Analyzing Canada’s 2025 federal budget

Audit & enforcement

Budget 2025 announced investments in the Canada Revenue Agency (CRA) to improve services, strengthen compliance, and reduce tax debt for Canadians.

Tackling non-compliance

By leveraging AI and automation for certain compliance and collections matters, the CRA is better able to focus on complex tax matters and clear the backlog in tax debt. 

Budget 2025 proposed funding for the CRA to ensure integrity and to deliver on the commitments related to tax fairness for global corporations—including specifically global minimum tax, excessive interest and financing expense limitation (EIFEL) rules and mandatory disclosure rules. 

This investment would ensure large global and digital corporations pay their fair share of taxes.

Combatting worker misclassification in trucking 

Budget 2025 proposed measures to address concerns of truckers being misreported as independent contractors instead of employees.

These include providing CRA with $77 million in funding over four years—starting in the 2026-2027 fiscal year, with ongoing funding of $19.2 million annually—to address compliance through penalties for failure to report fees for service transactions in the trucking industry, personal services businesses and reporting fees for service.

The federal government also intends to amend the Income Tax Act and Excise Tax Act to allow the CRA to share taxpayer information as it relates to classification of workers with Employment and Social Development Canada.

Amending the informal procedure threshold 

The Tax Court of Canada has two tracks, general procedure and informal procedure—the latter of which simplifies the appeal process and lowers costs. Budget 2025 proposed increasing the maximum amount at issue that qualifies for an informal procedure appeal, which could allow more self-represented individuals easier access to the judicial system.

Business tax

Encouraging investment to spur economic growth is at the forefront of Budget 2025’s proposed measures for businesses.

The productivity super-deduction

Budget 2025 proposed a set of enhanced tax incentives to boost productivity and attract investment amid economic uncertainty fuelled by trade and tariff tensions.

This productivity super-deduction would allow businesses to recover their investment costs faster through the tax system, to allow for growth. It includes previously announced measures related to immediate expensing of certain assets and capital expenditures, along with a reinstated accelerated investment incentive.

The productivity super-deduction also features new immediate expensing for manufacturing and processing buildings and accelerated capital cost allowances for low-carbon liquefied natural gas facilities. These measures could make investing in machinery, equipment and technology in Canada more attractive to businesses.

The intended effect of the productivity super-deduction is that it would reduce Canada’s marginal effective tax rate (METR) by more than two percentage points; in doing so, Canada would have the lowest METR in the G7—which could encourage investments and growth.

Here is a look at some of the productivity super-deduction’s main components:

Immediate expensing for manufacturing and processing Buildings

Currently, eligible buildings are prescribed a capital cost allowance (CCA) of four per cent, plus an additional allowance of six per cent if at least 90 per cent of the building’s floor space is used to manufacture or process goods for sale or lease. 

Budget 2025 proposed providing temporary, immediate expensing for the cost of eligible manufacturing or processing buildings—including the cost of eligible additions or alterations made to such buildings.

The enhanced allowance would provide a 100 per cent deduction in the first taxation year that the eligible property is used for manufacturing or processing—provided the minimum 90 per cent floor space requirement is met.

Property that has been used, or acquired for use, for any purpose before it is acquired by the taxpayer would be eligible for immediate expensing only if the following conditions are met:

• Neither the taxpayer nor a non-arm’s-length person previously owned the property.
• The property was not transferred to the taxpayer on a tax-deferred rollover basis. In cases where a taxpayer benefits from immediate expensing of a manufacturing or processing building—and the use of the building is subsequently changed—recapture rules may apply.

This measure would be effective for eligible property that is acquired on or after Nov. 4, 2025 and is first used for manufacturing or processing before 2030. This measure would be phased out over a four-year period between 2030 and 2033.

Accelerating CCAs for low-carbon liquefied natural gas facilities

Budget 2025 proposed reinstating accelerated CCAs for liquefied natural gas (LNG) equipment and related buildings acquired on or after Nov. 4, 2025 and used before 2035 for low-carbon LNG facilities. The previous CCAs expired at the end of 2024.

Depending on the emissions performance of the facility, two levels of support are available:

• Facilities that are in the top 25 per cent in emissions performance would be eligible for accelerated CCAs with the same rates as the previous measures: 30 per cent for liquefaction equipment and 10 per cent for non-residential buildings used in LNG facilities.
• Facilities that are in the top 10 per cent in emissions performance would be eligible for accelerated CCAs of 50 per cent for liquefaction equipment and 10 per cent for non-residential buildings used in LNG facilities.

Additional details regarding the new emissions performance requirements are expected at a later date.

Proceeding with previously announced measures

Budget 2025 also announced the government’s intention to move forward with all previously announced measures regarding the productivity super-deduction, including:

• Reinstating of the accelerated investment incentive, which provides an enhanced first-year write-off for most capital assets.
• Immediate expensing of manufacturing or processing machinery and equipment.
• Immediate expensing of clean energy generation, energy conservation equipment and zero-emission vehicles.
• Immediate expensing of productivity-enhancing assets, including patents, data network infrastructure and computers.
• Immediate expensing of capital expenditures for scientific research and experimental development.
   

Limiting deferral of tax on investment income using tiered corporate structures

A corporate shareholder is generally not subject to income tax on a taxable dividend received from another corporation because it can claim an offsetting inter-corporate dividend deduction. However, additional anti-deferral rules in Part IV of the Income Tax Act may impose a special refundable tax on the recipient corporation when it receives the taxable dividend. 

Part IV tax is payable by the recipient corporation on the balance-due day for its taxation year in which the dividend is received. This day can be after the balance due day for the payer corporation’s taxation year in which the dividend was paid. Certain tax planning techniques take advantage of this timing difference to defer the tax liability on investment income—at times, indefinitely—by interposing corporations with staggered year ends in a corporate chain. 

Budget 2025 proposed limiting the deferral of tax on investment income using tiered corporate structures with mismatched year ends. This measure would apply to taxation years that begin on or after Nov. 4, 2025.

The proposed limitation would suspend the dividend refund that could be claimed by a payer corporation on the payment of a taxable dividend to an affiliated recipient corporation. This would only be applicable if the recipient corporation’s balance-due day for the taxation year in which the dividend was received ends after the payer corporation’s balance-due day for the taxation year in which the dividend was paid.

The determination of whether the dividend payer and payee are affiliated would be based on current affiliation rules in the Income Tax Act. This rule would not apply if each corporate dividend recipient in the chain of affiliated corporations pays a subsequent dividend on or before the payer’s balance-due day, such that no deferral is achieved by the affiliated corporate group.

To accommodate bona fide commercial transactions, the rule would also not apply to a dividend payer that is subject to an acquisition of control where it pays a dividend within 30 days before the acquisition of control.

The payer corporation would generally be entitled to claim the suspended dividend refund in a subsequent taxation year when the recipient corporation pays a taxable dividend to a non-affiliated corporation or an individual shareholder.

Extending deferral of tax and withholding on patronage dividends to agricultural co-operatives

In 2005, amendments to the Income Tax Act allowed for the temporary deferral of income taxes and withholding obligations on patronage dividends paid in eligible shares by an agricultural co-operative to its members until the disposition of the shares—including a deemed disposition. The current measure is set to expire at the end of 2025.

With the current measure due to expire at the end of 2025, Budget 2025 proposed extending it to apply in respect of eligible shares issued before the end of 2030.

Eligible activities under the Canadian exploration expense

Canadian exploration expenses (CEE) may include expenses incurred by a taxpayer for the purpose of determining the existence, location, extent or quality of a mineral resource in Canada.

Budget 2025 proposed to clarify that quality does not include expenses related to determining the economic viability or engineering feasibility of the mineral resource. This amendment would apply as of Nov 4, 2025.

Credits and incentives

Budget 2025 introduced key enhancements to Canada’s innovation and clean economy tax incentives—but a patent box regime was notably excluded.

Expanding tax incentives for research and development

Budget 2025 proposed further increasing the credit expenditure limit for the scientific research and experimental development (SR&ED) program’s enhanced 35 per cent credit from the current $3 million limit to $6 million.

This measure, which would apply for taxation years that begin on or after Dec. 16, 2024, expands on previously announced changes.

The federal government also announced steps to improve the CRA’s administration of the SR&ED program by implementing an optional pre-claim approval process, increasing the use of artificial intelligence to risk assess claims and streamlining the review process. These will be implemented into CRA operations as of April 1, 2026.

Expanding which critical minerals qualify for tax credits

The clean technology manufacturing investment tax credit is calculated as a portion of investment in new machinery and equipment involved in certain activities including the extracting, processing or recycling of eligible critical minerals.

Budget 2025 proposed expanding the list of eligible critical minerals to include antimony, indium, gallium, germanium and scandium. This measure would apply in respect of property that is acquired and becomes available for use on or after Nov. 4, 2025.

Extending eligibility period for carbon capture credits

The credit rates for the carbon capture, utilization and storage (CCUS) investment tax credit were scheduled to be halved for expenses incurred in or after 2031.

Budget 2025 proposed extending the period to which the full credit rate applies by five years so that the rates would only be halved for eligible expenses incurred after 2035. The credit will be cancelled completely after 2040. 

The 2022 federal budget included a review of the credits rates scheduled for 2030; this will be postponed to 2035 in line with the above change.

Proceeding with a clean electricity credit

The government is moving ahead with the proposed clean electricity investment tax credit, a refundable tax credit that would be available to eligible entities like taxable Canadian corporations, provincial and territorial Crown corporations and corporations owned by municipalities.

This credit would be retroactively available as of April 16, 2024, for projects that did not begin construction before March 28, 2023.

Budget 2025 recommended including the Canada Growth Fund as an eligible entity for the clean electricity credit. It also proposed to exempt financing provided by the Canada Growth Fund from reducing the cost of eligible property for the purpose of computing the investment tax credit. 

These measures would apply to eligible property that is acquired and that becomes available for use on or after Nov. 4, 2025.

Expanding the critical mineral exploration tax credit

Budget 2025 proposed a critical mineral exploration tax credit (CMETC) for individuals who invest in eligible flow-through shares. This measure expands on a previous announcement from the federal government earlier this year.

The CMETC is equal to 30 per cent of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors. The federal budget recommended expanding the eligibility to include 12 additional critical minerals.

This credit expansion would apply to expenditures renounced under eligible flow-through share agreements entered into after Nov. 4, 2025 and on or before March 31, 2027.

No patent box regime

A patent box regime encourages the development and retention of intellectual property in Canada, which would offer a preferential tax rate to income derived from certain types of intellectual property—not only patents.

Following public consultations, the 2024 fall economic statement indicated details about a federal patent box regime that would be announced in Budget 2025. However, it was not included in the new federal budget.

Customs

With the evolving trade landscape an ongoing concern for Canada’s economy, the new federal budget introduced programs to mitigate the adverse effects of this uncertainty.

Enhancing trade measures

Budget 2025 reiterated the need for trade adaptability as it announced funding and loan programs meant to support key industries and workers while expanding the country’s trade relationships.

The announcements also address enforcement and trade controls, including:

• Funding for Global Affairs Canada to support effective implementation of trade controls to protect the steel industry.
• Reiterating proposals to amend the Export and Import Permits Act to allow import or export restrictions in response to actions that harm Canada to ensure reliability of the supply chain previously announced in the 2024 fall economic statement.
  

Unrelated to Canada’s current trade challenges, Budget 2025 proposed allowing duty drawback—essentially a refund of duties—for certain goods donated to registered charities for use in their charitable programs. The goods cannot be re-sold in Canada.

International tax

Budget 2025 outlined how Canada can modernize transfer pricing rules to align with standards set by the Organisation for Economic Co-operation and Development (OECD). It also clarified that investment income from assets backing Canadian insurance risks is included in calculating foreign accrual property income (FAPI).

Modernizing transfer pricing rules

Budget 2025 outlined how the federal government intends to modernize the transfer pricing rules—which are used to allocate profit among the related entities of a multinational enterprise (MNE) group.

The new rules would align more closely with the OECD’s transfer pricing guidelines and the international consensus on the arm’s length principle. An interpretation rule would also be added to ensure Canada’s transfer pricing rules are applied in a manner consistent with the analytic framework set out by the OECD’s framework.

Budget 2025 proposed a new transfer pricing adjustment application rule if the following conditions are met:

• There is a transaction or series of transactions between a taxpayer and a non-resident person with whom the taxpayer does not deal at arm’s length.
• The transaction or series includes actual conditions different from arm’s length conditions.

The actual conditions are not only determined by the contractual terms of the transaction or series, but also by other economically relevant characteristics. These include five comparability factors: contractual terms, functional profile, characteristics of the property or service, economic and market context and business strategies.

The first two comparability factors require consideration of the actual conduct of the parties to the transaction. This is intended to ensure that the factual substance of the transaction or series must be considered—instead of just its legal form.

In addition, a new definition, arm’s length conditions, was proposed in the federal budget. It would require the comparison of what actual arm’s length participants to the in-scope transaction or series would have done and not what theoretical arm’s length parties might have done.

If the conditions of the transfer pricing application rule are met, any amounts that would be determined for the purpose of applying the provisions of the Income Tax Act—in respect of the taxpayer’s taxation year—are to be adjusted to the quantum or nature of the amounts that would have been determined if the arm’s length conditions regarding the transaction or series would have applied.

Budget 2025 also modified certain administrative measures by:

• Increasing the threshold for the transfer pricing penalty to apply from an assessment from a $5 million transfer pricing adjustment to a $10 million adjustment.
• Clarifying the transfer pricing documentation requirements.
• Providing for simplified documentation requirements when conditions are met.
• Reducing the time to provide transfer pricing documentation from three months to 30 days.

These measures would apply to taxation years that begin after Nov. 4, 2025.

Clarifying Canadian insurance risks subject to FAPI

In general, investment income earned in an insurance business of a controlled foreign affiliate is included in computing the affiliate’s FAPI—which is taxable in Canada on an accrued basis.

Budget 2025 clarified that investment income derived from assets held by a foreign affiliate to back Canadian risks is included in FAPI regardless of which entity holds those assets. As such, investment income derived from assets backing Canadian risks includes both income from assets held to back such risks and assets included in regulatory surplus that back such risks.

This measure would apply to taxation years that begin after Nov. 4, 2025.

Indirect tax

Budget 2025 proposed eliminating the underused housing tax (UHT) and the luxury tax. It also focused its compliance efforts on carousel scheme fraud.

Cancelling the UHT

This tax took effect on Jan. 1, 2022, and applies to certain owners of vacant or underused residential property in Canada—generally non-residents. The UHT is imposed on an annual basis at a rate of one per cent on the value of the property and requires annual filings.

To alleviate the administrative burden, Budget 2025 proposed eliminating the UHT for the 2025 calendar year and subsequent years.

All UHT requirements regarding payments and filings continue to apply in respect of the 2022 to 2024 calendar years. Failure to do so could result in interest and penalties being assessed.

Cancelling the luxury tax on aircraft and vessels

Effective Sept. 1, 2022, the federal government introduced a tax on certain vehicles and aircraft with a value above $100,000 and vessels with a value above $250,000. The luxury tax is equal to the lesser of 10 per cent of the total value of the item and 20 per cent of the value above the relevant threshold. The tax is generally imposed on sales, importations, leases and certain improvements of subject vehicles, aircraft and vessels.

Budget 2025 proposed amending the Select Luxury Items Tax Act (SLITA) to end the luxury tax on subject aircraft and vessels. All instances of the tax would cease to be payable after Nov. 4, 2025, including the taxes on sales, importations and improvements. Registered vendors would be required to file a final return covering the reporting period that includes Nov. 4, 2025.

Registrations in respect of subject aircraft and vessels under the SLITA would be maintained after Nov. 4, 2025 to allow registered vendors the opportunity to claim rebates for which they are eligible. This would be available until Feb. 1, 2028, when registrations will be automatically cancelled.

Targeting carousel fraud in telecommunications industry

Carousel fraud schemes exploit the value-added tax system, such as GST/HST, by using a series of real or fraudulent transactions where at least one person—often known as the missing trader—collects GST/HST in respect of a supply of property or services but does not remit it to the government.

Budget 2025 announced proposed changes to the Excise Tax Act to introduce a new reverse charge mechanism (RCM) regarding supplies of specified telecommunication services.

Under the proposed new rules, suppliers would not be required to collect the GST/HST payable on the supply. Instead, the RCM would apply to supplies of specified telecommunication services—provided the recipient is registered under Subdivision D of Division V of Part IX of the Excise Tax Act and all or substantially all of the specified telecommunication services are acquired by the recipient for the purpose of resupplying the specified services.

The registered recipients would be required to self-assess and report the tax payable in their GST/HST return. If eligible, they would be able to claim an input tax credit (ITC) in the same return as long as they accounted for the GST/HST payable and are registered at the time the tax becomes payable or is paid without having become payable in respect of the supply.

Under these rules, a rebate for tax paid in error on a supply subject to the RCM would be limited to cases where the person had paid the amount to the Receiver General. Recipients who have erroneously paid the tax to a supplier may request a refund of the tax paid directly from the supplier—such as by means of a credit note—rather than from the government.

Supplier invoices would also need to be updated to indicate that a supply is subject to the RCM.

The federal government requested feedback on the proposed rules, with a Jan. 12, 2026 deadline, before it finalizes the new rules and enacts legislation.

Private client services

Budget 2025 introduced several targeted tax measures to streamline compliance, such as automatic tax filing, and closed off the possibility of using indirect trust transfers to avoid the 21-year deemed disposition rule for trusts.

Expanding the 21-year rule for personal trusts

The 21-year rule deems personal trusts to have disposed of their capital property and certain other property for fair market value every 21 years to prevent the use of trusts to shelter gains.

Some taxpayers engaged in tax planning involving the indirect transfer of trust property to a new trust to avoid the 21-year rule and related tax. This planning was previously designated as a notifiable transaction under the mandatory disclosure rules.

The notifiable transaction rules allow the government to require taxpayers to report transactions it believes are abusive or would like more information about to determine if the transaction is abusive. This amendment is likely a response to findings made through this reporting

Budget 2025 proposed expanding the anti-avoidance rule to include indirect transfers of trust property to other trusts, effectively preventing this type of planning.

This expanded anti-avoidance rule would apply to transfers of property that occur on or after Nov. 4, 2025.

Delaying bare trust reporting

Previously, the federal government introduced a reporting requirement for bare trusts for taxation years ending after Dec. 30, 2023. The CRA administratively exempted bare trusts from reporting for their 2023 and 2024 taxation years.

Draft legislation released in August 2025 proposed amendments that would have similarly exempted bare trusts from reporting for the 2024 taxation year with reporting to resume for years ending after Dec. 30, 2025. 

As part of the 2025 budget, the federal government announced the reporting requirement for bare trusts will be deferred one more year to begin for taxation years ending on or after Dec. 31, 2026.

Simplifying the rules for qualified investments for registered plans

Budget 2025 outlined how Canada intends to simplify the rules for qualifying investments in registered plans. This includes:

• Allowing registered disability savings plans (RDSPs) to acquire shares of specified small business corporations, venture capital corporations and specified cooperative corporations.
• Removing shares of eligible corporations and interests in small business investment limited partnerships and small business investment trusts from qualified investments.

The amendments would apply as of Jan. 1, 2027. Certain interests and shares purchased before 2027 would continue to be considered qualifying investments.

Introducing new categories in the registered investment regime

Qualified investments for registered plans include investments which must be registered with the CRA. Budget 2025 proposed replacing registered investments with two categories that do not require registration:

• Units of a trust that is subject to the requirements of National Instrument 81–102.
• Units of a trust that is an investment fund managed by a registered investment fund manager as described in National Instrument 31–103.

The current registered investment regime would be repealed as of Jan. 1, 2027. The new qualified investment trust rules would apply as of Nov. 4, 2025.

A new top-up tax

In May 2025, the federal government announced a reduction in the first marginal personal income tax rate, which also lowered the rate for most non-refundable tax credits.

This could create a case where an individual’s non-refundable tax credit amount is worth less than their actual tax savings from the lower tax rate.

To avoid this situation, Budget 2025 introduced a new non-refundable top-up tax credit. This would effectively maintain the current 15 per cent rate for non-refundable tax credits claimed on amounts in excess of the first tax bracket threshold.

The top-up tax credit would apply for the 2025 to 2030 taxation years.

Automatic tax filing

Budget 2025 recommended granting the CRA discretionary authority to file qualifying individuals’ returns starting with the 2025 taxation year onwards. This would ensure such individuals receive the appropriate benefits and credits.

Qualifying individuals must meet the following criteria:

• Taxable income below the lower of the federal basic personal amount and the provincial equivalent, including any age and/or disability amounts.
• All income has been reported on information returns, like T4 slips, filed with the CRA.
• No income tax return has been filed in any of the three preceding years.
• Have not already filed a return within 90 days following the tax filing deadline.
• Any other criteria determined by the federal national revenue minister.

If a taxpayer is determined to not meet the criteria after the return is filed, the return will be considered not filed.

Taxpayers may opt out of the automatic filing. Those who do not opt out will have the opportunity to confirm the information available to the CRA to prepare the return; if they do not, the CRA will be able to automatically file and assess after 90 days.

These assessments will be treated the same as if the taxpayer had prepared and filed it themselves.

Amending the home accessibility tax credit

This applies to eligible home renovation or alteration expenses per calendar year, whereas the medical expense tax credit applies to qualifying medical and disability related expenses. Taxpayers can currently claim both credits in respect of the same expense. For 2026 onward, Budget 2025 proposed removing this double eligibility from 2026 onward so an expense claimed under one cannot also be claimed under the other.

Eliminating carbon rebate payments

Canada carbon rebate (CCR) payments are ending following the removal of the federal fuel charge earlier this year. 

Budget 2025 proposed that no CCR payments would be made in respect of tax returns or adjustment requests filed after Oct. 30, 2026. Taxpayers hoping to claim their final CCR payments should ensure they are up to date on their filings before that date. 

Personal support workers credit

Budget 2025 introduced a tax credit available for the 2026 to 2030 taxation years to aid personal support workers in provinces and territories without an existing agreement with the federal government to increase wages.

The refundable tax credit will be equal to five per cent of eligible earnings, up to a credit amount of $1,100 per year.

Previously announced measures

Budget 2025 affirmed the intention to proceed with numerous previously announced tax measures, including:

• Legislative proposals released on Aug. 15, 2025—including capital gains rollover on small business deductions, reporting by NPOs, crypto-asset reporting framework, non-compliance with information requests, tax exemption for sales to employee ownership trusts and excessive interest and financing expenses limitation rules.
• Legislative proposals announced in the 2024 fall economic statement, including those focused on clean energy tax credits.
• Legislative proposals released on Aug.12, 2024—including alternative minimum tax, avoidance of tax debts, accelerated CCA for productivity-enhancing assets and purpose-built rental housing, withholding for non-resident service providers and various clean investment tax credits.
• The proposed increase in the lifetime capital gains exemption to apply to up to $1.25 million of eligible capital gains as announced in the 2024 federal budget.
• Legislative amendments to implement the hybrid mismatch arrangement rules announced in the 2021 federal budget.