Federal budget 2025

On November 4, 2025, the Minister of Finance and National Revenue, François-Philippe Champagne, presented the 2025 federal budget, titled “Canada Strong”. Budget 2025 projects a current deficit of $78 billion, with a subsequent reduction to $57 billion by 2029–2030. The budget is proposing $141 billion in various spending over the next five years, including defence and infrastructure (such as housing, roads, hospitals, etc.). As a savings measure, the government also intends to reduce the size of the federal public service by 40,000 jobs by 2028–2029. In addition, Budget 2025 marks the start of the government’s transition to a fall budget cycle to enable better planning among provincial and territorial governments, investors, and taxpayers.  

From a tax perspective, the budget maintains the overall status quo of our tax system. It reduces the lowest income tax bracket from 15 to 14 per cent, a measure accounting for approximately $27 billion from the above $141 billion in proposed spending. It also contains a variety of mostly technical changes, new and expanded incentives, and a number of small simplifications to our overly complex tax system, which are outlined below. 

As part of Budget 2025, the government has announced the cancellation of the Canadian Entrepreneurs’ Incentive, originally proposed in the 2024 federal budget. This incentive would have allowed individuals to benefit from a reduced effective tax rate on up to $2 million of capital gains on the disposition of a qualifying business, in addition to the lifetime capital gains exemption. Furthermore, the budget withdraws the proposal to fully permit resource expense deductions under the Alternative Minimum Tax (AMT) regime. 

At the same time, the budget confirms the government’s intention to proceed with a multitude of previously announced but still outstanding tax measures, including changes to excessive interest and financing expenses limitation rules, substantive CCPCs, the tax exemption for sales to Employee Ownership Trusts, additional changes to AMT regime, and the proposed increase in the lifetime capital gains exemption up to $1.25 million, among others. Last but not least, the budget defers the application of the proposed “bare trust” reporting rules until taxation years ending on or after December 31, 2026. 

Personal Support Workers Tax Credit

Budget 2025 proposes a temporary refundable tax credit of five per cent of eligible earnings, up to a maximum of $1,100, for eligible personal support workers working for eligible health care establishments. The tax credit is effective for the 2026 to 2030 taxation years. Certain conditions must be met for an individual to be considered an eligible personal support worker. Eligible health care establishments include hospitals, nursing care facilities, residential care facilities, community care facilities for the elderly, home health care establishments, and other similar regulated health care establishments. Employers must certify the eligible earnings of their employees in the prescribed form and manner. 

It should be noted that this credit will only be available in provinces and territories not covered by a bilateral agreement with the federal government to increase wages for personal support workers. Only British Columbia, Newfoundland and Labrador, and the Northwest Territories are signatories to this bilateral agreement. 

Automatic federal benefits for lower-income individuals

Since most benefit entitlements are determined by the Canada Revenue Agency (CRA) based on an individual’s net income, it is imperative that individuals file an annual tax return in order to receive any applicable benefits and credit payments.  

Budget 2025 proposes to grant the CRA a discretionary authority to file an income tax return on behalf of an individual (other than a trust), for the 2025 and subsequent taxation years, where the individual meets all the following criteria:  

• The individual’s taxable income for the taxation year is below the lower of either the federal basic personal amount or the provincial equivalent, plus the age amount and/or disability amount, where applicable. 
• All income for the taxation year is from sources for which specified information returns have been filed with the CRA.  
• The individual has not filed a return in at least one of the three preceding taxation years. 
• The individual has otherwise not filed a return for the taxation year prior to, or within 90 days following, the tax filing deadline for the year. 
• Any other criteria, as determined by the Minister of National Revenue.  

Once processed, the individual will have 90 days to review and submit any changes to the CRA. Individuals will have the option to opt out of automatic tax filing. 

Top-Up Tax Credit

Under Bill C-4, announced in May 2025, the first marginal personal income tax rate would be reduced from 15 per cent to 14.5 per cent for the 2025 taxation year, with a further reduction to 14 per cent for the 2026 and subsequent taxation years. In some cases, this may lead to a situation where the tax savings from the rate reduction is less than the reduction in the value of the non-refundable tax credits.  

To address this, the budget proposes a temporary non-refundable Top-Up Tax Credit that preserves the 15 per cent rate for federal non-refundable tax credits claimed on amounts in excess of the first income tax bracket threshold, which is set at amounts over $57,375 for 2025. 

This measure would only apply to taxation years from 2025 through 2030. 

Home Accessibility Tax Credit

Under the current legislation, if an expense qualifies for both the Home Accessibility Tax Credit and the Medical Expense Tax Credit, taxpayers may claim the qualifying expense under both tax credits. 

The budget proposes that any expenses claimed under the Medical Expense Tax Credit cannot be claimed again under the Home Accessibility Tax Credit. This measure would apply to the 2026 and subsequent taxation years. 

21-year rule

Currently, certain trusts are subject to the 21-year deemed disposition rules, which deems a trust to have disposed of its capital property at fair market value every 21 years. This measure was introduced to prevent trusts from indefinitely deferring the tax on accrued gains on the capital properties. 

In some cases, certain tax planning strategies have been implemented to avoid the 21-year rule, such as transferring the properties indirectly to a corporate beneficiary that is owned by a new trust. The budget proposes to expand the current anti-avoidance rules to include the indirect transfers of trust property to other trusts. 

These measures would apply to property transfers made on or after November 4, 2025. 

Canada Carbon Rebate

Budget 2025 proposes that there will be no Canada Carbon Rebate (CCR) payments issued in respect of tax returns or adjustment requests filed after October 30, 2026. This measure is introduced following the removal of the federal fuel charge, effective April 1, 2025. Starting April 2025, a final quarterly CCR payment was issued to eligible households. 

Qualified investments for registered plans  

Small business investments 

Budget 2025 proposes to simplify the qualified investment rules that govern what registered plans can invest in, specifically rules that relate to small business investments.  

There are currently seven types of registered plans:  

• Registered Retirement Savings Plans (RRSPs)  
• Registered Retirement Income Funds (RRIFs)  
• Tax-Free Savings Accounts (TFSAs)  
• Registered Education Savings Plans (RESPs)  
• Registered Disability Savings Plans (RDSPs)  
• First Home Savings Accounts (FHSAs) 
• Deferred Profit-Sharing Plans (DPSPs)  

Under the proposed rules, RDSPs would be permitted to invest in small business corporations, venture capital corporations, and specified cooperative corporations, which RRSPs, RRIFs, TFSAs, RESPs, and FHSAs are currently allowed to do.  

However, shares of eligible corporations, interests in small business investment limited partnerships, and small business investment trusts will no longer qualify as qualified investments for all registered accounts. 

These proposed changes would apply as of January 1, 2027. Interests in small business investment limited partnerships and small business investment trusts that are acquired before 2027 under the current rules would continue to be qualified investments. 

Registered investment regime 

Under the current registered investment regime, investments held within registered accounts must be registered investments; therefore, corporations and trusts must register themselves with the CRA for their shares or trust units to qualify as a registered investment. The budget proposes to replace the existing registered investment regime and introduce two new categories of qualified investments that do not require registration.  

The units or shares of mutual funds that were considered registered investments under the old regime will continue to qualify, either under existing rules or under one or both of the new categories of qualified investment trusts. 

The current registered investment regime would be repealed as of January 1, 2027, while the new qualified investment trust rules would apply as of November 4, 2025. 

Immediate expensing for manufacturing and processing buildings

Currently, taxpayers with eligible manufacturing and processing buildings may claim up to a prescribed tax deduction rate of 10 per cent per year through capital cost allowance (CCA).  

Budget 2025 proposes to introduce temporary immediate expensing for acquisitions, additions, and alterations of eligible manufacturing or processing buildings, effective on or after November 4, 2025, provided the building is used for manufacturing or processing before 2030. This incentive would allow for a 100 per cent deduction in the first year, provided that certain requirements are met.  

A manufacturing and processing building is considered eligible if: 

• It is used in Canada to manufacture or process goods for sale or lease; and 
• At least 90 per cent of the building’s floor space is used for this purpose. 

Eligible manufacturing and processing buildings acquired by a taxpayer that have already been used or previously acquired for use for any purpose are only eligible for the immediate expensing measure if both the following conditions are met: 

• Neither the taxpayer or a related party previously owned the building; and 
• The building has not been transferred to the taxpayer on a tax-deferred basis (e.g., through a section 85 rollover under the Income Tax Act). 

Like other similar incentives, there is a phase-out period: 

• Buildings first used in 2030 or 2031 qualify for a 75 per cent first year deduction. 
• Buildings first used in 2032 and 2033 qualify for a 55 per cent deduction.  
• The incentive will not be available for buildings first used after December 31, 2033. 

Recapture rules may apply if a taxpayer who previously claimed the immediate expensing incentive changes the use of the building from an eligible use. 

Scientific Research and Experimental Development (SR&ED) Tax Incentive Program

Under the current SR&ED incentive program, a taxpayer may be eligible to claim an investment tax credit with respect to qualifying expenditures. The credit is available in two sets of rates: 

1. Enhanced rate – Canadian-controlled private corporations (CCPCs) may be able to claim a refundable tax credit equal to 35 per cent on up to $3 million of qualifying expenditures. This $3 million limit must be shared amongst the associated group, and the limit may be reduced if the associated group’s taxable capital employed in Canada for the preceding year is between $10 million and $50 million. 
2. General rate – Non-CCPCs and CCPCs not eligible for the enhanced rate may be able to claim a non-refundable tax credit equal to 15 per cent of qualifying expenditures. 

The budget proposes to increase the limit for qualifying expenditures that would be eligible for the 35 per cent enhanced rate. The limit would increase from $4.5 million (per the 2024 Fall Economic Statement) to $6 million. This change would apply to taxation years starting on or after December 16, 2024. 

Critical Mineral Exploration Tax Credit (CMETC)

Individuals who invest in flow-through shares may be eligible for the CMETC, which provides a 30 per cent credit on specified mineral exploration expenses incurred in Canada. Currently, only certain minerals are eligible for the CMETC, including nickel, graphite, copper, uranium, lithium, etc. 

Budget 2025 indicates that the following critical minerals will now also be eligible for the CMETC: bismuth, cesium, chromium, fluorspar, germanium, indium, manganese, molybdenum, niobium, tantalum, tin, and tungsten. This change will be effective for flow-through agreements entered into after November 4, 2025, and up to March 31, 2027. 

Clean Technology Manufacturing Investment Tax Credit

Taxpayers that invest in new equipment or machinery used to manufacture and process key clean technology or to extract and process critical minerals required for clean technology supply chains may be eligible for the Clean Technology Manufacturing Investment Tax Credit. This refundable credit is equal to 30 per cent of the cost of the new equipment and machinery.  

The budget proposes to make the following minerals eligible for the credit: antimony, indium, gallium, germanium, and scandium. This change would apply to property that was acquired and became available for use on or after November 4, 2025. 

Investment Tax Credit for Carbon Capture, Utilization, and Storage

A refundable investment tax credit may be available for taxpayers that incur eligible expenditures that pertain to carbon capture, utilization, and storage (CCUS). 

From 2022 to 2030, the tax credit is available using three different rates, which depend on the nature of the equipment: 

• Eligible capture equipment pertaining to direct air capture projects is eligible for a tax credit at a 60 per cent rate. 
• All other eligible capture equipment is eligible for a tax credit at a 50 per cent rate. 
• Lastly, eligible transportation, storage, and use equipment is eligible for a tax credit at a 37.5 per cent rate. 

From 2031 to 2040, the above mentioned rates will be reduced to 30 per cent, 25 per cent and 18.75 per cent respectively. 

The budget proposes to revise this timeline. In particular, the first set of above mentioned rates will now apply to eligible expenditures incurred from 2022 to 2035. The second set of above mentioned rates will now apply to eligible expenditures incurred from 2036 to 2040. Additionally, it was confirmed that the government will adjust their timeline for reviewing the CCUS investments credit rates, which will now be conducted in 2035 as opposed to 2030. 

Clean Electricity Investment Tax Credit and Canada Growth Fund

Eligible entities that invest in equipment that stores electricity, transmits electricity between provinces and territories, or generates low-emitting electricity may qualify for a refundable investment tax credit equal to 15 per cent of the cost of eligible equipment.  

According to Budget 2024, the eligible entities include taxable Canadian corporations, provincial and territorial Crown corporations (subject to additional requirements), corporations owned by municipalities, corporations owned by Indigenous communities, pension investment corporations, and the Canada Infrastructure Bank. 

Budget 2025 proposes to expand the definition of eligible entities to include the Canada Growth Fund. In addition, it also introduces an exception that would ensure that financing from Canada Growth Fund would not reduce the cost of the eligible property for purposes of determining the investment tax credit. This change would apply to property that was acquired and became available for use on or after November 4, 2025. 

Eligible activities under the Canadian Exploration Expense (CEE)

Taxpayers who invest in flow-through shares may be eligible to claim an immediate deduction relating to CEE incurred by the underlying mining corporations. In addition to this, they may be eligible to claim the Mineral Exploration Tax Credit or the Critical Mineral Exploration Tax Credit (as outlined above).  

Generally, expenses incurred to evaluate the quality of a mineral resource may qualify as a CEE. According to the CRA, the assessment of quality should be based solely on the physical characteristics of the mineral resource. However, a recent ruling from the Supreme Court of British Columbia has indicated that the assessment of quality could also be based on economic viability. 

As such, the budget proposes to amend the Income Tax Act to specify that expenses will not qualify as CEE if the expenses relate to an assessment of the economic viability of the mineral resource. 

Tax deferral through tiered corporate structures

The Income Tax Act currently contains rules to prevent the deferral of income tax associated with the earning of investment income within a CCPC. Any such income earned by a CCPC is subject to additional refundable tax, which brings the tax rate within the corporation in line with the highest combined personal marginal income tax rate. A CCPC will receive a refund of this additional tax upon the payment of a taxable dividend to its shareholders. This refund is referred to as a dividend refund.  

Additionally, a dividend received from a “connected” payor corporation will result in a refundable tax under Part IV of the Income Tax Act equal to the dividend refund received by the payor. Two corporations will most commonly be “connected” for income tax purposes if one corporation holds shares carrying more than 10 per cent of the votes and value of the other corporation.  

The Part IV tax noted above is payable on the normal balance due date for the corporation (generally two or three months after year end). If this due date occurs after the balance due date for the payor corporation, a deferral of the tax can be achieved. This deferral is due to the payor receiving a dividend refund prior to the recipient paying the resulting Part IV tax.  

Budget 2025 proposes to limit this potential deferral of Part IV tax. The proposed provisions will suspend the dividend refund otherwise claimable by a payor corporation when a dividend paid to an “affiliated” corporation with a balance due date for the year the dividend is received is later than the payor corporation’s balance due date for the year the dividend is paid.  

Two corporations are considered “affiliated” for income tax purposes if they are controlled (directly or indirectly) by the same person, or by different persons who are spouses or common-law partners. This will automatically be the case where one corporation controls another (as the two corporations will ultimately be controlled by the persons).  

These provisions will not apply if each recipient corporation in the chain of affiliated corporations pays a taxable dividend on or prior to the payor corporation’s balance due date for the year the first dividend was paid. This situation would not result in any deferral of income tax under the current rules, and as such is not targeted by the new rules.  

These provisions will also not apply with respect to a dividend paid up to 30 days in advance of an acquisition of control of the payor corporation.  

The payor corporation will generally be entitled to the suspended dividend refund in a future taxation year in which the recipient corporation pays a taxable dividend to a non-affiliated corporation or individual.  

These new provisions will apply to taxation years beginning on or after November 4, 2025. 

Transfer pricing

Budget 2025 proposes to modernize Canada’s transfer pricing rules, which allocate profit among the various entities of a multinational enterprise group. The proposed measures aim to better align the domestic rules with the internationally accepted arm’s length principle set out in the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and Capital, OECD Transfer Pricing Guidelines, and Canada’s bilateral tax treaties.  

Proposed measures will provide:  

• More details on how to analyze cross-border transactions between non-arm’s length persons. 
• A new transfer pricing adjustment rule will apply where there is a transaction or a series of transactions between: 
  •  a taxpayer and a non-resident non-arm’s length person; and 
  •  the transaction or series include actual conditions different from arm’s length conditions.  

The actual conditions will be based not only on the contractual terms of the transaction or series, but also on the new definition of “economically relevant characteristics”. The economically relevant characteristics of a transaction or series will be defined to include, in addition to contractual terms, specific comparability factors, such as the functions performed by the parties, the characteristics of the relevant properties or services, the economic and market context, and the business strategies of the parties. 

The new rules would also modify certain administrative measures, including:  

• Penalty relief – An increase in the de minimis threshold for the application of the transfer pricing penalty from a $5 million transfer pricing adjustment to a $10 million adjustment. 
• Clarity on documentation – Clarifying the transfer pricing documentation requirements and more closely aligning them with the new definitions and the requirements. 
• Simplified documentation – Providing for simplified documentation requirements when prescribed conditions are met; and  
• Time period for documentation – Reducing the time to provide transfer pricing documentation from three months to 30 days. 

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

Underused Housing Tax (UHT)

The UHT is a tax that is imposed on the value of vacant or underused residential property of non-residents. This tax became effective on January 1, 2022. The budget proposes to terminate the UHT as of the 2025 calendar year. Therefore, no UHT would be payable and no UHT return filing would be required in respect of the 2025 and subsequent calendar years.  

Luxury tax on aircraft and vessels

Budget 2025 proposes to amend the Select Luxury Items Tax Act (SLITA) to end the luxury tax on subject aircraft and subject vessels. The luxury tax is a tax that is imposed on subject aircraft with a value above $100,000 and subject vessels with a value above $250,000. All instances of the tax (the tax on sales, on importation, and on improvements) would cease to be payable after November 4, 2025. Luxury tax registrations for registered vendors will be automatically cancelled effective February 1, 2028, at which point vendors will no longer be able to claim rebates, where applicable. Luxury tax will continue to apply on sales of vehicles. 

GST/HST treatment of manual osteopathic services

For GST/HST purposes, services provided by physicians, dentists and certain other health care practitioners are considered tax-exempt. Current legislation contains references to “osteopathic services” as being GST/HST exempt. However, such services may be provided by individuals other than osteopathic physicians. The budget proposes to distinguish osteopathic services rendered by such individuals and treat them as taxable for GST/HST purposes. 

For any questions regarding Budget 2025, please reach out to our Canadian Tax team.