Federal Budget 2026: Pre-budget submission highlights

The Canada-US trade dispute has intensified, with tariffs disrupting cross-border supply chains and increasing economic uncertainty for Canadian businesses and individuals. Against this backdrop, stakeholders have submitted a wide range of recommendations aimed at encouraging business investment, strengthening Canada's global competitiveness, and simplifying various aspects of the tax system.  Below are some of the more significant proposals that have been submitted to the government for consideration as part of Budget 2026. While these recommendations reflect areas that various organizations would like the government to consider, it remains uncertain which, if any, of these proposals will ultimately be adopted.

Supporting small businesses

Small business tax cut

Small- and medium-sized businesses continue to face significant pressures from trade-related uncertainty, rising costs, and barriers to growth. Many stakeholders have called for expanded access to the small business deduction (SBD) through lower tax rates, higher thresholds, or inflation indexation. Recent submissions to the government include recommendations to:

• Reduce the federal small business tax rate to 6% (from 9%), retroactive to January 1, 2026 (Canadian Federation of Independent Business (CFIB)).
• Temporarily increase the taxable capital threshold for the SBD to $100 million (from $50 million) (Canadian Chamber of Commerce).
• Index the current $500,000 SBD limit to inflation, which has remained unchanged since 2008 (Calgary Chamber of Commerce), as well as the index passive income and taxable capital thresholds which reduce access to the SBD (STEP Canada).

At the same time, some have questioned whether the current dual-rate corporate tax system remains the most effective way to support small businesses. The Joint Committee on Taxation of the Canadian Bar Association and CPA Canada (Joint Committee) has suggested replacing the current dual-rate corporate tax system with a single corporate tax rate, reasoning that the small business rate has resulted in significant complexity and compliance costs. Instead, the Joint Committee suggests that support for smaller businesses could be delivered through simpler measures, such as incentives tied to Canadian employment expenditures.

Indexation of other personal and business tax measures

STEP Canada recommends that the federal government review and update the various dollar thresholds in the Income Tax Act. Many of these amounts haven’t been updated for decades, and inflation has significantly reduced their real value. Examples include:

• Registered Disability Savings Plan contribution limit ($200,000 since 2008)
• Dividend allowance for Part VI.1 tax ($500,000 since 1988)
• Foreign assets threshold for T1135 reporting requirement purposes ($100,000 since 1998)
• Certain limits for disability tax credits and medical expenses credit for disabled persons (unchanged since 1997)
• Childcare expense limits (unchanged since 2015)

Reform of retirement savings plans

The Conference for Advanced Life Underwriting (CALU) has proposed several measures to modernize Canada’s registered saving regimes, including indexing unused RRSP contribution room, extending RRSP contributions and RRSP-to-RRIF conversion to age 75, and providing greater flexibility for retirement income planning.

A common theme emerging from these submissions is the need to modernize tax measures that haven’t kept pace with inflation, changing business conditions, and evolving retirement patterns. At the same time, several stakeholders have questioned whether increasingly complex rules remain the most effective way to achieve policy objectives. While the proposals differ considerably in their approach, many seek to improve the effectiveness of longstanding tax measures while reducing complexity, compliance costs, and administrative burden for Canadian businesses and individuals.

Encouraging capital investment in Canada

Productivity Mega Deduction and further CCA simplification

The federal government announced the Productivity Mega Deduction on September 15, 2026. This measure would permanently provide immediate expensing to most depreciable assets acquired on or after that date, and responds to longstanding calls from the business community for broader and more permanent accelerated tax depreciation incentives. 

In addition, Tax Executive Institute (TEI) recommends simplifying the capital cost allowance (CCA) system by consolidating and rationalizing existing asset classes, noting that many similar assets remain subject to different depreciation rates and technical requirements.

Enhancements to existing investment incentives

The federal government has introduced a variety of investment incentives to advance its policy objectives. For example, the Clean Economy Investment Tax Credits (ITCs) support Canada's greenhouse gas reduction targets, while the Critical Minerals Exploration Tax Credit helps strengthen domestic supply chains for clean energy technologies and reduce reliance on foreign nations. Various organizations are calling for enhancements to existing investment incentives, including recommendations to:

• Expand eligibility for the Clean Technology Manufacturing ITC [ 722 kb ] to include more expenditures (e.g., mine development expenses and the manufacture of Direct Air Capture machinery and equipment) (Canadian Chamber of Commerce)
• Improve financing certainty for the Clean Economy ITCs by adopting a safe-harbour approach where labour requirements can be satisfied once a specific threshold is met, and improving CRA guidance, administration and advance rulings to provide greater certainty for project developers, investors and lenders (Canadian Cleantech Alliance).
• Expand eligibility of the Critical Mineral Exploration ITC to include other mineral resources, such as helium (Helium Developers Association of Canada).

The Productivity Mega Deduction represents one of the most significant business tax measures introduced in recent years and addresses a longstanding call for broader and more permanent accelerated tax depreciation. While some commentators have argued that lower corporate tax rates would be a more neutral way to encourage investment, others have noted that investment-based incentives more directly target businesses that deploy capital in Canada. Regardless of where you fall in that debate, recent government announcements have generally favoured targeted incentives designed to advance specific economic and policy objectives. As a result, businesses shouldn’t be surprised to see future budgets continue to rely on targeted tax measures aimed at encouraging investment in strategic sectors of the Canadian economy.

Improving global competitiveness

Canada’s international tax rules have grown increasingly complex, creating uncertainty and significant compliance burdens for multinational corporations. Recent pre-budget submissions have highlighted several areas that stakeholders would like to see reviewed, including excessive interest and financing expenses limitation (EIFEL) rules and the global minimum tax (GMT) framework.

International tax reporting 

TEI recommends the following measures:

• Narrow the scope of the Foreign Accrual Property Income (FAPI) rules.
• Eliminate duplicative international reporting requirements where substantially similar information is already provided under GMT reporting regimes.
• Introduce a consolidated or group-based filing system for related Canadian corporations, allowing for group-wide loss utilization, deduction sharing, and simplified reporting for non-arm's length transactions and elections.

EIFEL

Stakeholders propose the following amendments to the EIFEL rules:

• Increase the $1 million aggregate net interest and financing expense threshold and the taxable capital threshold before a group becomes subject to the EIFEL rules to better target large multinational groups engaged in profit shifting (Joint Committee).
• Narrow the overlap between the EIFEL rules and existing thin capitalization rules to reduce compliance obligations (TEI).
• Revise the definition of "interest and financing expenses" to exclude routine surface lease and provincial Crown mineral lease payments  (Canadian Association of Petroleum Producers).
• Review the 30% interest deductibility limit (Canadian Chamber of Commerce).

GMT

The Canadian Chamber of Commerce recommends simplifying compliance requirements related to the GMT framework OECD Pillar Two reporting obligations.

A common theme emerging from these submissions is concern over the increasing complexity of Canada’s international tax framework. Stakeholders note that multinational businesses are often required to navigate multiple overlapping reporting regimes and compliance requirements, which can result in significant administrative costs and create barriers to cross-border investments. While stakeholders have identified a number of areas for potential reform, many of these issues are complex and may require further consultation and coordination among OECD member countries.

Modernizing tax rules for individuals, private businesses, and trusts

A common theme across several pre-budget submissions is the call for the government to simplify the administration and application of the Income Tax Act, particularly in areas affecting individuals, private businesses, and trusts.

TOSI 

CALU proposes several amendments to the tax on split income (TOSI) rules, such as excluding spouses aged 25 and over and expanding the excluded shares exemption to professional and service corporations.

Part VI.1 tax 

STEP Canada proposes reforms to the Part VI.1 tax regime to reduce unintended tax consequences and simplify the rules. This recommendation notes that this tax can apply in private corporation and trust planning situations that fall outside the original intended target of the rules, namely preferred share financing arrangements.

Part IV tax for dividends distributed by a trust

STEP Canada proposes amendments to address unintended Part IV tax consequences arising from the timing mismatch that can occur when dividends flow through a trust (following Canada v. Vefghi Holding Corp.). The issue may be particularly relevant in private business sale transactions where pre-sale dividends are distributed through trusts to corporate beneficiaries. The issue may also have implications when applying the proposed dividend suspension rules where dividends pass through a trust.

Life interest trusts

STEP Canada also recommends a series of reforms to align the post-death tax treatment of life interest trusts more closely with how graduated rate estates are treated, noting that taxpayers can face materially different tax outcomes depending on whether assets are held through a trust or directly through an estate.

Tax simplification 

The Joint Committee also makes various proposals in areas affecting individuals, private businesses and trusts, including recommendations to: 

• Introduce an elective standard personal amount regime that would allow individuals to replace numerous non-refundable tax credits with a prescribed standard amount based primarily on age and marital status.
• Simplify the eligibility for the lifetime capital gains exemption by replacing the current 24-month historical active-asset test with a business-activity test, reducing the need for ongoing purification planning by private businesses merely to maintain certain tax statuses.
• Modernize eligible dividend designation and capital dividend election procedures, including removing the contemporaneous notification requirement for eligible dividends and permitting a corporation to elect to treat only a portion of a dividend as a capital dividend.

Many of these submissions reflect a broader concern that the Income Tax Act has become increasingly complex as new rules have been layered onto existing provisions over time. Several recommendations focus on situations where tax rules may now apply outside their original intended scope or produce unintended outcomes that are difficult to justify on policy grounds.  Although stakeholders have put forward numerous proposals for reform, meaningful simplification often requires considerable consultation, legislative resources, and must compete with other tax policy priorities. While significant legislative reform is unlikely to occur all at once, Budget 2026 could provide an opportunity for the government to advance some targeted simplification measures or launch consultations on broader reforms.

Looking ahead to Federal Budget 2026

Canadian businesses and individuals will need to continue adapting to a rapidly evolving economic landscape shaped by ongoing trade tensions between Canada and the US. As policymakers seek to strengthen Canada's economic resilience, we expect Federal Budget 2026 to include measures aimed at fostering domestic growth, enhancing global competitiveness, and simplifying the tax system to encourage investment and business expansion in Canada. 

Doane Grant Thornton will closely monitor the tax measures announced in Federal Budget 2026 when it is tabled this fall. Stay tuned for our analysis of the budget and its potential implications for Canadian businesses and individuals. 

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The information contained herein is general in nature and is based on proposals that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice or an opinion provided by Doane Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, specific circumstances or needs and may require consideration of other factors not described herein.}