2025 federal budget

Budget 2025 was touted as a plan to make generational investments and a “roadmap to spend less so we can invest more.” This roadmap did not include any meaningful tax changes, other than enhancements to previously announced tax measures such as accelerated depreciation and further investments in Scientific Research and Experimental Development (SR&ED). This is consistent with “no surprises” that the government had committed to in the lead up to the Budget, while formalizing a narrative around investments to enable long-term economic growth.

There were no material changes to personal income tax rates, corporate income tax rates, or the goods and services tax. Notably absent were several tax measures from the Liberal Party’s 2025 election platform, including a patent box, housing tax incentives, expanded flow through shares for startup businesses, an artificial intelligence tax credit, and an expert review of the corporate tax system.

While Budget 2025 met the Liberal Party’s 2025 election commitment to balance the operating budget within 4 years, the combined deficit for the fiscal year 2025-26 is projected to reach $78.3 billion. This is nearly double the projection in the 2024 Fall Economic Statement of $42.2 billion, and 25% higher than the $62.3 billion forecast in the Liberal Party’s 2025 election platform. By 2028-2029, the deficit is projected to reach $57.9 billion, still significantly higher than the $47.8 billion forecast in the Liberal Party’s 2025 election platform. Although these deficit projections are still higher than fiscal hawks would like, they are lower than some organizations were expecting (given all the investment announcements since the election) primarily because a large portion of the investments had been previously announced. 

Prime Minister Mark Carney had announced that his government would “spend less to invest more” – a phrase which occurs 14 times throughout the Budget. Throughout the election campaign, the Prime Minister indicated there would be a change to the budget framework to split the operating and capital expenditures. A technical backgrounder from the Department of Finance released several weeks ago used broad definitions in this classification which left some concerned about the use of such a framework to obscure clear fiscal anchors. While these concerns remain, the focus on the capital expenditures is a marked departure from the previous Liberal government. The Budget shows historical capital expenditures, previously in a range between $25.8 billion to $30.7 billion post COVID, while the next 4 years has capital expenditures approaching $60.0 billion and represents a renewed focus by the federal government.

Furthermore, investments are focused in areas that are expected to encourage private sector investment, which, when combined with government funding, is estimated by the government to approach $1 trillion over the next five years. Some of these investments will be derived from projects referred to the new Major Projects Office, while others are expected as part of a broader strategy to build infrastructure to help diversify trade. Other funding initiatives, such as a new $1 billion fund to leverage venture capital investment by incentivising pension funds and other institutional investors, are in a similar theme of cooperation with the private sector. The government appears to be counting on the effectiveness of previously announced tax measures (enhanced by Budget 2025) and proposed regulatory reform to encourage investment confidence and enabling these generational investments.

Budget 2025 encourages private sector investment through enhanced capital cost allowance measures, partially in response to US tax legislation passed earlier this year. The tax measures reaffirm the extension of the Accelerated Investment Incentive regime, which provides an enhanced first-year write off for most capital assets, and further expand this to permit immediate expensing for manufacturing or processing buildings which are acquired on or after November 4, 2025 and are first used for manufacturing or processing before 2030. For context, the immediate expensing measure was estimated at approximately $1.2 billion over 5 years, which was similar in cost to a proposed Personal Support Workers Tax Credit which would provide up to $1,100 per worker annually. While the incremental tax measures are modest, it should be noted that the majority of the tax measures were previously announced, including the removal of the increase to the capital gains inclusion rate and a broad-based middle-class tax cut through a reduction in the lowest marginal rate.

Government savings are estimated at $60 billion over 5 years, representing 4.9% of direct program expenses. Budget 2025 includes a summarized plan of expected savings by government department. For example, the Canada Revenue Agency (CRA) is expected to reinvest any operational savings in additional resources for more complex cases, while also strengthening tax compliance and debt collection for additional revenue of approximately $4.9 billion over the next 5 years. These investments will likely increase the number of tax disputes with revenue authorities.

The Liberal Party’s 2025 election platform committed to an expert review of the corporate tax system based on principles of fairness, transparency, simplicity, sustainability, and competitiveness. Many organizations, including Deloitte, have called for meaningful tax reform to help improve the country’s competitiveness. The lack of any reference to tax reform or acknowledgement of the need to focus on changes to improve business investment and productivity was a missed opportunity to engage constructively with business and tax communities.

As a conclusion to a previous consultation, the Budget does include proposed legislation to amend Canada’s transfer pricing rules in order to give greater weight to economic substance and to tighten certain administrative requirements. While most multinational groups already consider economic substance in their transfer pricing agreements, it remains to be seen how the legislation will be administered and applied in practice.

Budget 2025 makes positive steps towards several simplification measures, including the repeal of the Underused Housing Tax Act and the removal of the luxury tax on aircraft and boats. Bare trust reporting is further delayed until 2026, while expanded tax reporting by not-for-profit organizations is delayed until 2027. Continued delays and consultations highlight the increasing complexity in the Canadian tax system, while the reaffirming of such an extensive list of previously announced measures (some many years in the making) further highlights the need for meaningful and timely tax reform, including simplification. The detailed content of the next tax bill to be introduced in the House of Commons will be helpful in determining the precise status of the various outstanding technical measures.

Immediate expensing for manufacturing and processing buildings
Budget 2025 proposes temporary immediate expensing for certain eligible manufacturing or processing buildings provided the newly acquired building (including additions or alterations made to an existing building) meets a minimum 90% floor space requirement, is acquired on or after November 4, 2025, and is first used for manufacturing or processing before 2030. An enhanced first-year rate of capital cost allowance (declining from 75% to 55%) would be available for eligible property first used for manufacturing or processing from 2031 to 2033.

SR&ED tax incentive program
The government confirmed their intent to introduce legislation to support the changes to the SR&ED program first announced in the 2024 Fall Economic Statement, with additional enhancements introduced in Budget 2025. These changes include an increase to the expenditure limit from $3 million to $6 million for the enhanced 35% refundable tax credit, an increase to the taxable capital phase out from $15 million to $75 million, an expansion of the eligibility of Canadian public corporations for the enhanced 35% refundable tax credit rate and a change in the ability to claim certain capital expenditures. Changes are applicable for taxation years that begin on or after December 16, 2024.

Tax deferral through tiered corporate structures
Effective for taxation years that begin on or after November 4, 2025, Budget 2025 proposes to limit the ability of taxpayers to defer the payment of refundable tax on assessable dividends paid through a tiered corporate structure with non-coterminous year ends. The legislation introduces the notion of a suspended dividend refund.

The anti-deferral mechanism provides that a dividend payor in a chain of affiliated corporations has its dividend refund suspended until such time as the dividend recipient has paid a taxable dividend to a non-affiliated corporation or an individual shareholder. There is some relief provided for dividend payers that are subject to an acquisition of control provided that taxable dividends are paid within 30 days of an acquisition of control.

Other business tax measures

• Extension of the tax-deferred treatment of patronage dividends paid in shares by an agricultural cooperative to its members provided that eligible shares are issued before the end of 2030.
• Expansion of the 30% Critical Mineral Exploration Tax Credit to include additional eligible minerals in respect of expenditures renounced under eligible flow through shares agreements entered into after November 4, 2025 and on or before March 31, 2027.
• Expansion of the list of critical minerals eligible for the 30% Clean Technology Manufacturing Investment Tax Credit for property acquired and that becomes available for use on or after November 4, 2025.
• Extension of the availability of full credit rates applicable to expenditures eligible for the Carbon Capture, Utilization and Storage (CCUS) Investment Tax Credit until the end of 2035. Reduced rates previously applicable to expenditures incurred from the start of 2031 will now only be applicable to expenditures incurred from the start of 2036 until the end of 2040.
• Introduction of an exception such that, for purposes of computing the Clean Electricity Investment Tax Credit, funding provided by the Canada Growth Fund will not reduce the cost of eligible property that is acquired and that becomes available for use on or after November 4, 2025. The Canada Growth Fund is also now an eligible entity for the purposes of claiming this investment tax credit.
• Modification to restrict the expenses eligible for the Canadian Exploration Expense deduction to exclude expenses related to economic viability or engineering feasibility of the mineral resource effective as of November 4, 2025.
• Effective for taxation years beginning after November 4, 2025, proposal to include investment income earned by a foreign affiliate on assets held in connection with the insurance or reinsurance of Canadian risks in foreign accrual property income (FAPI), regardless of whether another person or partnership insures or reinsures such Canadian risks. The rule is also applicable to income derived from assets included in regulatory surplus that backs such risks.

Transfer pricing
Budget 2025 proposes to implement a variety of changes to Canada’s transfer pricing rules, effective for taxation years beginning after November 4, 2025. Proposed changes include the following:

• A requirement to analyze and determine transactions based on economically relevant characteristics, which are defined to include, in addition to contractual terms:
  
  
  • The economic circumstances of the participants and the markets in which the participants operate;
  • The business strategies pursued by the participants;
  • The characteristics of property transferred or services provided; and
  • The actual conduct of the parties including functions performed, having regard to assets used, risks assumed, how functions relate to the broader creation of value by the multinational group, circumstances surrounding the transaction, and industry practices.
• A requirement to compare the actual conditions applicable to a transaction with arm’s length conditions that would have been applicable had the parties been dealing at arm’s length in comparable circumstances, in order to determine whether a transfer pricing adjustment is warranted. For these purposes, conditions are defined to include the absence of a condition, and arm’s length conditions may include the absence of a transaction or a different transaction altogether.
• An increase to the threshold for the magnitude of transfer pricing adjustments that will result in the imposition of penalties from $5 million to $10 million.
• A requirement to provide contemporaneous documentation to the CRA within 30 days (previously three months) of a written request.
• Simplified contemporaneous documentation requirements where prescribed conditions are met.
• The codification of the requirement to delineate transactions and determine the most appropriate transfer pricing method based on the Organisation for Economic Co-operation and Development (OECD) transfer pricing guidelines as adopted by the Committee on Fiscal Affairs on January 7, 2022, or any other text prescribed by Regulation.

21-year rule for trusts
Budget 2025 proposes to broaden the current anti-avoidance rule for direct trust-to-trust transfers to include indirect transfers of trust property to other trusts as a supplement to the existing rules and existing notifiable transaction. The revision is an extension to the existing rules to add a qualification for property transferred “directly or indirectly in any manner whatever.” This would apply to transfers of property that occur on or after November 4, 2025.

Automatic federal benefits for lower-income individuals
For 2025 and subsequent tax years, Budget 2025 proposes 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 a variety of conditions. These conditions include, but are not limited to, a low-income threshold with income below the basic personal amount (federally or the provincial equivalent plus the age and or disability amount), a verification threshold reporting only income from specified information returns filed with the CRA, and a non-compliance threshold if the taxpayer has been delinquent in filing for at least one of the preceding 3 years.

No change to the existing assessment, objection and appeal process are contemplated and taxpayers are able to opt out of the automatic tax filing.

The government is seeking consultation and submissions on this new process until January 30, 2026.

Other personal tax measures

• An Eligible Support Worker Refundable Tax Credit of 5% of eligible earnings for a credit of up to $1,100 for the 2026 taxation year.
• A Top-up Tax Credit to help maintain the current 15% tax rate for non-refundable credits for the 2025 to 2030 taxation years. The purpose of this change is to ensure that a small number of taxpayers are not negatively impacted as a result of the previously announced middle-class tax cut.
• A phase out of the Canada Carbon Rebate after October 30, 2026, with a view that no compensation is required to taxpayers in light of the removal of the federal fuel charge.
• An introduction of integrity measures regarding the Home Accessibility Tax Credit applicable for 2026 and subsequent tax years for seniors over the age of 65 on up to $20,000 of eligible home renovation or alteration expenses that improve the safety, accessibility or functionality of an eligible dwelling. Specifically, that the same expenditure can only be claimed for one of the Home Accessibility Tax Credit or the Medical Expense Tax Credit.
• A proposal to change and simplify the rules that apply to qualified investments for registered plans. First, the proposals will broaden the categories of collective investment vehicles that qualify as of November 4, 2025, by introducing two new types of qualified investment trusts. At the same time, the existing Part X.2 rules, under which certain vehicles could become qualified investments by registering with the CRA, will be repealed effective January 1, 2027. Second, the proposals will also create a single set of rules to create categories of investments in small businesses that are qualified investments. Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Tax-Free Savings Accounts (TFSAs), Registered Education Savings Plans (RESPs), and First Home Savings Accounts (FHSAs) ─ and for the first time Registered Disability Savings Plans (RDSPs) (but not Deferred Profit Sharing Plans (DPSPs)) ─ will be able to invest in these categories of qualified investments as of January 1, 2027.

Carousel fraud
Budget 2025 announces a measure to combat carousel fraud schemes, which entail the charging of Goods and Services Tax/Harmonized Sales Tax (GST/HST) without the remittance of such tax to the government. This entails the introduction of a reverse charge mechanism on supplies of certain telecommunication services acquired for the purpose of resupplying such services and associated administrative measures concerning invoicing and availability of rebates in respect of any taxes wrongly charged. Stakeholders are invited to make submissions on the proposals until January 12, 2026.

Underused Housing Tax
The Underused Housing Tax, first announced in Budget 2021, is repealed such that no returns are required to be filed for the 2025 taxation year and beyond. The repeal is a welcome simplification of a regime that raised only $30 million annually when compared to the original expectations in Budget 2021 of nearly $165 million.

Luxury tax
The government also proposed an end to the luxury tax on subject aircraft with a value above $100,000 and vessels with a value above $250,000 effective November 5, 2025. The luxury tax remains on automobiles.

In Budget 2025, the government has confirmed its intent to proceed with a number of previously announced proposed and introduced measures after having taken into account consultations and deliberations since their release. Of note, the following measures were reaffirmed:

• Tax exemption for sales to Employee Ownership Trusts
• Tax exemption for sales to Worker Cooperatives
• Targeted amendments to the Excessive Interest and Financing Expenses Limitation (EIFEL) Rules
• Substantive Canadian-Controlled Private Corporations (CCPCs), as outlined in the August 15, 2025 draft legislation
• Deferral of application date for reporting by bare trusts, so that it would apply to taxation years ending on or after December 31, 2026
• Tax-free treatment of Canada Carbon Rebates for small businesses
• Alternative Minimum Tax (other than changes related to resource expense deductions, which are not proceeding as previously announced)
• Synthetic Equity Arrangements
• Manipulation of Bankrupt Status
• Amendments to the Global Minimum Tax Act and the Income Tax Conventions Interpretation Act
• Hybrid Mismatch Arrangements rules announced in Budget 2021
• Increase in the Lifetime Capital Gains Exemption to apply to up to $1.25 million
• Reference to legislative and regulatory proposals and other technical amendments to the Income Tax Act and Excise tax Act from the last few years