Federal Budget 2025

On November 4, 2025, the federal government introduced Budget 2025: Canada Strong.

The Budget focuses on defensive spending, and encouraging development in manufacturing, mineral resources, new housing, and technology. There were no increases in taxation, in fact there was an elimination of certain taxation initiatives introduced in recent years such as Underused Housing Tax(UHT) and Luxury Tax in certain cases. The federal government aims to drive innovation, grow our defence sector, and put policies in place to allow us to become our own best customer.

Highlights:

The federal government appears to be supporting manufacturing with the immediate expensing of building purchases or renovations and R&D after years of scaling back these incentives, particularly SR&ED. There is an effort to incentivize these types of activities by broadening the types of expenditures that can be claimed and the increasing the limits on the amounts that can be claimed
The federal government rolled back the additional taxes imposed under the last government by eliminating the UHT and Luxury tax in certain cases. These initiatives seemed to only expand the enforcement requirements of the CRA and cause a significant burden on taxpayers to comply
Eliminating GST for first time home buyers will be a very beneficial mechanism to help reduce the cost for first time buyers on new home purchases, in an effort to make Canadian homes more affordable

Note that the federal government is a minority government. There are no guarantees that the proposals in the budget will proceed, and we could be faced with an election if the Liberals government doesn’t obtain the necessary votes in favour of the budget.

Key Priorities of Budget 2025

1. Protecting Sovereignty and Security (42% of new spending)

Record defence investments: $30 billion over 5 years to meet NATO’s 2% spending goal early and target 5% by 2035
1,000 new CBSA and RCMP officers, stronger border tech, new Financial Crimes Agency, and a National Anti-Fraud Strategy
Modernizing Arctic, maritime, cyber, and space capabilities

2. Bringing Down Costs for Canadians (36% of new spending)

Middle-class tax cut and elimination of the consumer carbon price (reducing gas prices by approximately 18 ₵/L)
Permanent National School Food Program, Automatic Federal Benefits for 5.5 million low-income Canadians, and GST exemption for first-time home buyers
Renewed Canada Strong Pass and measure to increase telecom and banking competition

3. Economic Growth and Productivity (22% of new spending)

$280 billion in capital investment over five years ($450 billion on a cash basis)
Creation of a Major Projects office to fast-track infrastructure and industrial projects
Productivity Super-Deduction and enhanced R&D tax incentives
Large investments in AI, clean energy, and critical minerals under the new Climate Competitiveness Strategy

Personal Income Tax Measures

Middle-Class Tax Cut

Since July 1, 2025, Canadians have been paying less tax after the government announced lowering the first marginal personal income tax rate from 15% to 14%. The rate reduction, currently before Parliament as part of Bill C-4, applies to taxable income of up to $57,375 in 2025.

Budget 2025 proposes to introduce a new non-refundable Top-Up Tax Credit. The credit would effectively maintain the current 15% rate for non-refundable tax credits claimed on amounts in excess of the first income tax bracket to ensure that no one has their tax liability increased by the middle-class tax cut.

Coming into Force

The Top-Up Tax Credit would apply for the 2025 to 2030 taxation years.

Delivering Automatic Federal Benefits for Low-Income Individuals

As announced on October 10th, the federal government will start Automatic Federal Benefits for the 2026 tax year that will reach up to 5.5 million low-income Canadians by the 2028 tax year. These individuals will be able to review and confirm a pre-filled income tax return, and the Canada Revenue Agency (CRA) will automatically file these individuals’ taxes to ensure they receive government benefits they qualify for—including benefits that these Canadians may not be aware they are entitled to.

Coming into Force

This measure will apply for the 2026 taxation year.

Delivering for Personal Support Workers

As announced on October 27, Budget 2025 proposes to introduce a temporary Personal Support Workers Tax Credit, under which eligible personal support workers employed in the remaining provinces and territories could claim a refundable tax credit equal to 5 per cent of their eligible earnings, providing support of up to $1,100 per year.

Coming into Force

This measure would apply to the 2026 to 2030 taxation years.

Lowering Barriers to Access the Canada Disability Benefit

Budget 2025 reaffirms the government’s intention to lower barriers to access the Canada Disability Benefit by helping to offset the costs of applying for the Disability Tax Credit for Canada Disability Benefit recipients. To that end, Budget 2025 proposes funding of $115.7 million over four years, beginning in 2026-27, and $10.1 million per year ongoing, including administrative costs, for a one-time supplemental Canada Disability Benefit payment of $150 in respect of each Disability Tax Credit certification, or re-certification, giving rise to a Canada Disability Benefit entitlement. Following successful completion of the regulatory process, the first supplemental payments are expected to be made to Canada Disability Benefit recipients before the end of 2026-27.

Coming into Force

This one-time payment would be retroactive to the launch of the Canada Disability Benefit (June 2025).

Qualified Investments for Registered Plans

RDSPs would be permitted to acquire shares of specified small business corporations, venture capital corporations, and specified cooperative corporations. Shares of eligible corporations and interests in small business investment limited partnerships and small business investment trusts would no longer be qualified investments. 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. It is intended that shares of eligible corporations would continue to be qualified investments under the rules relating to specified small business corporations that would be maintained.

Coming into Force

These amendments would apply as of January 1, 2027.

Home Accessibility Tax Credit

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. At present, if the eligibility criteria for both credits are met, taxpayers can claim both credits in respect of the same expense.

Coming into Force

This measure would apply to the 2026 and subsequent taxation years.

Business Income Tax Measures

Scientific Research & Experimental Development

To support Canadian businesses’ ability to conduct innovative research, the government is proceeding with the following previously proposed enhancements to the SR&ED program:

Increasing the prior-year taxable capital phase-out thresholds for the SR&ED program’s enhanced 35-per-cent tax credit.
Increasing the annual expenditure limit on which the enhanced credit can be earned, from $3 million to $4.5 million.
Extending the enhanced credit to eligible Canadian public corporations.
Restoring the eligibility of SR&ED capital expenditures.

To improve predictability and streamline administration of the SR&ED program, the government’s intention for the CRA to:

Implement an elective pre-claim approval process to provide businesses with an up-front technical approval of their eligible SR&ED projects, before businesses undertake any work or incur costs. For claims submitted through this elective process that require an expenditure review, processing time will be cut in half to 90 days from 180 days.
Increase the use of artificial intelligence in the program’s administration, which will enable the CRA to avoid subjecting low risk claims to unnecessary audit interventions, allowing them to be processed faster.
Streamline the review process by eliminating unnecessary steps and reducing burdensome information requirements that can delay the final determination of claims.

To encourage investment in Canadian innovation, Budget 2025 also proposes to further increase the annual expenditure limit on which the SR&ED program’s enhanced credit can be earned from $4.5 million to $6 million.

Coming into Force

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).

Immediate Expensing for Manufacturing and Processing Buildings

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-per-cent deduction in the first taxation year that eligible property is used for manufacturing or processing, provided the minimum 90-per-cent 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.

Coming into Force

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 per cent would be provided for eligible property that is first used for manufacturing or processing in 2030 or 2031, and a rate of 55 per cent 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.

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.

Coming into Force

Budget 2025 proposes to extend this measure to apply in respect of eligible shares issued before the end of 2030.

Tax Deferral Through Tiered Corporate Structures

Budget 2025 proposes to limit the deferral of tax on investment income using tiered corporate structures with mismatched year ends. In general terms, the proposed limitation would suspend the dividend refund that could be claimed by a payer corporation on the payment of a taxable dividend to an affiliated recipient corporation 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. The determination of whether the dividend payer and payee are affiliated would be based on current affiliation rules in the Income Tax Act.

This rule would not apply if each corporate dividend recipient in the chain of affiliated corporations pays a subsequent dividend on or before the payer’s balance-due day, such that no deferral is achieved by the affiliated corporate group. 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.

Coming into Force

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

Critical Mineral Exploration Tax Credit

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.

Coming into Force

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

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.

Coming into Force

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

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 the lower credit rates.

Coming into Force

This measure applies until 2035. The government will also postpone by five years the review of the CCUS investment tax credit rates that was announced in Budget 2022. Under this new timeline, the review will be undertaken before 2035 (rather than before 2030).

Clean Electricity Investment Tax Credit and Canada Growth Fund

The Clean Electricity investment tax credit is a refundable credit equal to 15 per cent 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 proposes to include the Canada Growth Fund as an eligible entity under the Clean Electricity investment tax credit.

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.

Coming into Force

These measures would apply to eligible property that is acquired and that becomes available for use on or after Budget Day.

Eligible Activities under the Canadian Exploration Expense

Budget 2025 proposes to amend the Income Tax Act to clarify that expenses incurred for the purpose of determining the quality of a mineral resource in Canada do not include expenses related to determining the economic viability or engineering feasibility of the mineral resource.

Coming into Force

This amendment would apply as of Budget Day.

Protecting Workers Against Improper Classification

The deliberate misclassification of employees as independent contractors means that employers are not withholding and remitting the proper amounts of income tax, or Canada Pension Plan and employment insurance contributions. Misclassified employees may lose out on labour law protections, as well as benefits and pensions available to employees. This misclassification of employees has been particularly common in the trucking industry.

To crack down on employers that misclassify employees, Budget 2025 proposes to provide $77 million over four years starting in 2026-27, with ongoing funding of $19.2 million annually, for the Canada Revenue Agency (CRA) to implement a program that addresses non-compliance related to personal services businesses, as well as lift the moratorium on reporting fees for services in the trucking industry.

International Tax Measures

Transfer Pricing

After consideration of stakeholder comments received during the consultation period, Budget 2025 proposes to modernise Canada’s transfer pricing rules to better align with the international consensus on the application of the arm’s length principle. In addition, an interpretation rule would be added to ensure that Canada’s transfer pricing rules are applied in a manner consistent with the analytic framework set out by the OECD Transfer Pricing Guidelines.

The new rules would provide more detail on how cross-border transactions between non-arm’s length persons must be analysed. To assist this analysis, a new transfer pricing adjustment application rule would apply if two conditions are met: (i) there is a transaction or series of transactions between a taxpayer and a non-resident person with whom the taxpayer does not deal at arm’s length; and (ii) the transaction or series (once it has been analysed and determined) includes actual conditions different from arm’s length conditions. The actual conditions are determined not only by the contractual terms of the transaction or series, but also by other “economically relevant characteristics”, including the conduct of the participants.

New administrative measures:

providing relief for taxpayers through an increase in the threshold for the transfer pricing penalty to apply from an assessment (from a $5 million transfer pricing adjustment to a $10 million adjustment);
clarifying the transfer pricing documentation requirements and also more closely aligning them with the new definitions and the requirements to select and apply the most appropriate method;
providing for simplified documentation requirements when prescribed conditions are met; and
reducing the time to provide transfer pricing documentation from 3 months to 30 days (whereas the requirement for taxpayers and partnerships to make or obtain the appropriate records or documentation by their documentation-due date for any given year or period would remain unchanged).

Coming into Force

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

Sales and Excise Tax Measures

Eliminating the Goods and Services for First-time Home Buyers

To immediately bring down costs for many Canadians, Canada’s new government is eliminating the Goods and Services Tax (GST) for first-time home buyers on new homes up to $1 million and reducing the GST for first-time home buyers on new homes between $1 million and $1.5 million.

The removal of the GST for first-time home buyers, which is currently before Parliament as part of Bill C-4, helps bring down the costs of a newly built home—immediately making the goal of home ownership a reality for more Canadians, especially young families.

Underused Housing Tax (UHT)

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.

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. 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.

Carousel Fraud

Budget 2025 announces proposed changes to the Excise Tax Act (the “Act”) to help prevent carousel fraud and improve the overall fairness of the Canadian tax system. Specifically, the government is proposing to introduce a new reverse charge mechanism (RCM) beginning with certain supplies in the telecommunications sector.

The federal government invites individuals, stakeholders, organizations and associations, Indigenous partners, and other interested parties to share their feedback on these proposals.

The proposed new RCM would apply to supplies of specified telecommunication services, which would be telecommunication services that enable:

speech communication that is instant or with only a negligible delay between the transmission and the receipt of signals; or
the transmission of writing, images and sounds or information of any nature when provided in connection with services that enable such speech communication.

For example, this would include supplies of voice-over internet protocol (VoIP) minutes.

Under the proposed new rules, suppliers would not be required to collect the GST/HST payable on the supply. Instead, when the RCM applies to a supply of specified telecommunication services, recipients would be required to self-assess and report the tax payable in their GST/HST return and, if entitled, would be eligible to claim an input tax credit (ITC) in the same return provided that they accounted for the GST/HST payable.

GST/HST Treatment of Manual Osteopathic Services

Budget 2025 proposes to clarify the longstanding policy that osteopathic services rendered by individuals who are not osteopathic physicians are taxable under the GST/HST.

Coming into Force

This measure would apply to supplies made after June 5, 2025, except that it would not apply to a supply of osteopathic services made after June 5, 2025 but on or before Budget Day if the supplier did not charge, collect or remit any amount as or on account of tax in respect of the supply.

Notable Previously Announced Measures

Bare Trust Filing Deferral

Budget 2025 confirms the intent to proceed with the August 15, 2025 proposals, subject to modifications.

Coming into Force

The reporting requirements for bare trusts would be deferred to be applicable for taxation years ending on or after December 31, 2026.

No filings for bare trusts would be required for the 2025 taxation year.

Carbon Rebates for Small Businesses

Legislative proposals released on June 30, 2025, to ensure that all Canada Carbon Rebates for Small Businesses are provided tax-free, and to extend the filing deadline for the 2019 to 2023 calendar years.

Alternative Minimum Tax Exemption for Trust

The proposed exemption from the Alternative Minimum Tax for certain trusts for the benefit of Indigenous groups announced in Budget 2024.

Lifetime Capital Gain Exemption Increase

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.

Key Priorities of Budget 2025