2025 Federal Budget Highlights

Minister of Finance and National Revenue, the Honourable François-Philippe Champagne, tabled the federal government’s budget on November 4, 2025 (Budget Day). This years’ budget, titled Building Canada Strong (the Budget), includes measures aimed at making the Canadian economy more resilient in the face of economic headwinds and trade uncertainty.

Below are the tax highlights from this year’s budget.

Business tax measures

Immediate expensing for manufacturing and processing buildings

The capital cost allowance (CCA) system determines the deductions that a business may claim at specified rates each year in respect of the capital cost of its depreciable property. Currently, eligible buildings in Canada used to manufacture or process goods for sale or lease (manufacturing or processing buildings) are prescribed a CCA rate of 10 percent (the regular CCA rate of four percent, plus an additional allowance of six percent). To be eligible for the six percent additional allowance, at least 90 percent of the building’s floor space must be used to manufacture or process goods for sale or lease.

Budget 2025 proposes to provide 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 percent deduction in the first taxation year that eligible property is used for manufacturing or processing before 2030, provided the minimum 90 percent 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 both of the following conditions are met:

• Neither the taxpayer nor a non-arm’s-length person previously owned the property; and
• The property has not been 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 Budget Day and is first used for manufacturing or processing before 2030 and will be subject to a phase-out. Specifically, an enhanced first-year CCA rate of 75 percent would be provided for eligible property that is first used for manufacturing or processing in 2030 or 2031. A rate of 55 percent would be provided for eligible property that is first used for manufacturing or processing in 2032 or 2033. The enhanced rate would not be available for property that is first used for manufacturing or processing after 2033. 

Tax deferral through tiered corporate structures

The Budget announced changes to the refundable tax system for taxation years beginning on or after Budget Day.

Refundable tax was originally introduced to prevent individuals from deferring tax on investment income within a corporation by applying a tax rate to the corporation that approximates what an individual would otherwise pay on that income if earned directly. A portion of the tax paid by the corporation on the investment income is refunded to the corporation once dividends are paid to an individual shareholder.

In corporate group structures, intercorporate dividends can be received tax free unless the payor corporation receives a refund of taxes on investment income. In such situations, the payee corporation will be subject to a refundable tax based on its share of the dividend received. By staggering the year-ends of the payor and payee corporation, it was possible to defer payment of the refundable tax by the payee based on its tax year but have a refund of the tax to the payor based on an earlier tax year.

The Budget proposes legislation to suspend the refund of tax to an affiliated payor corporation until the portion of the dividend received is ultimately paid to an individual shareholder. An exception to this suspension is provided for transaction commonly referred to as “butterfly” reorganizations.

Scientific Research and Experimental Development (SR&ED)

The Budget confirms the government’s intention to introduce legislation to implement the changes to the SR&ED incentive program previously announced in the federal 2024 Fall Economic Statement. Those proposed changes generally being:

• Increasing the annual expenditure limit from $3 million to $4.5 million on which the enhanced ITC rate of 35 percent applies. 
• Increasing the taxable capital phase-out threshold for determining the SR&ED expenditure limit to start at $15 million and phase out at $75 million (previously $10 million to $50 million);
• Extending eligibility for the enhanced ITC rate of 35 percent to eligible Canadian public corporations (ECPC)
• Restore the SR&ED eligibility of capital expenditures for both the deduction against income and the ITC components of the SR&ED program.

The Budget proposes to further increase the expenditure limit on which the SR&ED program’s enhanced 35-per-cent tax credit can be earned, from the previously announced $4.5 million to $6 million.

These measures would apply for taxation years that begin on or after December 16, 2024 (i.e., the date of the 2024 Fall Economic Statement).

Other clean energy and investment tax incentives

The Budget proposes changes to certain other investment tax credits and incentives:

• Critical Mineral Exploration Tax Credit (CMTEC): The Budget proposed to expand the eligibility of this tax credit to include a variety of additional critical minerals, such as bismuth, cesium, chromium, tin, and tungsten. This tax credit offers an additional income tax benefit for individuals who invest in eligible flow-through shares of corporation who have specified mineral exploration expenses incurred in Canada and renounced to share investors. This measure applies in respect of expenditures renounced under a flow-through share agreement entered into after Budget Day and before March 31, 2027.
• Clean Technology Manufacturing Investment Tax Credit: Budget 2025 proposes to expand the list of critical minerals eligible for this investment tax credit to include antimony, indium, gallium, germanium, and scandium. This measure applies in respect of property acquired or becomes available for use, after Budget Day.
• Investment Tax Credit for Carbon Capture, Utilization and Storage (CCUS): The Budget proposes to extend the availability of the full credit rates (37.5 to 60 percent) by five years, so that the full rates apply to eligible expenditures incurred from the start of 2022 to the end of 2035. Eligible expenditures that are incurred from the start of 2036 to the end of 2040 would continue to be subject to the lower credit rates (18.75 to 30 percent) The government will also postpone the previously announced review of the CCUS investment tax credit rates, to be undertaken now before 2035 (rather than before 2030).
• Clean Electricity Investment Tax Credit: The Budget proposes to include the Canada Growth Fund as an eligible entity under this investment tax credit. It also proposes to introduce an exception so that financing provided by the Canada Growth Fund would not reduce the cost of eligible property for the purpose of computing this investment tax credit. These measures apply to eligible property that is acquired and that becomes available for use on or after Budget Day.

Canada Carbon Rebate for Small Businesses

Budget 2025 provides additional confirmation of the government’s intention for the Canada Carbon Rebate for Small Businesses to be tax-free and that the filing deadline for 2019-2023 calendar years is extended.

Personal tax measures

Trusts and the 21-year rule

Personal trusts are generally deemed to have disposed of their capital property and certain other property for fair market value proceeds on the twenty-first anniversary of their creation, and every twenty-first anniversary thereafter (the “21-year rule”). This prevents personal trusts from being used to indefinitely postpone tax on accrued gains. Where property is transferred by a trust on a tax-deferred basis to a new trust, a rule prevents the avoidance of the 21-year rule.

Certain planning has been employed to transfer trust property indirectly to a new trust to extend or avoid the 21-year period where the existing anti-avoidance rule was not applicable. For example, this planning may involve trust property being transferred on a tax-deferred basis to a beneficiary that is a corporation owned by a new trust (with a later twenty-first anniversary).

The Budget proposes to broaden the current anti-avoidance rule for direct trust-to-trust transfers to include indirect transfers of trust property to other trusts. This measure would apply in respect of transfers of property that occur on or after Budget Day.

Personal Support Workers Tax Credit

As previously announced, the Budget introduces a new refundable tax credit for eligible personal support workers, being health care professionals who provide care to those requiring assistance with daily activities due to illness, disability, or age. This temporary tax credit will be available for five years, and equal to five percent of eligible earnings, to a maximum of $1,100 per year.

A number of conditions would need to be met to be considered an eligible personal support worker. Eligible earnings would generally be those earned performing duties for hospitals, nursing care facilities, residential care facilities, and other similar regulated health care establishments. Employers will need certify their employees’ eligible earnings in prescribed form and manner.

This tax credit would apply to the 2026 to 2030 taxation years and will be available in provinces and territories not covered by a bilateral agreement with the federal government to increase wages for personal support workers. Amounts earned in British Columbia, Newfoundland and Labrador, and the Northwest Territories would not be eligible.

Automated filing of individual tax returns

As previously announced, the Budget proposes to amend the Income Tax Act to grant the CRA the discretionary authority to file a tax return for a taxation year on behalf of an individual (other than a trust) who meets certain criteria. Very generally, this measure is proposed to apply to individuals with taxable income below either the federal or provincial basic personal amount and all income for the taxation year is included in information returns filed with CRA. The Budget includes various details regarding required contact with the individual, providing an opportunity to review and submit changes to CRA and confirm certain basic information to determine eligibility for certain benefits.

The aim is to reduce the burden and remove barriers to tax filing for vulnerable and lower income Canadians. Individuals would be able to opt out of automatic tax filing.

The measure is proposed to apply to the 2025 and subsequent taxations years. The government is launching a consultation on this measure, which will remain open until January 30, 2026.

Home Accessibility Tax Credit

The Home Accessibility Tax Credit is a non-refundable tax credit that applies at the lowest personal income tax rate on up to $20,000 of eligible home renovation or alteration expenses per calendar year. Currently, expenses incurred under the Medical Expense Tax Credit are also eligible to be claimed simultaneously for the Home Accessibility Tax Credit. Budget 2025 proposes that an expense claimed under Medical Expense Tax Credit cannot also be claimed under the Home Accessibility Tax Credit. The proposed change would apply for the 2026 taxation year.

Qualified Investments in Registered Plans

The qualified investment regime governs what these plans can invest in. A broad range of assets are qualified investments, including mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates. Registered investments are qualified investments for all registered plans.

The Budget proposes a series of amendments to simplify, streamline, and harmonize the qualified investment rules relating to registered plan investments in small businesses in order to address duplication and complexity within these rules.

As well, the Budget proposes to replace the registered investment regime with two new categories of qualified investments which do not involve registration. The existing registered investment regime would be repealed as of January 1, 2027, and the new qualified investment trust rules would apply as of Budget Day.

The Budget also proposes to make a number of other technical legislative amendments to simplify the qualified investment rules.

Indirect tax measures

Luxury Tax on aircraft and vessels

Budget 2025 proposes to amend the Select Luxury Items Tax Act to eliminate the luxury tax on subject aircraft and vessels after Budget Day.

International tax measures

Transfer pricing

Domestic transfer pricing rules serve to allocate appropriate profit to Canada for non-arm’s length cross border activities based on the functions, risks, and activities undertaken in Canada and abroad. The Budget proposes to modernize Canada’s transfer pricing rules to better align with the international application of the arm’s length principle as well as ensuring they are applied in a manner consistent with the analytic framework outlined by the OECD.

A new transfer pricing rule will apply to outline how non-arm’s length transactions should be analyzed. In addition, a new transfer pricing adjustment rule will apply where there is a transaction or a series of transactions between (i) a taxpayer and a non-resident non-arm’s length person and (ii) the transaction or series include actual conditions different from arm’s length conditions. The actual conditions will be determined by the new definition of “economically relevant characteristics”, including the actual conduct of the parties and the terms of the contract between the parties.

The Budget also provides some additional administrative measures which include:

• Increase in the threshold for the application of penalties from $5 million to $10 million;
• Clarifying documentation requirements and aligning them with the new rules;
• Providing simplified documentation where certain requirements are met; and
• Reducing time to provide documentation from 3 months to 30 days.

These measures would apply to taxation years that begin on or after Budget Day.

Tax administration measures

Reporting fees for service in trucking industry

As previously announced, the Budget includes $77 million in funding over four years, starting in 2026-2027, and additional funding annually of $19.2 million for the CRA to lift the moratorium on the penalties for failure to report fees for service transactions in the service industry. The aim of this project is to improve tax compliance in the trucking industry related to such issues as personal services businesses and driver misclassification (employee vs contractor) in the trucking industry.

Businesses are generally required to report fees paid to other businesses for services provided. Payments that exceed $500 in a calendar year must be reported on a T4A slip. While these slips are technically required, CRA has had a longstanding policy of not assessing penalties for failure to report fees for service in a T4A. CRA recently concluded a review and external consultation on these reporting requirements.

Information sharing – worker misclassification

The Budget proposes to amend the information sharing provisions to allow the CRA to share taxpayer information and confidential information with Employment and Social Development Canada (ESDC) for the purposes of the administration and enforcement of the Canada Labour Code as it relates to the classification of workers.

Other tax measures

Underused Housing Tax

Budget 2025 proposes to eliminate the Underused Housing Tax (UHT) starting for the 2025 calendar year. As a result, there will be no return filing requirements or taxes payable for 2025 and future years.

All UHT requirements for the 2022-2024 calendar years continue to apply. These includes penalties and/or interest for failing to file returns when required and payment of UHT balances due for the above years.

Bare trusts

On August 15, 2025, the Department of Finance released draft legislative amendments pertaining to bare trusts among other changes to what is generally referred to the enhanced trust reporting rules.

The proposed implementation date of the reporting requirements for bare trusts was to be effective for taxation years ending on or after December 31, 2025. The Budget announced the government’s intent to defer the application date for the bare trust reporting so that it will be applicable for taxation years ending on or after December 31, 2026.

Previously announced measures

The Budget confirms the government’s intention to proceed with a number of previously announced tax and related measures, as modified by consultations, deliberations, and further legislative developments since their release.

Significant measures include:

• Capital Gains Rollover on Small Business Investments;
• Reporting by Non-profit Organizations;
• Tax exemption for sales to Employee Ownership Trusts;
• Excessive Interest and Financing Expenses Limitation Rules;
• Substantive CCPCs;
• Extension of the 2024 charitable donations deadline;
• Extension of the Accelerated Investment Incentive and Immediate Expensing Measures;
• Alternative Minimum Tax;
• Accelerated Capital Cost Allowance for Productivity-Enhancing Assets;
• Accelerated Capital Cost Allowance for Purpose-Built Rental Housing;
• Exemption from the Alternative Minimum Tax for certain trusts for the benefit of Indigenous groups;
• Increase in the Lifetime Capital Gains Exemption to apply to up to $1.25 million of eligible capital gains.