined total income is $150,000 per year. Property taxes on the home to be purchased are $4,800 per year, and the estimated heating costs are $1,500 per year. They have applied for a five-year closed mortgage, for which the current interest rate is 4.5%.

The GDS ratio for the couple is calculated (in rounded figures) as follows:

Annual mortgage payments at $3,900 per month = $46,800

Annual property taxes = $4,800

Annual heating costs = $1,500

Total housing costs are $53,100, which is 35.4% of their total income, under the GDS required percentage of 39%.

When the couple’s required car payment is added, their total debt repayment obligation increases to $57,900 for the year, making their TDS ratio 38.6%, again well below the mandated 44%.

In order to determine whether the couple can meet the mortgage stress test, their prospective lender is now required to determine those GDS and TDS ratios at a notional mortgage interest rate of 6.5%. The change in interest rate increases their annual mortgage payment obligation to $56,400, making their total housing cost $62,700. When the GDS ratio is calculated based on the higher notional housing cost, it increases to 41.8% – higher than the allowed 39%. When their car loan payments of $4,800 per year are added in, their total debt repayment costs become $67,500 and their TDS ratio increases to 45.0%, also higher than the allowed 44%, meaning that they cannot satisfy the required mortgage stress test.

Would-be buyers who find out that they cannot qualify for a mortgage because they are unable to pass the mortgage stress test face some tough choices. The courses of action open to them to change that result depend, in part, on why they were unable to meet that stress test.

Mortgage applicants whose GDS ratio is acceptable, but who cannot meet the required 44% TDS ratio can change that result by reducing their cost of servicing non-housing debts. Generally that means paying off, or at least paying down, such debt as credit card balances, car loans, or student loans.

Mortgage applicants who cannot meet the required 39% GDS ratio face a tougher choice. There are, practically speaking, only three ways to improve that score: earn more income, increase the amount of down payment, or purchase a property which has a lower cost. The first of those alternatives isn’t really within the control of applicants, certainly not in the short term, and most first-time home buyers have scraped together every possible source of funds to put together the down payment they already have.  Increasing the amount of that down payment by additional saving can be done over the long term, but not likely the short term.

It is, of course, possible to borrow to increase, or even create, a down payment, but there are significant risks to doing so. Unless those funds come from a source (usually meaning family) which will provide them interest-free and not require repayment on a regular schedule – or will simply provide such funds as a gift – taking on interest-bearing debt which must be repaid on a set schedule for both a down payment and a mortgage often puts first time homeowners at risk of overextending themselves and ultimately struggling, or even being unable, to meet their mortgage and non-mortgage debt obligations.

The practical and far less risky course of action where the application of the mortgage stress test means that would-be homebuyers can’t get approved for a mortgage is to reduce expectations somewhat and purchase a less expensive property – a smaller house, or a townhouse instead of a detached home, or even, where practical, a house in a less expensive location. Especially where first-time buyers are seeking to take advantage of the current drop in house prices as well as lower interest rates, it can be worth reducing expectations in order to accomplish that important and difficult first step on to the property ladder, and begin the process of building the equity which will enable the purchase of their “dream home” in the future.

As the holiday season approaches, the year-round appeals for charitable donations which every Canadian receives will inevitably increase – and there’s no shortage of need, or of worthy causes which merit support, both domestically and internationally.  Generally, those appeals are met, as Canadians have a well-deserved reputation for supporting charitable causes, through donations of both money and goods. Our tax system supports that generosity by providing both federal and provincial tax credits for qualifying donations made, and in all cases, in order to claim a credit for a donation in a particular tax year, that donation must be made by the end of that calendar year.

As the holiday season approaches, the year-round appeals for charitable donations which every Canadian receives will inevitably increase – and there’s no shortage of need, or of worthy causes which merit support, both domestically and internationally.  Generally, those appeals are met, as Canadians have a well-deserved reputation for supporting charitable causes, through donations of both money and goods. Our tax system supports that generosity by providing both federal and provincial tax credits for qualifying donations made, and in all cases, in order to claim a credit for a donation in a particular tax year, that donation must be made by the end of that calendar year.

There is an additional reason, when planning charitable donations, to ensure that such donations are made by December 31. The credit provided by the federal government is a two-level credit, in which the percentage credit claimable increases with the amount of donation made. For federal tax purposes, the first $200 in donations is eligible for a non-refundable tax credit equal to 14.5% of the donation. (The 14.5% credit percentage is effective for 2025, and will decrease to 14.0% for 2026, as the result of a change in federal tax rates.) The credit for donations made during the year which exceed the $200 threshold is, however, calculated as 29% of the excess. Finally, where the taxpayer making the donation has taxable income (for 2025) over $253,414, charitable donations above the $200 threshold can receive a federal tax credit of 33%.

As a result of the two-level credit structure, the best tax result is obtained when donations made before the end of the calendar year are maximized. For example, a qualifying charitable donation of $600 made in December 2025 will receive a federal credit of $145.00 ($200 times 14.5% plus $400 times 29%). If the same amount is donated, but the donation is split equally between December 2025 and January 2026, meaning that a $300 donation is made in each year, the total credit claimable in 2025 will be $58.00 and the total credit claimable in 2026 will be $57.00, for a total federal credit of $115.00. As well, the credit for the donation made in 2026 cannot be claimed until the 2026 tax return is filed in the spring of 2027. And, of course, the larger the donation made in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% level rather than the 14.5% level.

It’s also possible to carry forward, for up to five years, donations which were made in a particular tax year, but not claimed on the tax return for that year. So, if donations made in 2025 don’t reach the $200 level, it’s usually worth holding off on claiming the donation and carrying it forward to the next year in which total donations, including carryforwards, are over that threshold. Of course, this also means that donations made but not claimed in any of the 2020, 2021, 2022, 2023, or 2024 tax years can be carried forward and added to the total donations made in 2025, and the total then claimed on the 2025 tax return. There is a ceiling on the amount of donations which can be claimed in any one calendar year, but that ceiling is a very generous one – a taxpayer can claim any qualifying current or carryforward donations up to a limit of three quarters of the taxpayer’s net income for the year.

When claiming charitable donations, it’s possible to combine donations made by oneself and one’s spouse and claim them on one spouse’s return. Generally it makes sense to do so, in order to maximize the total amount of donations claimed by a single individual, and therefore the amount of donations which can qualify for the higher tax credit rate(s). There is one caveat, however: the charitable donation tax credit is a non-refundable credit, meaning that it can reduce taxes payable, but cannot create or increase a refund. In deciding who should claim the charitable donation tax credit for total family donations, it's necessary to make sure that that person has tax payable of at least the amount of the charitable donations tax credit to be claimed.

Regardless of when a charitable donation is made or who claims it for tax purposes, would-be donors are well advised to carefully consider the charities to which they donate. It’s an unfortunate reality that while most organizations seeking charitable donations are legitimate, the charitable sector attracts perhaps more than its share of scammers and fraudsters who exploit the willingness of Canadians to help, but whose only aim is to personally profit from the generosity of others. Such charitable donation frauds arise most often whenever there are Canadian or world events like wars or natural disasters and people are particularly motivated to help. After every such event a flurry of “instant” charities spring to life, seeking donations which may or may not actually be used as represented. And, while some of the individuals or organizations who seek to raise funds in response to particular events may actually be both legitimate and well intentioned, the reality is that they are unlikely to have either the infrastructure or the experience needed to actually carry out their stated or intended aims. And others, of course, are simply scammers seeking to capitalize on the desire of Canadians to help in response to disaster or other need.

There are two ways to ensure that one’s charitable dollar is actually utilized as intended. The first is to donate only to large international charities which have been in existence for some time and who have both expertise and experience in utilizing charitable donations in an efficient and effective way. However, where a donor is deciding whether to make a donation to a newer or less well-known charity, it’s relatively easy to find information about that charity on the website of the Canada Revenue Agency.

Only donations made to registered charities can be claimed for purposes of the charitable donations tax credit. The Canada Revenue Agency maintains on its website a listing of all such registered charities, and that listing (which is searchable) can be found at https://apps.cra-arc.gc.ca/ebci/hacc/srch/pub/dsplyBscSrch?request_locale=en.

That webpage will also provide information on the charity’s activities, including the date on which it became a registered charity. Through that site (which is updated each business day by the Canada Revenue Agency), it’s also possible to obtain information on the countries in which the charity operates, the nature of its charitable activities, and details of its revenues and expenditures, all of which can help a would-be donor to determine whether or not to make a donation.

Detailed information on calculating and claiming the charitable donation tax credit is available on the same website at Giving to charity: Information for donors - Canada.ca.

For most Canadians, tax planning for a year that hasn’t even started yet may seem premature. However, most Canadians will start paying their taxes for 2026 with the first paycheque they receive in January of 2026, less than two months from now. And while the overall rate of inflation has eased from the 8.1% high recorded in June 2022, the cost of necessities (especially groceries) continues to outpace the general rate of inflation. Managing cash flow and maximizing take-home (after tax) income continues to be a priority for all Canadians, especially families.

For most Canadians, tax planning for a year that hasn’t even started yet may seem premature. However, most Canadians will start paying their taxes for 2026 with the first paycheque they receive in January of 2026, less than two months from now. And while the overall rate of inflation has eased from the 8.1% high recorded in June 2022, the cost of necessities (especially groceries) continues to outpace the general rate of inflation. Managing cash flow and maximizing take-home (after tax) income continues to be a priority for all Canadians, especially families.

For most Canadians (certainly for the vast majority who earn their income from employment), income tax, along with other statutory deductions like Canada Pension Plan contributions and Employment Insurance premiums, are paid periodically throughout the year by means of deductions taken from each paycheque received, with those deductions then remitted to the Canada Revenue Agency (CRA) on the taxpayer’s behalf by their employer.

Of course, each taxpayer’s situation is unique and so the employer has to have some guidance as to how much to deduct and remit on behalf of each employee. That guidance is provided by the employee/taxpayer in the form of TD1 forms which are completed and signed by each employee, sometimes at the start of each year, but certainly at the time employment commences. Each employee must, in fact, complete two TD1 forms – one for federal tax purposes and the other for provincial tax imposed by the province in which the taxpayer lives. Federal and provincial TD1 forms for 2026 (which have not yet been released by the CRA but, once published, will be available on the Agency’s website at https://www.canada.ca/en/revenue-agency/services/forms-publications/td1-personal-tax-credits-returns/td1-forms-pay-received-on-january-1-later.html) list the most common statutory credits claimed by taxpayers, including the basic personal credit, the spousal credit amount, and the age amount. Adding amounts claimed on each form gives the Total Claim Amounts (one federal, one provincial) which the employer then uses to determine, based on tables issued by the CRA, the amount of income tax which should be deducted (or withheld) from each of the employee’s paycheques and remitted on their behalf to the federal government.

While the TD1 completed by the employee at the time their employment commenced will have accurately reflected the credits claimable by the employee at that time, everyone’s life circumstances change. Where a baby is born, or a son or daughter starts post-secondary education, there is a separation or a divorce, a taxpayer turns 65 years of age, or an elderly parent comes to live with their children, the affected taxpayer(s) will often become eligible to claim tax credits not previously available. And, since the employer can only calculate source deductions based on information provided to it by the employee, those new credit claims won’t be reflected in the amounts deducted at source from the employee’s paycheque.

Consequently, it’s a good idea for all employees to review both the federal and provincial TD1 forms prior to the start of each taxation year and to make any changes needed to ensure that a claim is made for any and all credit amounts currently available to them. Doing so will ensure that the correct amount of tax is deducted at source throughout the year.

As well, it’s often the case that a taxpayer will have available deductions which cannot be recorded on the TD1, like RRSP contributions, deductible support payments, or child care expenses. While such claims make things a little more complicated, it’s still possible to have source deductions adjusted to accurately reflect those claims, and the employee’s resulting reduced tax liability for 2026. The way to do so is to file Form T1213 – Request to Reduce Tax Deductions at Source (available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1213.html) with the Agency. Once that form is filed with the CRA, the Agency will, after verifying that the claims made are accurate, provide the employer with a Letter of Authority authorizing the employer to reduce the amount of tax being withheld from the employee’s paycheque – and thereby increasing the employee’s take-home income. 

Of course, as with all things bureaucratic, having one’s source deductions reduced by filing a T1213 takes time. While a T1213 can be filed with the CRA at any time of the year, the sooner it’s done, the sooner source deductions can be adjusted, effective for all subsequent paycheques. Providing an employer with an updated TD1 for 2026 as soon as possible, along with filing the T1213 with the CRA where circumstances warrant, will ensure that source deductions made starting January 1, 2026 will accurately reflect all of the employee’s current circumstances, and consequently their actual tax liability for the year – and possibly provide the employee and their family with a little more cash flow to meet day-to-day expenses.

Even Canadians who have no more than a basic knowledge of our tax system are usually aware that the deadline for making registered retirement savings plan (RRSP) contributions is March 1, and that contributions to one’s tax-free savings account (TFSA) can be made at any time during the tax year. As well, most Canadians who have opened a registered retirement income fund (RRIF) are aware that they are required to withdraw a specified amount from that RRIF each year, with the percentage withdrawal amount based on the RRIF holder’s age – although few are aware of when and how that required withdrawal is calculated.

Even Canadians who have no more than a basic knowledge of our tax system are usually aware that the deadline for making registered retirement savings plan (RRSP) contributions is March 1, and that contributions to one’s tax-free savings account (TFSA) can be made at any time during the tax year. As well, most Canadians who have opened a registered retirement income fund (RRIF) are aware that they are required to withdraw a specified amount from that RRIF each year, with the percentage withdrawal amount based on the RRIF holder’s age – although few are aware of when and how that required withdrawal is calculated. 

Consequently, as the end of the calendar year, and therefore the tax year, approaches, most Canadians aren’t really focused on either making a contribution to (or a withdrawal from) any of their tax-deferred savings plans, whether an RRSP, RRIF, or TFSA.

That’s an unfortunate reality, as there are some instances in which December 31 is an absolute deadline for taking required steps with respect to one’s tax-deferred savings plans, and many more instances in which significant tax advantages can be obtained by acting before the end of the calendar year. What follows is an outline of steps which should (or in some cases must) be considered and implemented before the end of the 2025 calendar year, by Canadians who have an RRSP, RRIF, or TFSA – or maybe all three.

Timing of RRSP contributions

When you are making a spousal RRSP contribution

Under Canadian tax rules, a taxpayer can make a contribution to an RRSP in their spouse’s name and claim the deduction for the contribution on their own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income, at a (presumably) lower tax rate. However, the benefit of having withdrawals taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year in which the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2025, the contributor can claim a deduction for that contribution on their return for 2025. The spouse can then withdraw that amount as early as January 1, 2028 and have it taxed in their own hands. If the contribution isn’t made until January or February of 2026, the contributor can still claim a deduction for it on the 2025 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 1, 2029. It’s an especially important consideration for couples who are approaching retirement and may plan on withdrawing funds in the relatively near future. Even where that’s not the situation, making the contribution before the end of the calendar year will ensure maximum flexibility in the event that an unforeseen need to withdraw funds arises.

If you turn 71 during 2025

Every Canadian who has an RRSP must collapse that plan by the end of the year in which they turn 71 years of age – usually by converting the RRSP into an RRIF or by purchasing an annuity. An individual who turns 71 during the year is still entitled to make a final RRSP contribution for that year, assuming that they have sufficient contribution room. However, in such cases, the 60-day window for making contributions after December 31 is not available. Any RRSP contribution to be made by a person who turns 71 during the year must be made by December 31 of that year. Once that deadline has passed, no further RRSP contributions are possible.

RRIF withdrawals for 2025

Under Canadian law, anyone who has an RRIF is required to make a minimum withdrawal from that RRIF each year. The amount of the withdrawal is calculated as a specified percentage of the fair market value of the property held in the RRIF at the beginning of the calendar year, with that percentage based on the age of the RRIF holder at that time.

Taxpayers who have no immediate need of funds held within an RRIF are often reluctant to make a withdrawal and pay the tax on those amounts, especially where the value of investments held in an RRIF have declined. While there is no way of avoiding the requirement to withdraw that minimum amount from one’s RRIF, and to pay tax on the amount withdrawn, such taxpayers can consider contributing those amounts to a TFSA. Where that is done, the funds can be re-invested and continue to grow. As well, neither the original contribution nor the investment gains will be taxable when the funds are withdrawn from the TFSA, and amounts withdrawn will not be included in income when determining the taxpayer’s eligibility for means-tested federal benefits and tax credits, like Old Age Security, the GST/HST credit, or the age credit.

Planning for TFSA withdrawals and contributions

Each Canadian aged 18 and over can make an annual contribution to a Tax-Free Savings Account (TFSA) – the maximum contribution for 2025 and for 2026 is $7,000. As well, where an amount previously contributed to a TFSA is withdrawn from the plan, that withdrawn amount can be re-contributed, but not until the year following the year of withdrawal.

Consequently, it makes sense, where a TFSA withdrawal is planned (or the need to make such a withdrawal might arise) within the next few months, to make that withdrawal before the end of the calendar year. A taxpayer who withdraws funds from their TFSA on or before December 31, 2025 will have the amount which is withdrawn added to their TFSA contribution limit for 2026, which means it can be re-contributed, where finances allow, as early as January 1, 2026. If the same taxpayer waits until January of 2026 to make the withdrawal, they won’t be eligible to recontribute the funds withdrawn until 2027.

The approach of the calendar year end doesn’t usually prompt Canadians to consider the details of making contributions to an RRSP, or contributions to or withdrawals from a TFSA or RRIF. There is, however, no flexibility in the deadlines for taking such actions, and considering what steps may be needed or advisable now means one less thing to remember as the December 31 deadline nears.

Two quarterly newsletters have been added – one dealing with personal issues, and one dealing with corporate issues.

Two quarterly newsletters have been added – one dealing with personal issues, and one dealing with corporate issues.

They can be accessed below.

Corporate:

Issue #73 Corporate

Personal:

Issue #73 Personal