Budget 2025: Highlights of Business, International and Personal Tax Measures

I. INTRODUCTION

On November 4, 2025 (“Budget Day”), Canada’s Minister of Finance tabled Canada Strong: Budget 2025 (“Budget 2025”). Under the slogan “spending less to invest more,” the federal government proposes to reduce operational spending in favour of generational investments in housing, infrastructure and defence, as well as productivity and competitiveness. A deficit of $78.3 billion is projected for 2025-2026, declining to $56.6 billion by 2029-2030.

Business tax measures proposed in Budget 2025 include an enhanced capital cost allowance (“CCA”) deduction for buildings used in manufacturing or processing goods for sale or lease. Other proposals include the limitation to the deferral of refundable tax on investment income through the use of tiered corporate structures with staggered year ends, and a new “reverse charge mechanism” to help combat carousel fraud schemes under the Excise Tax Act (Canada) (the “ETA”).

International tax measures in Budget 2025 include rules to better align Canada’s domestic transfer pricing rules with the arm’s length principle in the Organisation for Economic Co-operation and Development (the “OECD”) Model Convention and Canada’s bilateral tax treaties. The proposed amendments would require that the comparability analysis be done in accordance with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “Guidelines”) and that taxpayers analyze and determine a transaction or series of transactions with reference to “economically relevant characteristics.”

Personal tax measures in Budget 2025 include the “Top-Up Tax Credit” in relation to non-refundable tax credits as well as amendments to simplify the qualified investment rules that apply to RRSPs, RRIFs, TFSAs and other registered plans. Budget 2025 also proposes to eliminate the Underused Housing Tax (the “UHT”) as well as the luxury tax on aircraft and vessels.

Deferred and Cancelled Measures of Interest

The new trust reporting rules requiring T3 returns and Schedule 15 (Beneficial Ownership Information) filings for bare trusts have caused uncertainty for many taxpayers. Although the Canada Revenue Agency (“CRA”) granted administrative relief for 2023 and 2024 (subject to specific requests for information from the CRA), mandatory filing was expected for 2025. Budget 2025 now proposes a further deferral, with bare trust reporting required for taxation years ending on or after December 31, 2026.

Budget 2025 contains a reference that implies that the Canadian Entrepreneurs’ Incentive and a proposal to fully allow resource expense deductions under the Alternative Minimum Tax have both been cancelled.

II. BUSINESS TAX MEASURES

Immediate Expensing for Manufacturing and Processing Buildings

Budget 2025 provides for immediate expensing of the cost of eligible manufacturing or processing buildings, including certain capital improvements or alterations. The proposals include a temporary enhanced CCA deduction of 100% in the first taxation year that eligible property is used for manufacturing or processing goods for sale or lease, provided that at least 90% of the building’s floor space is used for such purpose (an “Eligible Use”).

Where property has been used or acquired for use for any purpose before it is acquired by the taxpayer, it would be eligible for the enhanced CCA deduction only where:

• 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 (i.e., rollover) basis.

Upon a change of use, recapture rules may apply if an enhanced CCA deduction has been taken.

Property that is acquired on or after Budget Day and first put to an Eligible Use before 2030 will be eligible for the 100% CCA deduction. A first-year CCA deduction rate of 75% applies for Eligible Use in 2030 or 2031. The first-year CCA deduction rate for Eligible Use in 2032 or 2033 is 55%. The enhanced first-year CCA deduction will be eliminated after 2033.

Tax Deferral Through Tiered Corporate Structures

The Income Tax Act (Canada) (the “ITA”) includes rules 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, and the corporation is entitled to a refund of a portion of this additional tax when it pays a taxable dividend. The refund reflects that a shareholder that is an individual is subject to personal income tax on a taxable dividend.

A corporate shareholder generally is not subject to income tax on a taxable dividend received from another corporation. Anti-deferral rules in Part IV of the ITA may impose refundable tax on the recipient corporation when it receives the taxable dividend from a “connected corporation” (generally, a corporation that owns shares carrying more than 10% of the votes and value of the payer corporation) corresponding to the amount of the payer corporation’s dividend refund.

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 may be after the balance-due day for the payer corporation’s taxation year in which the dividend was paid. Tax planning techniques may be employed to take advantage of this timing difference to defer the tax liability on investment income by interposing corporations with staggered year ends in a corporate chain.

Budget 2025 contains measures to limit the ability to defer refundable tax through the use of tiered corporate structures with mismatched year ends. The proposed limitation provides that a dividend refund for a payer corporation is suspended where the refund arises as a result of the payment of a taxable dividend to an “affiliated” recipient corporation (as currently defined in the ITA) 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. Under the proposed rules, the refund that otherwise would have been available to the payer corporation is delayed until the recipient corporation pays sufficient taxable dividends to a corporation that is not affiliated or to an individual shareholder.

This proposed rule would not apply where a subsequent dividend is paid by each corporate dividend recipient in the chain of affiliated corporations on or before the payer corporation’s balance-due day such that no deferral is achieved. In addition, this proposed rule would not apply to a dividend payer that is subject to an acquisition of control where it pays the dividend within 30 days before the acquisition of control.

This measure would apply to taxation years that begin on or after Budget Day.

SR&ED Tax Incentive Program

Budget 2025 confirmed the government’s intention to introduce enhanced Scientific Research and Experimental Development (“SR&ED”) benefits as proposed in the 2024 Fall Economic Statement. These measures include:

• extending the enhanced tax credit currently available to CCPCs to eligible Canadian public corporations;
• increasing the expenditure limit on which the enhanced tax credit is available from $3 million to $6 million and increasing the lower and upper prior-year taxable capital phase-out boundaries to $15 million and $75 million, respectively; and
• restoring the eligibility of capital expenditures for the deduction against income and investment tax credit components of the SR&ED program.

These measures will apply to taxation years beginning on or after December 16, 2024.

Agricultural Cooperatives: Patronage Dividends Paid in Shares

Budget 2025 proposes to extend a deferral of income taxes and withholding obligations on patronage dividends paid in eligible shares of an agricultural cooperative to the date of disposition of such shares. Currently, this deferral is set to expire at the end of 2025. Budget 2025 intends to extend this deferral to eligible shares issued before the end of 2030.

Critical Mineral Exploration Tax Credit

Budget 2025 expands the current list of 15 eligible critical minerals by adding 12 additional critical minerals for the purposes of the Critical Mineral Exploration Tax Credit for agreements entered into after Budget Day and on or before March 31, 2027.

Clean Technology Manufacturing Investment Tax Credit

Budget 2025 expands the list of eligible minerals by adding five additional critical minerals for the purposes of the Clean Technology Manufacturing Investment Tax Credit. This measure applies to property acquired and 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 related to CCUS. There are three different credit rates (depending on the purpose of the equipment) which currently apply to eligible expenditures incurred from 2022 to the end of 2030. For eligible expenditures that are incurred from the start of 2031 to 2040, however, the applicable credit rates are reduced by 50%.

Budget 2025 proposes to extend the availability of the full credit rates by five years – for eligible expenditures incurred from the start of 2022 to the end of 2035. Eligible expenditures incurred from the start of 2036 to 2040 would continue to be subject to the lower credit rates described above.

Clean Electricity Investment Tax Credit and Canada Growth Fund

Budget 2025 proposes to add the Canada Growth Fund as an eligible entity for the purposes of the Clean Electricity Investment Tax Credit and exclude Canada Growth Fund financing from reducing the cost of eligible property in computing this credit. The measures would apply to eligible property acquired and available for use on or after Budget Day.

Eligible Activities Under Canadian Exploration Expenses

Budget 2025 proposes to clarify that expenses incurred for the purposes of determining the quality of a mineral resource do not include expenses related to determining the economic viability or engineering feasibility of such resource. This proposed amendment applies as of Budget Day.

III. INTERNATIONAL TAX MEASURES

Transfer Pricing

Budget 2025 contains new rules which better align Canada’s domestic transfer pricing rules with the arm’s length principle in the OECD Model Convention and Canada’s bilateral tax treaties.

The proposed amended transfer pricing adjustment application rule would provide that the transfer pricing rules would apply where (i) a taxpayer and a non-resident person with whom the taxpayer does not deal at arm’s length are participants in a transaction or series of transactions and (ii) the transaction or series includes “actual conditions” that are different from “arm’s length conditions.”

A new transfer price adjustment rule provides that, if it applies to a transaction or series, any amounts that would be determined for the purposes of the ITA are to be adjusted to the quantum or nature of the amounts that would have been determined if “arm’s length conditions” had applied to the transaction or series.

“Arm’s length conditions,” in respect of a transaction or series, are defined as the conditions that would have applied had the actual participants to the transaction or series been at arm’s length, including the possibility that no transaction or series, or a different transaction or series, would have been entered into.

The new rules provide that a transaction or series of transactions is to be analyzed and determined with reference to the five “economically relevant characteristics” of the transaction or series:

• the contractual terms underlying the transaction or series of transactions;
• the actual conduct of the participants to the transaction or series and in particular the functions performed by those participants;
• the characteristics of the property transferred or service provided;
• the economic circumstances of the participants and of the market in which they operate; and
• the business strategies pursued by the participants.

A new rule provides that the analysis and determination of a transaction or series, the identification of “arm’s length conditions” and the determination of transfer pricing adjustments to make the quantum or nature of amounts related to a transaction or series consistent with an arm’s length transaction or series “are to be made so as to best achieve consistency with” the Guidelines. The Guidelines describe the different methods that can be used to determine whether the conditions of a transaction or series are consistent with arm’s length principles. Whether a transaction or series includes “actual conditions” that differ from “arm’s length conditions” is to be determined by selecting and applying the most appropriate method described in the Guidelines.

Budget 2025 also contains administrative measures applicable to the transfer pricing regime:

• providing relief for taxpayers through an increase in the threshold at which a transfer pricing penalty will apply, from a $5-million transfer pricing adjustment to a $10-million transfer pricing adjustment;
• clarifying the transfer pricing documentation requirements and more closely aligning them with the new definitions and requirements;
• providing for simplified documentation requirements where certain prescribed conditions are met; and
• reducing the time to provide transfer pricing documentation from three months to 30 days (without any change to the requirement that taxpayers and partnerships make or obtain the appropriate records or documentation by their documentation-due date for any given year or period).

This measure is intended to apply to taxation years that begin after Budget Day.

Investment Income Derived From Assets Supporting Canadian Insurance Risks

Budget 2025 contains measures to clarify that investment income derived from assets directly or indirectly held by a foreign affiliate for the purposes of backing insurance policies in respect of Canadian insurance risks is included in “foreign accrual property income” and that 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 is intended to apply to taxation years that begin after Budget Day.

IV. PERSONAL INCOME TAX MEASURES

Budget 2025 introduces a range of personal tax measures, including a temporary refundable tax credit of up to $1,100 for personal support workers, automatic tax filing by the CRA for eligible low-income individuals and a new Top-Up Tax Credit to preserve the value of non-refundable credits for individuals with large one-time claims – introduced in response to the previously announced middle-class tax cut, which contemplates a phased reduction of the first marginal tax rate beginning in 2025.

Additional measures include expanded CRA information-sharing powers with Employment and Social Development Canada to support enforcement of worker classification rules and amendments to prevent double-claiming expenses under both the Home Accessibility and Medical Expense Tax Credits.

Qualified Investments for Registered Plans

Budget 2025 proposes to simplify, streamline and harmonize the qualified investment regime for various registered plans: RRSPs, RRIFs, TFSAs, RESPs, RDSPs, FHSAs and DPSPs. These proposals reflect stakeholder comments from a consultation process initiated in Budget 2024.

Small Business Investments

Currently, two sets of rules govern registered plan investments in small businesses. The first allows RRSPs, RRIFs, TFSAs, RESPs and FHSAs to invest in specified small business corporations, venture capital corporations and specified cooperative corporations. The second permits RRSPS, RRIFs, RESPs and DPSPs to invest in eligible corporations, small business investment limited partnerships and small business investment trusts. RDSPs are currently excluded from both sets of rules.

To eliminate duplication and reduce complexity, Budget 2025 proposes to maintain the first set of rules and extend them to RDSPs, while repealing the second set of rules.

As a result, effective January 1, 2027:

• shares of specified small business corporations, venture capital corporations and specified cooperative corporations will be qualified investments for RDSPs; and
• shares of eligible corporations and interests in small business investment limited partnerships and small business investment trusts will no longer be qualified investments for RRSPs, RRIFs, RESPs and DPSPs, unless they were acquired before 2027 under the current rules.

Registered Investment Regime

The registered investment regime allows certain trusts or corporations to qualify as investments for all registered plans by registering with the CRA and limiting their holdings to qualified investments. This regime has typically been used by investment funds that do not qualify as mutual fund trusts or corporations.

Budget 2025 proposes to eliminate this regime due to its compliance burden and replace it with two new categories of qualified investments that would not require registration:

• units of a trust subject to the requirements of National Instrument 81-102 published by the Canadian Securities Administrators (the “CSA”); and
• units of a trust that is an investment fund (as defined in the ITA) managed by a registered investment fund manager as described in National Instrument 31-103 published by the CSA.

Units or shares of funds that are currently registered investments are expected to continue to qualify, either under the existing rules or under one or both of the new categories. The registered investment regime will be repealed as of January 1, 2027. The new qualified investment categories will apply as of Budget Day.

Other Changes

To achieve clarity and simplicity, Budget 2025 proposes technical legislative amendments to consolidate the qualified investment rules for all registered plans, other than DPSPs, into one definition under the ITA and update and reorganize the list of qualified investments prescribed in the regulations to the ITA by asset class (debt instruments or equity instruments).

21-Year Rule

Budget 2025 proposes to strengthen rules that prevent trusts from avoiding the 21-year deemed dispositions through otherwise tax-deferred direct trust-to-trust transfers and will introduce amendments to extend the anti-avoidance rule to indirect transfers of property from a trust to another trust (such as transfers made through a corporation owned by another trust). Under the proposed rules, the transferee trust will be deemed to have been created on the same day as the transferor trusts for purposes of the 21-year deemed disposition rule.

V. GST/HST AND OTHER TAX MEASURES

Carousel Fraud

Budget 2025 proposes to amend the ETA to combat “carousel fraud” and “missing trader” schemes (i.e., schemes intended to defraud the government’s revenue from value-added tax, which generally involve the collection and non-remittance of GST/HST). The government intends to implement these measures starting with certain supplies in the telecommunications sector (and presumably, if these measures are successful, would roll them out in other historically problematic sectors).

While no draft legislation has been released, Budget 2025 outlines the nature of the proposed amendments, with emphasis on a new “reverse charge mechanism” (“RCM”) for certain supplies in the telecommunications sector.

Specified Supplies

The new RCM is intended to apply to supplies of specified telecommunication services which enable speech communication that is instant or with only a negligible delay between transmission and receipt of signals, or the transmission of writing, images and sounds when provided in connection with services that enable speech communication (e.g., voice-over internet protocol (VoIP) minutes).

Reverse Charge Rules

In the absence of any special rules, suppliers need to charge and collect GST/HST on taxable supplies. These new reverse charge rules would require the recipient of such specified telecommunication services (i.e., the person who is obligated to pay for the services under the contract) to self-assess and report the tax payable in their GST/HST return and, where available, claim an offsetting input tax credit in respect thereof.

The RCM would only apply to specified telecommunication services where the recipient is registered under Subdivision D of Division V of Part IX of the ETA and all or substantially all of the specified telecommunication services are acquired by the recipient for the purpose of resupplying the specified telecommunication services.

Suppliers would be required to indicate on their invoices that their supply is subject to the RCM.

Budget 2025 intends to increase the range of supplies subject to the RCM by regulation, rather than legislation.

Input Tax Credit Eligibility

The ability to claim input tax credits for supplies subject to the RCM (or that would have been subject to the RCM if the recipient were registered) would be limited to persons that are registered at the time the tax becomes payable or is paid in respect of the supply.

A recipient of a specified supply subject to the RCM would only be eligible for a refund of tax paid in error where the amount was paid to the Receiver General. Where the amount was paid in error to a supplier of the service, the recipient may only request a refund from the supplier (and not the government).

Repeal of Underused Housing Tax

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 2022-2024 years.

Repeal of Luxury Tax on Aircraft and Vessels

Budget 2025 proposes to eliminate 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, importations and improvements. Registered vendors would be required to file a final return covering the reporting period that includes Budget Day. Registrations would be maintained after Budget Day, allowing the vendors to claim eligible rebates. However, returns in respect of those items would otherwise no longer need to be filed for subsequent reporting periods.

The luxury tax would continue to apply to vehicles that meet the criteria for taxation.

VI. PREVIOUSLY ANNOUNCED MEASURES

Budget 2025 confirms the government’s intention to proceed with a number of previously announced tax measures, including:

• Capital Investment and Entrepreneurship: Introduction of a Capital Gains Rollover for Small Business Investments and an increase in the Lifetime Capital Gains Exemption to $1.25 million to encourage reinvestment, entrepreneurship and smoother business succession.
• Innovation and Productivity Incentives: Enhancements to the SR&ED Tax Incentive Program and continuation of Accelerated Capital Cost Allowance and Immediate Expensing Measures to support R&D and capital upgrades.
• Clean Economy and Energy Transition: Expansion of Clean Technology, Clean Electricity and Clean Hydrogen Investment Tax Credits – including eligibility for small nuclear, waste biomass and methane pyrolysis projects – to promote clean energy and industrial decarbonization.
• Employee and Worker Ownership: New tax exemptions for sales to Employee Ownership Trusts and Worker Cooperatives to facilitate business succession and employee-led ownership transitions.
• Compliance and Transparency Rules: Implementation of measures such as the Crypto-Asset Reporting Framework, Excessive Interest and Financing Expenses Limitation (EIFEL) rules, Substantive CCPCs rules and enhanced CRA enforcement powers to strengthen tax integrity and reporting.
• Global and Cross-Border Taxation: Global Minimum Tax Act amendments, Hybrid Mismatch Arrangement rules and suspension of the Canada-Russia Tax Treaty align Canada with OECD standards and tighten cross-border tax compliance for multinationals.
• Sector-Specific and Resource Incentives: Extension of the Mineral Exploration Tax Credit, removal of GST on new student residences and introduction of the Fuel, Alcohol, Cannabis, Tobacco and Vaping value-added tax framework for Indigenous governments to support investment and industry partnerships.

If you have any questions about Budget 2025, please contact a member of our Tax Group.