Buying your first Home? Check out this great  article on the benefits of the First Home Savings Account (FHSA) which may allow you to save of to 40,000.00 on a tax-free basis towards purchasing a home in Canada. It also looks into 5 other ways of growing your wealth Tax-free in Canada.

There are a number of ways you may defer tax in Canada; however, there are few ways to grow your wealth tax-free in Canada. This article highlights and explores six ways to do so – four ways for all Canadians and two ways for Canadian business owners.

Principal Residence Exemption

Possibly one of the most coveted tax benefits for Canadian residents, the Principal Residence Exemption (PRE) provides for tax-free growth on the value of one real property, which for many Canadians is their principal home.

The PRE may eliminate or reduce a capital gain you realize on the disposition, such as a sale, or on the deemed disposition, such as at death, of a property you own and designate as your principal residence in your personal income tax return. If any capital gain you realize is eliminated by claiming the PRE, this provides for tax-free growth on the value of your principal residence.

For a property to qualify as a principal residence, it must generally meet the following conditions:

• it is a housing unit, which can include a house; an apartment or unit in a duplex, apartment building, or condominium; a cottage; a mobile home; a trailer; or a houseboat; among others,
• you own the property (either solely or jointly with another person),
• the housing unit must be “ordinarily inhabited” in the year by you, your current or former spouse or common-law partner (partner), or any of your children, and
• you designate the property as your principal residence for the year, and no other property has been so designated by you or any member of your family unit for the same year.

If you own multiple properties, such as your family home and cottage, and both properties otherwise meet the criteria noted above for being your principal residence, you may only designate one property per year as your principal residence. Generally, for years where you own more than one property, it may be more advantageous to claim your PRE on the disposition of the property with the higher capital gain per year.

The PRE’s complexity is commonly overlooked, and you should consult with your tax advisor if you own multiple properties and are disposing of your family home or cottage.

Tax-Free Savings Account

The Tax-Free Savings Account (TFSA) is a registered account where you can invest up to certain limits and earn tax-free investment income and growth. Canadian residents aged 18 and older may contribute to a TFSA. Unlike a Registered Retirement Savings Plan (RRSP), TFSA contributions are not tax-deductible. Instead, all investment income and returns earned within a TFSA are tax-free. The annual maximum TFSA contribution limit is $7,000 in 2025 and is indexed to inflation and rounded to the nearest $500 annually. Any unused contribution limit may be carried forward to future years. The accumulated contribution limit since 2009, when the TFSA was introduced, for an individual aged 18 and older at that time, and a Canadian resident since then, is currently $102,000.

There is no deadline for making a TFSA contribution, and withdrawals from your TFSA can be made at any time tax-free. Generally, the withdrawn amount may be re-contributed to your TFSA in the following calendar year unless you have unused TFSA contribution room in the year of withdrawal.

You should confirm your TFSA contribution limit before contributing to your TFSA, as a penalty of 1% per month may apply to any over-contribution made to your TFSA. You may find your TFSA contribution limit details on your CRA My Account on canada.ca or by consulting with your tax advisor.

The flexibility of the TFSA makes it useful for short-term or long-term savings. Typically, when you are younger, you may benefit from using TFSAs for saving for life events such as a new vehicle, vacations, weddings, or as part of a down payment on a first or new home. As you get older, you may benefit from using TFSAs to help fund your retirement or as a strategy to transition your wealth to the next generation tax-free.

First Home Savings Account

The tax-free First Home Savings Account (FHSA) is a registered account that allows Canadian residents aged 18 and older who are qualifying first-time home buyers the ability to invest $40,000 on a tax-free basis toward the purchase of a first home in Canada.

As a first-time home buyer, you may contribute up to $8,000 annually, subject to any available carryforward room, and up to a $40,000 lifetime contribution limit to an FHSA. Like an RRSP, contributions to an FHSA are tax-deductible, but withdrawals to purchase a first home are non-taxable, like a TFSA. An FHSA essentially combines certain tax benefits of an RRSP and a TFSA in one account.

Like RRSP contributions, you are not required to claim the FHSA deduction in the tax year a contribution is made. The amount can be carried forward indefinitely and deducted in a later tax year, which may be beneficial if you expect to be in a higher marginal tax bracket in a future year. Unlike an RRSP, contributions you make within the first 60 days of a subsequent year cannot be deducted against your income in the previous tax year. FHSA contributions are deductible for tax purposes on a calendar-year basis.

The maximum amount of unused FHSA contribution room that can be carried forward to a subsequent year is $8,000, which means that for any year after the year you open an FHSA, the maximum FHSA contribution room may be up to $16,000 ($8,000 carried forward contribution room plus $8,000 current year contribution room).

The FHSA can remain open for up to 15 years or until the end of the year in which you turn 71 years old. The FHSA must be closed by December 31 of the year following the year of the first qualifying withdrawal, and thereafter, you are not permitted to have another FHSA in your lifetime.

Any funds not used toward a home purchase can be transferred to an RRSP or Registered Retirement Income Fund (RRIF) penalty-free and tax-deferred. These transfers do not affect your RRSP contribution room, nor do they reinstate your $40,000 FHSA lifetime contribution limit. Funds transferred to an RRSP or RRIF become subject to the rules applicable to those plans. Funds can also be withdrawn from an FHSA on a taxable basis if not required for a first home purchase.

You are also permitted to transfer funds from an RRSP to an FHSA on a tax-free basis, subject to the FHSA annual and lifetime contribution limits. These transfers are not tax-deductible and do not reinstate your RRSP contribution room. You should consult with your wealth advisor or financial institution to complete any direct transfer between your RRSP and your FHSA plans. You should not withdraw the funds from your RRSP and contribute them to your FHSA yourself, as the withdrawal will be taxable to you.

If you are eligible to contribute to an FHSA and an RRSP, you may consider contributing to an FHSA first, up to the annual contribution room of $8,000. Even if you have no intention of purchasing a home in the future, contributing to an FHSA rather than an RRSP maintains your RRSP room for future use. If you decide not to buy a first home in the future, you may transfer your FHSA contributions plus growth to your RRSP without affecting your RRSP contribution room. Alternatively, if you contribute to your RRSP first, you can only transfer the RRSP contributions to an FHSA up to your available FHSA contribution room, and you do not get that RRSP contribution room back in the future. The FHSA may be the preferred savings vehicle if you are eligible, even if you do not plan on purchasing a first home.

If you do plan on purchasing a first home, you may consider waiting before opening an FHSA since the 15-year time limit begins upon opening the account. Opening your FHSA too early may put you in a position in the future where you are required to close your FHSA before finding your first home. So, if you plan to one day become a homeowner, carefully considering the account’s 15-year time limit should be factored into your home-buying planning.

Permanent Life Insurance

Permanent life insurance is another wealth planning strategy to grow and transfer your wealth tax-free, either personally or corporately.

There are two types of life insurance – term and permanent. Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years, or until a certain age. It offers a tax-free death benefit to your beneficiaries if you pass away during that time. Its purpose is to cover a financial need with a limited duration, such as paying off your home mortgage on your death. Term life insurance can be renewed at regular intervals. However, premiums may increase with each renewal as you age. It can also be converted to permanent life insurance. While term life insurance is initially less expensive, there is usually a cost to waiting to convert it to permanent life insurance. In many cases, it may make sense to purchase permanent life insurance at the outset.

Permanent life insurance provides lifelong coverage and has many uses and benefits, such as:

• Risk mitigation: the death benefit may be used to pay the outstanding mortgage on your home or other properties such as a cottage, the daily living expenses of your surviving spouse and children, and your children’s education costs.
• Estate preservation: the death benefit provides funds for your terminal income tax liabilities, such as those associated with registered plans (e.g., RRSPs and RRIFs) and capital gains taxes, as well as funds for provincial probate fees.
• Estate equalization: beneficiaries of the death benefit may be children who are not active in their parent’s business to equalize them with children who are active in the business and who will receive shares of the corporation on their parents’ death.
• Alternative asset class: permanent life insurance is another way to diversify your investment portfolio. If the life insurance policy is an “exempt” policy and not subject to accrual taxation, the growth within the policy will be tax-deferred. In many policies, there are two unique features – a tax-free death benefit and a tax-free investment account held inside the policy. Both may be paid out as a tax-free death benefit upon your passing.
• Buy-sell funding for shareholders: the death benefit is commonly used to fund buy-sell agreements in corporations’ shareholders’ agreements, which generally provide that the corporation or its shareholders buy the deceased shareholders’ shares from their estate on a tax-efficient basis.
• Capital Dividend Account (CDA): the CDA is a special notional tax account that keeps track of certain tax-free surpluses the corporation realizes over time. Corporate life insurance is paid into the CDA (less the adjusted cost basis of the policy), which may be paid out to shareholders as tax-free dividends. This allows for tax-efficient buy-sell funding for the corporation or its shareholders upon a shareholder’s death, for example.

Lifetime Capital Gains Exemption

In addition to the above four ways to grow your wealth tax-free in Canada, business owners may be able to avail themselves of two additional ways – the first being the Lifetime Capital Gains Exemption (LCGE). The LCGE may help you shelter up to $1,250,000¹ (in 2025, indexed annually) of capital gains from income tax on the disposition of Qualifying Small Business Corporation (QSBC) shares or Qualified Farm or Fishing Property (QFFP). This article will discuss the LCGE for QSBC shares.

Generally, three tests must be met for shares to be QSBC shares:

• Holding period ownership test: you or a person related to you, such as your partner or child, must own the shares of the corporation for at least 24 months prior to sale.
• Holding period asset test: throughout the 24 months prior to sale, the corporation was a Canadian-Controlled Private Corporation (CCPC) and more than 50% of the fair market value (FMV) of its assets were used in an active business carried on primarily (interpreted to mean more than 50%) in Canada.
• Small Business Corporation (SBC) test: at the time of sale, the corporation must be a CCPC and all or substantially all (interpreted to mean at least 90%) of the FMV of the corporation’s assets must be used principally (interpreted to mean more than 50%) in an active business carried on primarily in Canada.

Generally, a CCPC is a corporation that is:

• incorporated in Canada,
• resident in Canada,
• not a public corporation, and
• not controlled by non-residents or public corporations.

It is important to note that only individual taxpayers (not corporations) may claim the LCGE. Therefore, if you own shares of a QSBC indirectly through another corporation, commonly known as a “holding corporation” or “Holdco” (Holdco), claiming the LCGE is much more complex. As such, consult with your tax advisor when structuring your business, such as incorporating, purchasing, or reorganizing your share ownership of a QSBC, to ensure your corporation’s shares may qualify for the LCGE upon a future disposition.

For purposes of the latter two QSBC tests above, it is important that business owners keep their operating company (Opco) “pure” to maintain eligibility to claim their available LCGE. Simple “purification” strategies include distributing non-active assets (such as excess cash or investments not actively used in your Opco) in the form of salary or dividends, using non-active assets to pay down current and long-term debts, or purchasing additional active assets.

A more complex purification strategy includes incorporating a Holdco in your corporate structure, which may allow you to transfer non-active assets to your Holdco tax-efficiently. This may be done by paying tax-free intercorporate dividends or undergoing a corporate reorganization to transfer non-active assets from your Opco to your Holdco.

If the capital gain to be realized on your Opco shares is or will be greater than $1,250,000¹, it is also important to consider the potential multiplication of the LCGE well in advance of the disposition of your Opco shares. The disposition of your Opco shares may arise on their gifting, their sale, or on your death. Typically, the LCGE may be multiplied amongst family members, such as your partner, children, and grandchildren who have available LCGE. This may require you to reorganize the share ownership of your Opco so that other shareholders, commonly a family trust settled for the benefit of family members, can own shares of your Opco and provide your family with the ability to access multiple LCGEs upon a future disposition of their shares. The timing of such a reorganization should be well in advance of any disposition of the shares to allow sufficient growth in value to accrue to the shares of your corporation held by other shareholders, such as your family trust, such that other family members may access their LCGE.

Alternative Minimum Tax (AMT) is an alternative way to calculate Canadian income tax when you earn preferentially taxed income in excess of an annual exemption. AMT may also arise when you claim preferential tax deductions to reduce your taxable income, such as the LCGE, and certain credits to reduce your tax liability. If you realize a capital gain that you shelter or partially shelter with your LCGE, you may be susceptible to AMT, depending on your other sources of taxable income, deductions, and credits.

$10,000,000 capital gains exemption for a qualifying business transfer

A second, temporary, way qualifying business owners may grow their wealth tax-free in Canada is by selling their qualifying business to an Employee Ownership Trust (EOT). The sale of your shares of a qualifying corporation to an EOT before 2027 may allow you to shelter up to $10,000,000 of capital gains from income tax on the disposition. Where the qualifying conditions are met, the $10,000,000 capital gains exemption ($10M CGE) may be claimed before claiming your available LCGE on the sale of your shares of a qualifying corporation to an EOT. Only individual taxpayers (not corporations) may claim the $10M CGE. AMT does not apply to capital gains sheltered by the $10M CGE.

The $10M CGE is available on the sale of shares of a qualifying corporation to an EOT in 2024, 2025, and 2026, subject to qualifying conditions. The $10M CGE applies to the business, not to each shareholder. So, where the qualifying conditions are met and multiple individuals dispose of shares of a qualifying corporation to an EOT as part of a qualifying business transfer, each individual may claim a portion of the $10M CGE. However, the total exemption claimed cannot exceed $10,000,000 in aggregate. All individuals must agree on allocating the exemption amongst themselves and jointly file an election with the CRA indicating their allocated eligible amount up to the $10M CGE.

Generally, an EOT is a form of employee ownership where a trust holds shares of a qualifying corporation for the benefit of the corporation’s employees. EOTs may be used to facilitate the purchase of a qualifying business by its employees, without requiring the employees to pay directly to acquire the shares of the corporation. For business owners, the sale of shares of a qualifying business to an EOT provides an additional option for transition planning. However, because an EOT must generally benefit the corporation’s employees, it cannot be used for buy-outs by management or only a few key employees. It may be a limited-time option for business owners who are able to sell their business to its employees before 2027.

The $10M CGE qualifying conditions are complex. There are also disqualifying events that may occur after the sale of your qualifying business to an EOT that may retroactively deny your claim of the $10M CGE, making any capital gain previously exempted taxable. Other disqualifying events may only defer the taxation of your capital gain, making it taxable to the EOT at a future date.

If you can sell your business to its employees before 2027, taking advantage of this structure to transition your business may be beneficial. Consult with your tax advisor well in advance of transitioning your business to review and plan for a tax-efficient and effective sale.

Article written By Wealth Management Taxation, Scotia Capital Inc.

Bank of Canada Holds Rates Steady as Tariff Clouds Linger.

Bank of Canada Holds Rates Steady As Tariff Turmoil Continues

As expected, the Bank of Canada held its benchmark interest rate unchanged at 2.75% at today’s meeting, the third consecutive rate hold since the Bank cut overnight rates seven times in the past year. The Governing Council noted that the unpredictability of the magnitude and duration of tariffs posed downside risks to growth and lifted inflation expectations, warranting caution regarding the continuation of monetary easing.

Trade negotiations between Canada and the United States are ongoing, and US trade policy remains unpredictable.

While US tariffs are disrupting trade, Canada’s economy is showing some resilience so far. Several surveys suggest consumer and business sentiment is still low, but has improved. In the labour market, we are seeing job losses in the sectors that rely on US trade, but employment is growing in other parts of the economy. The unemployment rate has moved up modestly to 6.9%.

Inflation is close to the BoC’s 2% target, but evidence of underlying inflation pressures continues. “CPI inflation has been pulled down by the elimination of the carbon tax and is just below 2%. However, a range of indicators suggests underlying inflation has increased from around 2% in the second half of last year to roughly 2½% more recently. This largely reflects an increase in prices for goods other than energy. Shelter cost inflation remains the biggest contributor to CPI inflation, but it continues to ease. Surveys indicate businesses’ inflation expectations have fallen back after rising in the first quarter, while consumers’ expectations have not come down”.

The Bank asserted today that there are reasons to think that the recent increase in underlying inflation will gradually unwind. The Canadian dollar has appreciated, which reduces import costs. Growth in unit labour costs has moderated, and the economy is in excess supply. At the same time, tariffs impose new direct costs, which will be gradually passed through to consumers. In the current tariff scenario, upside and downside pressures roughly balance out, so inflation remains close to 2%.

The central bank provided alternative scenarios for the economic outlook. In the de-escalation scenario, lower tariffs improve growth and reduce the direct cost pressures on inflation. In the escalation scenario, higher tariffs weaken the economy and increase direct cost pressures.

So far, the global economic consequences of US trade policy have been less severe than feared. US tariffs have disrupted trade in significant economies, and this is slowing global growth, but by less than many anticipated. While growth in the US economy looks to be moderating, the labour market has remained solid. And in China, lower exports to the United States have largely been replaced with stronger exports to other countries.

In Canada, we experienced robust growth in the first quarter of 2025, primarily due to firms rushing to get ahead of tariffs. In the second quarter, the economy looks to have contracted, as exports to the United States fell sharply—both as payback for the pull-forward and because tariffs are dampening US demand.

The gap between the 2.75% overnight policy rate in Canada and the 4.25-4.50% policy rate in the US is historically wide. Another cause of uncertainty is the fiscal response to today’s economic challenges. The One Big Beautiful Bill has passed, and it will add roughly US$4 trillion to the already burgeoning US federal government’s red ink. This has caused a year-to-date rise in longer-term bond yields, steepening the yield curve.

The slowdown of the housing sector since Trump’s inauguration has been a substantial drain on the economy.  The Monetary Policy Report (MPR) for July states that “growth in residential investment strengthens in the second half of 2025, partially due to an increase in resale activity after the steep decline in the first half of the year. Growth in residential investment is moderate over 2026 and 2027, supported by dissipating trade uncertainty and rising household incomes.”

Bottom Line

We expect the Canadian economy to post a small negative reading (-0.8%) in Q2 and (-0.3%) in Q3, bringing growth for the year to 1.2%. The next Governing Council decision date is September 17, which will give the  Bank time to assess the underlying momentum in inflation and the dampening effect of tariffs on economic activity.

If inflation slows over the next couple of months and the economy slows in Q2 and Q3 as widely expected, the Bank will likely cut rates one more time this year, bringing the overnight rate down to 2.50%, within the neutral range for monetary policy. Bay Street economists have varying views on the rate outlook (see chart above). While the Fed will hold rates steady today, despite the incredible pressure coming from the White House, the Bank of Canada could well cut rates one more time this year.

Published by Dr. Sherry Cooper