Stikeman Elliott’s Tax Group provides its annual detailed review of the 2025 federal budget, examining the most significant tax, compliance, and regulatory changes for Canadian businesses. The firm's experts offer practical analysis and explain how these updates may affect business operations and legal obligations in the coming year.
Personal income tax measures
- Qualified investments for registered plans: Effective as of January 1, 2027, Budget 2025 proposes the following changes to the qualified investment rules that govern the types of investments that may be made by RRSPs, RRIFs, TFSAs, RESPs, FHSAs, DPSPs and RDSPs (each a registered plan):
- The existing rules applicable to RRSPs, RRIFs, TFSAs, RESPs, and FHSAs for qualified investments in small business corporations, venture capital corporations and specified cooperative corporations will be expanded to also apply to RDSPs; and
- Shares of eligible corporations and interests in small business investment limited partnerships and small business investment trusts would no longer be qualified investments for RRSPs, RRIFs, RESPs and DPSPs, subject to limited grandfathering rules for investments acquired by such plans before 2027.
- Registered investment regime: Budget 2025 proposes to repeal the registered investment regime effective as of January 1, 2027, which currently allows certain unit trusts (e.g., those that do not meet the minimum 150 unitholders requirements for mutual fund trust status) to register with the CRA to be considered a qualified investment for Registered Plans. As part of this repeal of the registered investment regime, two new categories of qualified investments which do not involve registration would be added:
- Units of a trust that is subject to the requirements of NI 81–102 (which regulates certain mutual funds and non-redeemable investment funds); and
- Units of a trust that is an investment fund managed by a registered investment fund manager as described in NI 31–103.
- Changes to the 21-year rule regarding the deemed disposition of property of a trust
- Certain trusts are deemed to have disposed of their property on the 21st anniversary of the trust and every 21st anniversary thereafter. The Income Tax Act (Tax Act) currently contains rules dealing with the transfer of property from one trust to another that provide that the transferee trust is deemed to be the same trust as the transferor trust for purposes of this 21-year rule. Budget 2025 proposes to broaden this anti-avoidance rule to apply to indirect transfers in addition to direct transfers. For example, a transfer of property by a trust to a corporate beneficiary that has a trust as its shareholder would be caught by this new rule.
Business income tax measures
- Immediate expensing for manufacturing and processing buildings
- The current capital cost allowance (CCA) system permits owners of eligible manufacturing and processing buildings to deduct costs at a prescribed CCA rate of 10%. Budget 2025 proposes to enhance this rate by providing temporary and immediate expensing for the cost of such buildings. In particular, the enhanced allowance will provide a 100% deduction in the first taxation year that the eligible property is used for manufacturing or processing, provided that at least 90% of the eligible property’s floor space is used for manufacturing and processing goods. 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. After this period, a gradually decreasing first-year CCA rate will be provided between 2030 and 2033. The enhanced rate will not be available after 2033.
- The current capital cost allowance (CCA) system permits owners of eligible manufacturing and processing buildings to deduct costs at a prescribed CCA rate of 10%. Budget 2025 proposes to enhance this rate by providing temporary and immediate expensing for the cost of such buildings. In particular, the enhanced allowance will provide a 100% deduction in the first taxation year that the eligible property is used for manufacturing or processing, provided that at least 90% of the eligible property’s floor space is used for manufacturing and processing goods. 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. After this period, a gradually decreasing first-year CCA rate will be provided between 2030 and 2033. The enhanced rate will not be available after 2033.
- LNG accelerated CCA
- Liquefaction equipment and non-residential buildings used in LNG facilities will benefit from the accelerated CCA regime, at a rate of 30% and 10%, respectively, subject to the satisfaction of new emissions performance criteria intended to limit the accelerated CCA to low-carbon emission LNG facilities. Additionally, top performing low emissions LNG facilities may benefit from a further accelerated rate of 50% for liquefaction equipment. The accelerated CCA rate is applicable to property acquired on or after Budget Day and before 2035.
- Liquefaction equipment and non-residential buildings used in LNG facilities will benefit from the accelerated CCA regime, at a rate of 30% and 10%, respectively, subject to the satisfaction of new emissions performance criteria intended to limit the accelerated CCA to low-carbon emission LNG facilities. Additionally, top performing low emissions LNG facilities may benefit from a further accelerated rate of 50% for liquefaction equipment. The accelerated CCA rate is applicable to property acquired on or after Budget Day and before 2035.
- Enhancing the Scientific Research and Experimental Development Tax Incentive Program
- Budget 2025 confirms and further enhances the amendments proposed in the 2024 Fall Economic Statement regarding the scientific research and experimental development (SR&ED) program. Effective for taxation years that begin on or after December 16, 2024, those amendments would:
- increase the expenditure limit to $6 million (from $3 million);
- increase the lower and upper taxable capital phase-out thresholds to $15 million and $75 million, respectively;
- extend eligibility for the enhanced tax credit to eligible Canadian public corporations; and
- restore the eligibility of SR&ED capital expenditures for both the deduction against income and investment tax credit components of the SR&ED program.
- Budget 2025 confirms and further enhances the amendments proposed in the 2024 Fall Economic Statement regarding the scientific research and experimental development (SR&ED) program. Effective for taxation years that begin on or after December 16, 2024, those amendments would:
- Extending the list of eligible critical minerals for the 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. This measure would apply to eligible property that is acquired and that becomes available for use on or after November 4, 2025.
- 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 to eligible property that is acquired and that becomes available for use on or after November 4, 2025.
- Extending the Investment Tax Credit for Carbon Capture, Utilization, and Storage
- Budget 2025 proposes to extend the availability of the full carbon capture, utilization, and storage investment tax credit rates by five years, so that they apply to eligible expenditures incurred to the end of 2035, rather than to the end of 2030. 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.
- Budget 2025 proposes to extend the availability of the full carbon capture, utilization, and storage investment tax credit rates by five years, so that they apply to eligible expenditures incurred to the end of 2035, rather than to the end of 2030. 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.
- Clean Electricity Investment Tax Credit and Canada Growth Fund
- Budget 2025 proposes to include the Canada Growth Fund as an eligible entity under the clean electricity investment tax credit and to introduce an exception that would result in financing provided by the Canada Growth Fund to not reduce the cost of eligible property for the purpose of computing such tax credit. Those measures would apply to eligible property that is acquired and that becomes available for use on or after November 4, 2025.
- Budget 2025 proposes to include the Canada Growth Fund as an eligible entity under the clean electricity investment tax credit and to introduce an exception that would result in financing provided by the Canada Growth Fund to not reduce the cost of eligible property for the purpose of computing such tax credit. Those measures would apply to eligible property that is acquired and that becomes available for use on or after November 4, 2025.
- Changes affecting flow-through shares: Individuals who invest in flow-through shares may be entitled to claim a 30% Critical Mineral Exploration Tax Credit (CMETC) and are able to claim a 100% CEE deduction for such expenses that are renounced by the resource issuers issuing flow-through shares. The following changes are proposed in Budget 2025 with respect to such incentives:
- 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; and
- Following a Supreme Court of British Columbia decision that held that CEE could be interpreted to include assessment of economic viability, and not just the physical characteristics, of a mineral resource, Budget 2025 proposes to amend the Tax Act to clarify that the former type of expenses do not qualify as CEE.
- Suspending dividend refunds of CCPCs in certain abusive tiered corporate structure with staggered year ends: Aimed at protecting the integrity of the Canadian tax system, Budget 2025 proposes to amend the Tax Act to limit the deferral of refundable tax on investment income earned by Canadian-controlled private corporations (CCPCs) through the use of tiered corporate structures with staggered year ends, for taxation years that begin on or after Budget Day.
- CCPCs are subject to an additional tax on their aggregate investment income, which is refundable in certain circumstances when they pay taxable dividends. Under the current dividend refund rules and subject to the potential application of the general anti-avoidance rule (GAAR), the use of tiered corporate structures with staggered year-ends could be used to indefinitely defer the recognition of such additional tax on investment income.
- To curb such tax planning, the new proposed rules in subsections 129(1.3) to (1.32) of the Tax Act may suspend the dividend refund that could be claimed by the dividend payer on taxable dividends paid to an affiliated recipient corporation in circumstances where there is a potential deferral benefit because of the staggered year-ends.
- Any dividend refunds that are suspended under the proposed rules may be released in a subsequent taxation year when the dividend recipient pays a taxable dividend to a non-affiliated corporation or an individual shareholder.
- To accommodate bona fide commercial transactions, the draft legislation provides certain helpful exceptions to the suspension of dividend refunds applicable in a transactional context, such as where dividends are paid within 30 days prior to an acquisition of control.
International tax measures
- Transfer pricing update: In 2021, the government announced their intention to consult stakeholders on updating Canada’s transfer pricing rules. Based on the comments received during the consultation process, Budget 2025 proposes to introduce new rules to better align Canada’s transfer pricing rules with the analytic framework set out by the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (Transfer Pricing Guidelines). Specifically, the new rules introduce a transfer pricing adjustment rule, which would apply when 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 includes actual conditions different from arm’s length conditions. Further, the new rules also introduce two key definitions (amongst others) to assist in analyzing cross-border transactions between non-arm’s length persons:
- “economically relevant characteristics”, which is defined to assess five main factors with respect to a transaction or series of transactions - contractual terms, functional profile, characteristics of the property or service, economic and market context, and business strategies.
- “arm’s length conditions,” which requires the comparison to consider what the actual participants to the in-scope transaction or series would have done if they had been dealing at arm’s length, and not what other theoretical parties dealing at arm’s length might have done.
Further, the new rules also modify certain administrative measures which include, inter alia: (i) providing relief for taxpayers by increasing the threshold for the transfer pricing penalty to apply from a $5 million transfer pricing adjustment to a $10 million adjustment; (ii) providing simplified documentation requirements when certain prescribed conditions are met; and (iii) reducing the time to provide transfer pricing documentation from 3 months to 30 days.
- Insurance company foreign affiliates
- Canadian taxpayers must include in income the “foreign accrual property income” (FAPI) earned by their controlled foreign affiliates. FAPI includes certain types of investment income and income from the insurance of Canadian risks (including risks in respect of persons resident in Canada, property situated in Canada and businesses carried on in Canada). The FAPI rules will be expanded to specifically include investment income earned by a foreign affiliate of a Canadian insurance company on assets that are held to back Canadian risks. Some taxpayers have taken the position that the current definition of FAPI does not include such investment income.
Sales and excise tax measures
- Eliminating the underused housing tax
- Budget 2025 proposes to eliminate the underused housing tax as of the 2025 calendar year, which would result in no underused housing tax being payable and no return being required to be filed for that year and subsequent calendar years.
- Budget 2025 proposes to eliminate the underused housing tax as of the 2025 calendar year, which would result in no underused housing tax being payable and no return being required to be filed for that year and subsequent calendar years.
- Ending the luxury tax on aircraft and vessels
- Budget 2025 proposes to end the luxury tax on subject aircraft and vessels, effective after November 4, 2025. The luxury tax would remain in effect with respect to other vehicles currently subject to the luxury tax.
Previously announced measures
- Budget 2025 confirms that the government has considered each of the outstanding tax measures announced by the previous government and confirms that it intends to proceed with substantially all of these measures, other than those that have been the subject of prior announcements (such as the increase to the capital gains inclusion rate) and as modified to take into account consultations and deliberations since their release. These include proposed changes in respect of mutual fund corporations, a tax exemption for sales to employee ownership trusts and worker cooperatives, synthetic equity arrangements, alternative minimum tax (other than changes related to resource expense deductions), the proposed increase in the lifetime capital gains exemption and the hybrid mismatch arrangement rules, among others.
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John J. Lennard is a partner and Co-Head of the Toronto office’s Tax Group. He works closely with leading private and public companies, as well as pension funds, sovereign wealth funds, private equity firms and Crown corporations on corporate reorganizations, mergers and acquisitions, investment fund formation, and corporate finance matters. He frequently consults on cross-border transactions, structuring non-resident investment into Canada and outbound investment by Canadian multinationals. John also advises high-net-worth individuals on a wide variety of taxation matters. John’s clients turn to him for his practical and business-oriented advice on all aspects of domestic and international tax planning.
John O'Connor is a partner and Co-Head of the Toronto office’s Tax Group. John's practice involves all areas of corporate tax, focusing primarily on complex mergers, acquisitions and reorganizations, along with advising tax-exempt entities. In addition, John regularly consults on a variety of technical tax matters.
Frank Mathieu is a partner and Head of the Montréal office's Tax Group. His practice focuses on all areas of Canadian income tax law, including complex tax aspects of public and private mergers & acquisitions, strategic investments and joint ventures, and corporate reorganizations and restructurings in a domestic and cross-border context. With over 15 years of extensive expertise, Frank is often sought after by foreign clients and counsel, including private equity funds, for his knowledgeable tax structuring advice on Canadian investments by foreign entities.