Federal Budget Commentary 2025
On November 4, 2025 (Budget Day) Minister of Finance and National Revenue, François-Philippe Champagne, announced the budget, “Building Canada Strong” (Budget 2025). Budget 2025 has been advertised as a bold budget where tough choices and sacrifices will have to be made and as such, Canada will have to spend less and invest more. Budget 2025 anticipates a deficit for the 2025-2026 budget year of $78.3 billion.
The government has indicated that in future years it will continue to release the federal budget in the fall and the economic update in the spring. In addition, the government has separated Budget 2025 into an operational budget for day-to-day spending and a capital budget for “any government expense or tax expenditure that contributes to public or private sector capital formation.” The government intends to balance the operational budget in three years.
Major spending announcements include a plan to provide an additional $50 billion for infrastructure, $81.8 billion for defence spending over five years, an initial $13 billion for “Build Canada Homes”, $5 billion for a strategic response fund and $1.8 billion to boost federal policing capacity.
In addition, the tax related announcements include a focus on having the trucking industry treat more drivers as employees rather than contractors and that the Canada Revenue Agency (CRA) will prepare more pre-filled tax returns for low-income people to ensure they get access to benefit programs which require a tax return to be filed.
The tax changes announced in Budget 2025 do not include any significant increases in taxes, with a number of business measures including immediate expensing of manufacturing buildings, expanding Scientific Research and Experimental Development (SR&ED) and clean energy credits.
The announcements in Budget 2025 will not become law until they are passed by the government. The legislation being passed into law is not a certainty as the current government does not have a majority in the House of Commons. However, in many cases the CRA will take the position that tax returns should be filed on the basis that proposed legislation will be enacted.
PERSONAL INCOME TAX MEASURES
Personal Support Workers Tax Credit
Budget 2025 proposes to introduce a temporary Personal Support Workers Tax Credit, which would provide eligible personal support workers employed by an eligible health care establishment with a refundable tax credit of 5% of eligible earnings, providing a credit value of up to $1,100. The eligible earnings will need to be certified by the employer in prescribed form and manner.
This credit will be effective for the 2026 to 2030 taxation years.
Automatic Federal Benefits for Lower-Income Individuals
Budget 2025 proposes to amend the Income Tax Act to grant the CRA the discretionary authority to file a tax return for a taxation year for low-income individuals meeting certain criteria. Individuals would be able to opt out of automatic tax filing. This measure would apply to the 2025 and subsequent taxation years.
Top-Up Tax Credit
Current proposed legislation aims to reduce the first marginal personal income tax rate, along with the rate applied to most non-refundable tax credits, from 15% to 14.5% for the 2025 taxation year, and to 14% for the 2026 and subsequent taxation years.
Budget 2025 proposes to introduce the Top-Up Tax Credit to effectively maintain the current 15% rate for non-refundable tax credit for the 2025 to 2030 taxation years.
Qualified Investments for Registered Plans
Budget 2025 proposes to simplify the qualified investment rules applicable to most registered plans. Qualified investment rules provide a number of specific rules and restrictions in order for certain investments to qualify to be held within the registered plan.
As a result of these proposed changes:
- Registered Disability Savings Plans (RDSPs) will be permitted to acquire shares of specified small business corporations, venture capital corporations, and specified cooperative corporations; and
- Streamline the provisions with respect to registered plans investing in small businesses.
Budget 2025 also proposes to remove the current registered investment regime for all registered plans as of the Budget Day, replacing them with two new categories of qualified investments which do not have to be registered with the CRA.
Information Sharing – Worker Misclassification
Budget 2025 proposes to amend the information sharing provisions of the Income Tax Act and the Excise Tax Act to allow the CRA to share taxpayer 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, particularly those in the trucking industry.
These measures are aimed at addressing the misclassification of employees as independent contractors, and would come into force on royal assent of the enacting legislation.
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 incurred to improve the safety, accessibility or functionality of an eligible dwelling of a qualifying individual.
Certain expenditures eligible for the Home Accessibility Tax Credit may also meet the criteria for the Medical Expense Tax Credit. Under current legislation, a taxpayer can claim both credits in respect of the same expense.
Budget 2025 proposes to amend the Income Tax Act such that an expense claimed under the Medical Expense Tax Credit cannot also be claimed under the Home Accessibility Tax Credit. This measure would apply to 2026 and subsequent taxation years.
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 21st anniversary of their creation, and every 21st anniversary thereafter (the “21-year rule”).
Budget 2025 proposes to broaden the current anti-avoidance rules for direct trust-to-trust transfers to address certain tax avoidance planning techniques aimed at avoiding the 21-year rule. This measure would apply in respect of transfers of property that occur on or after Budget Day.
Canada Carbon Rebate
With the removal of the federal fuel charge as of April 1, 2025, the government provided the final quarterly Canada Carbon Rebate (CCR) to individuals starting in April 2025. To support the winding down of the program, Budget 2025 proposes to amend the Income Tax Act to provide that no CCR payments would be made in respect of tax returns, or adjustments requests, filed after October 30, 2026.
BUSINESS INCOME TAX MEASURES
Immediate Expensing for Manufacturing and Processing Buildings
Currently, eligible buildings in Canada used to manufacture or process goods for sale or lease (manufacturing or processing buildings) are prescribed a capital cost allowance (CCA) depreciation rate of 10% when the appropriate election is made.
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% deduction in the first taxation year that eligible property is used for manufacturing or processing, provided that the minimum 90% floor space requirement is met.
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. An enhanced first-year CCA rate of 75% would be provided for eligible property in 2030 or 2031, and a rate of 55% would be provided for eligible property in 2032 or 2033. The enhanced rate would not be available for property that is first used for manufacturing or processing after 2033.
Scientific Research and Experimental Development Tax Incentive Program
Under the Scientific Research and Experimental Development (SR&ED) tax incentive program, qualifying expenditures are fully deductible in the year they are incurred. Additionally, a 35% refundable tax credit is available to Canadian-controlled private corporations (CCPCs) and non-refundable tax credits of 15% for other claimants.
The government confirms its intention to introduce legislation to implement the following 2024 Fall Economic Statement proposed measures:
- increase the expenditure limit for the 35% refundable credit from $3 million to $4.5 million and increase the lower and upper prior-year taxable capital phase-out boundaries to $15 million and $75 million, respectively;
- extend eligibility for the 35% tax credit to eligible Canadian public corporations; and
- allow capital expenditures for both the deduction against income and investment tax credit components of the SR&ED program.
Budget 2025 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.
This measure would apply for taxation years that begin on or after December 16, 2024 (i.e., the date of the 2024 Fall Economic Statement).
Agricultural Cooperatives: Patronage Dividends Paid in Shares
In 2005, the tax rules were amended to allow for the temporary deferral of income taxes and withholding obligations on patronage dividends received as eligible shares until the disposition (including a deemed disposition) of the shares. An eligible share must not, except in the case of death, disability or ceasing to be a member, be redeemable or retractable within five years of its issue.
The current measure is set to expire at the end of 2025.
Budget 2025 proposes to extend this measure to apply in respect of eligible shares issued before the end of 2030.
Critical Mineral Exploration Tax Credit
The Critical Mineral Exploration Tax Credit (CMETC) provides an additional income tax benefit for individuals who invest in eligible flow-through shares. The CMETC is equal to 30% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors.
Budget 2025 proposes to expand the eligibility of the CMETC to include the following additional critical minerals: bismuth, cesium, chromium, fluorspar, germanium, indium, manganese, molybdenum, niobium, tantalum, tin and tungsten.
This measure would apply to expenditures renounced under eligible flow-through share agreements entered into after Budget Day and on or before March 31, 2027.
Clean Technology Manufacturing Investment Tax Credit
The Clean Technology Manufacturing investment tax credit is a refundable tax credit equal to 30% of the cost of investments in new machinery and equipment used to manufacture or process key clean technologies, or to extract, process or recycle critical minerals essential for clean technology supply chains (i.e., lithium, cobalt, nickel, graphite, copper and rare earth elements).
Budget 2025 proposes to expand the list of critical minerals eligible for the Clean Technology Manufacturing investment tax credit 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 Budget Day.
Investment Tax Credit for Carbon Capture, Utilization and Storage
The Carbon Capture, Utilization and Storage (CCUS) investment tax credit is a refundable tax credit that provides support for eligible expenditures relating to CCUS.
Budget 2025 proposes to extend the availability of the full credit rates 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 lower credit rates.
Clean Electricity Investment Tax Credit and Canada Growth Fund
The Clean Electricity investment tax credit is a refundable credit equal to 15% of the capital cost of eligible investments in equipment related to low-emitting electricity generation, electricity storage and the transmission of electricity between provinces and territories.
Budget 2025 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 the Clean Electricity investment tax credit.
These measures would apply to eligible property that is acquired and that becomes available for use on or after Budget Day.
Tax Deferral Through Tiered Corporate Structures (Part IV Tax)
The Income Tax Act includes a set of rules that seek to prevent the use of Canadian-controlled private corporations (CCPCs) to defer personal income tax on investment income. Investment income earned by a CCPC is subject to an additional refundable tax that increases the corporation’s tax rate to approximately the highest marginal combined federal-provincial personal income tax rate. A corporation is entitled to a refund of a portion of this additional tax when it pays a taxable dividend. The refund reflects the fact that a shareholder who is an individual is subject to personal income tax on a taxable dividend.
This refundable tax is payable on the balance-due day for the recipient corporation’s taxation year.
When the payer and recipient corporations have different tax year ends, this creates a timing difference between when the payer corporation recovers refundable taxes, and when the recipient corporation pays the refundable taxes.
Budget 2025 proposes to limit the deferral of tax in situations where the payer corporation and recipient corporation are affiliated within the meaning of the Income Tax Act. The proposed limitation would suspend the dividend refund that could be claimed by a payer corporation if the affiliated recipient corporation’s balance-due day for the taxation year ends after the payer corporation’s balance-due day for the taxation year. 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.
This measure would apply to taxation years that begin on or after Budget Day.
INTERNATIONAL TAX MEASURES
Transfer Pricing
Budget 2025 is bringing Canada’s transfer pricing rules more into line with international standards, effective for taxation years that end after Budget Day. Specifically, Budget 2025 aligns these rules with the international arm’s length principle in the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and Capital. The proposed measures provide additional details on how to analyze cross-border transactions between non-arm’s length persons based on the contractual terms of the arrangement as well as other “economically relevant characteristics”.
Also proposed is a new rule to provide more detail on how international transactions between non-arm’s length persons must be analyzed. This new rule would adjust the transaction amounts to the new definitions of “arm’s-length conditions” and “economically relevant characteristics”.
Budget 2025 also proposes to increase the threshold for transfer pricing penalties to a $10 million assessment from $5 million and apply more strict documentation requirements.
The proposed measures would apply to taxation years that begin on or after Budget Day.
SALES AND EXCISE TAX AND OTHER MEASURES
Underused Housing Tax
The Underused Housing Tax (UHT) took effect on January 1, 2022 and applies a 1% tax on the value of property to certain owners of vacant or underused residential property in Canada, generally non-resident, non-Canadians.
Budget 2025 proposes to eliminate the UHT as of the 2025 calendar year. As a result, no UHT would be payable and no UHT returns would be required to be filed in respect of the 2025 and subsequent calendar years. All UHT requirements continue to apply in respect of the 2022 to 2024 calendar years.
Luxury Tax on Aircraft and Vessels
The luxury tax is a tax on subject vehicles and subject aircraft with a value above $100,000 and subject vessels (e.g., boats) with a value above $250,000.
Budget 2025 proposes to end the luxury tax on subject aircraft and subject vessels. All instances of the tax would cease to be payable after Budget Day, including the tax on sales, the tax on importations, and the tax on improvements. Budget 2025 does not mention ending the luxury tax on other subject vehicles.
Other Excise Tax Matters
Budget 2025 also includes the following with respect to excise taxes:
- Changes to help prevent “carousel fraud” in which GST/HST is collected in respect of a supply of property or services but is not remitted to the government; and
- Clarify the longstanding policy that osteopathic services rendered by individuals who are not osteopathic physicians are taxable under the Goods and Services Tax/Harmonized Sales Tax (GST/HST).
PREVIOUSLY ANNOUNCED MEASURES
Budget 2025 intends to proceed with certain other tax proposals announced in previous budgets, as follows:
- Capital Gains Rollover on Small Business Investments;
- Enhanced reporting for Non-profit Organizations deferred to 2027;
- Tax exemption for sale to Employee Ownership Trusts;
- Deferring the application of bare trust reporting to taxation years after December 31, 2026;
- Ensure Canada Carbon Rebates for Small Businesses are provided tax-free, and to extend the filing deadline for the 2019 to 2023 calendar years;
- Extension of the Accelerated Investment Incentive and Immediate Expensing Measures;
- The proposed increase in the Lifetime Capital Gains Exemption to apply to up to $1.25 million of eligible capital gains announced in Budget 2024;
- In conjunction with the capital gains inclusion rate remaining at ½, to not proceed with the Canadian Entrepreneur’s Incentive; and
- Numerous other technical changes.
If you have any questions concerning the above, do not hesitate to contact your trusted advisor at Wilkinson & Company LLP.
This summary deals with proposed matters that are complex and may not apply to particular facts and circumstances. As well, the material and the references contained therein reflect laws and practices which are subject to change. For these reasons, this material should not be relied upon as a substitute for specialized professional advice in connection with any particular matter.
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