Our experienced professionals summarize the key tax measures to help Canadian businesses and individuals understand the impacts and opportunities.
The budget emphasizes long-term capital investment over routine operating costs, with priorities including clean energy, critical minerals, housing, innovation, and national security. It introduces $32.5 billion in new capital spending over five years while targeting $60 billion in savings, and projects a balanced operating budget by 2028–29. As a result of the proposed measures, the federal deficit is expected to rise to $78.3 billion in 2025–26 before gradually declining.
The budget introduces several notable tax measures, including immediate expensing for eligible manufacturing and processing buildings, an increased expenditure limit under the Scientific Research and Experimental Development (SR&ED) program, and expanded clean economy tax credits. The budget also proposes significant updates to Canada’s transfer pricing rules, while leaving federal personal and corporate tax rates unchanged.
Additional measures aim to streamline the tax system, such as adjustments to qualified registered savings plans and broader anti-avoidance provisions related to the 21-year trust rule. The budget also removes certain taxes, including the Underused Housing Tax starting in 2025 and the luxury tax on specified aircrafts and vessels.
Read on to learn about these measures and more.
Budget 2025 proposes a temporary 100% deduction for the cost of eligible manufacturing and processing (M&P) buildings, including additions or alterations to existing buildings. This is provided that 90% or more of the floor space is used to manufacture or process goods for sale or lease, among other conditions. The current rules provide an accelerated capital cost allowance (CCA) rate of 10% for these types of buildings, provided a valid election is filed.
The purchase of used M&P buildings may also qualify, unless the taxpayer or non-arm's length person previously owned the property, or the property was transferred on a tax-deferred basis.
If the M&P building is no longer used for M&P subsequent to claiming the immediate expensing, there could be recaptured CCA into income.
The 100% deduction will apply to eligible property acquired on or after November 4, 2025 and used in a manufacturing process before 2030. Under a gradual phase-out, a 75% and 55% deduction will be available for eligible property first used in M&P between 2030 to 2031 and 2032 to 2033 respectively. M&P buildings acquired or first used in M&P after 2033 won’t be eligible for the enhanced rates.
Rules governing the recovery of refundable dividend tax on hand (RDTOH) will be amended to prevent deferral of income tax on investment income earned by a Canadian-controlled private corporation (CCPC) resulting from intercorporate dividends paid between connected corporations with staggered year ends. Under current rules, a CCPC earning investment income benefits from an immediate refund of RDTOH after paying taxable dividends to a connected payee corporation which in turn pays Part IV tax based on the payer CCPC’s refund, irrespective of the payee corporation’s year end. This can result in a tax deferral, depending on the payee corporation’s balance-due date.
The proposed limitation suspends a payer corporation’s RDTOH refund where it is ‘affiliated’ with a payee corporation, and the payee corporation’s balance-due day occurs after that of the payer corporation. The suspended RDTOH refund will be released in a later taxation year of the payer corporation once the recipient corporation (and any affiliated corporation further up the corporate chain) has paid the dividend to a non-affiliated corporation or an individual shareholder. There are certain exceptions to the suspension rule, such as where the subsequent qualifying dividends are paid before the payer corporation’s balance-due day.
This proposal may impact private companies with intercorporate shareholdings and misaligned tax year-ends. The measure applies to dividends paid in taxation years that begin on or after November 4, 2025.
The deferral of tax and withholding obligations on patronage dividends received in the form of shares from agricultural cooperatives will be extended to apply to shares received before the end of 2030. The current rules, which were set to expire at the end of 2025, allow for a deferral of the tax and withholding requirements on these dividends until the year of disposition of the shares.
The SR&ED expenditure limit on which the enhanced 35% SR&ED investment tax credit can be claimed will be doubled to $6 million (from the previously announced $4.5 million). The existing limit is $3 million. This measure will apply retroactively to taxation years that begin on or after December 16, 2024.
The updated administration of the SR&ED program will provide businesses with greater certainty and speed when making investment and R&D decisions by:
These administrative changes will be implemented into SR&ED program operations as of April 1, 2026.
Additionally, the CRA intends to further improve administration by engaging in targeted consultations, including a review of the SR&ED claim form (T661). Previously proposed measures will also proceed, including increasing prior-year taxable capital phase out for enhanced credit, allowing eligible Canadian public corporations to access the enhanced credit, and restoring capital expenditures eligibility.
Budget 2025 proposes several changes to pre-existing clean economy tax incentives:
Clean Technology Manufacturing investment tax credit
The list of critical minerals eligible for the 30% refundable Clean Technology Manufacturing investment tax credit will expand to include five new minerals. Property to extract, process, or recycle these newly eligible minerals that’s acquired and becomes available for use on or after November 4, 2025 will qualify for this ITC.
Carbon Capture, Utilization and Storage investment tax credit
The phase-out period of the Carbon Capture, Utilization and Storage (CCUS) investment tax credit will be deferred by extending the full credit rates to 2035. Under the proposed rules, the full credit rates, which range from 37.5 - 60%, will apply to eligible expenditures incurred until the end of 2035, while the tax credit will reduce to half of the full credit rates for eligible expenditures incurred from the start of 2036 to the end of 2040.
Clean Electricity investment tax credit
The list of eligible entities for this 15% refundable credit will expand to include entities in the Canada Growth Fund. Also, financing from the Canada Growth Fund received by taxpayers will not reduce the cost of eligible property for the purpose of calculating the tax credit. This expansion applies to eligible property that is acquired and becomes available for use on or after November 4, 2025.
The list of critical minerals eligible for the 30% Critical Mineral Exploration Tax Credit (CMETC) is being expanded to include 12 previously excluded critical minerals including bismuth, manganese, and tungsten. The CMETC allows investors holding flow-through shares an additional tax incentive on renounced specified mineral exploration expenses incurred in Canada. This measure will apply to expenditures renounced under eligible flow-through share agreements entered into after November 4, 2025 and on or before April 1, 2027.
The definition of Canadian exploration expense (CEE) will be amended to specifically exclude expenses related to determining the economic viability or engineering feasibility of mineral resource. This amendment pre-empts the application of a recent Supreme Court of British Columbia decision relating to the interpretation of the provincial equivalent of the federal CEE definition to the federal regime. This proposed measure is effective November 4, 2025.
The Personal Support Workers Tax Credit is a proposed refundable credit equal to 5% of eligible earnings, up to a maximum of $1,100. The credit is available to certain eligible personal support workers, who provide certain health care services in specific regulated health care establishments. Amounts earned in BC, Newfoundland and Labrador, and the Northwest Territories are excluded because of pre-existing federal funding agreements in those provinces. This measure will apply to the 2026 to 2030 taxation years.
The CRA will have discretion to file a tax return for a taxation year on behalf of an individual who meets all the following criteria:
This measure is meant to bring more individuals into the system so that they’ll qualify for credits and benefits that might otherwise go unclaimed without a tax return filing. The CRA will provide the individual with a summary of the information being used to prepare the tax return prior to filing on their behalf and allow 90 days for the taxpayer to submit changes. This measure will apply to the 2025 and subsequent taxation years. This proposal is subject to a consultation period ending January 30, 2026.
The top-up tax credit maintains a 15% tax rate for non-refundable tax credits in rare instances where the credits exceed the first federal income tax bracket threshold. Non-refundable tax credits are generally applied at the lowest marginal income tax rate and existing proposals in Bill C-4 could reduce the first marginal income tax bracket to 14.5% (from 15%) in 2025 and 14% in 2026 and subsequent years. The credit is intended to ensure individuals don’t have a higher tax liability if Bill C-4 is enacted. This measure will apply to the 2025-2030 taxation years.
Rules related to investments that can be held in registered plans will be simplified. In particular, Registered Disability Savings Plans (RDSPs) will 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 won’t be permitted going forward. These amendments will apply as of January 1, 2027. Accommodating provisions will allow for investments in small business investment limited partnerships and small business investment trusts made prior to 2027.
A taxpayer can no longer claim expenses under both the Medical Expense Tax Credit and the Home Accessibility Tax Credit. The Home Accessibility Tax Credit is a non-refundable credit available for certain eligible renovation expenses that improve the home’s safety, accessibility or functionality for individuals 65 or older or eligible for the Disability Tax Credit. The Medical Expense Tax Credit applies to medical and disability-related expenses, which can include costs to build or renovate a home to improve access or mobility for persons with disabilities. Individuals can currently claim both credits for expenses that meet both sets of eligibility criteria. The amendment will apply to the 2026 and subsequent taxation years.
The current anti-avoidance rules that prevent postponing the deemed disposition of property in a trust by making direct trust-to-trust transfers of property will be broadened to include indirect transfers of property to other trusts. These anti-avoidance rules are in place to support adherence with the rule that deems a personal trust to have disposed of its capital property on the 21st anniversary of the trust’s creation to prevent an indefinite postponement of tax on accrued gains. The proposal will expand the scope of the anti-avoidance rule effective for transfers of property on or after November 4, 2025.
Taxpayers will no longer receive Canada Carbon Rebate (CCR) payments on tax returns or adjustment requests filed after October 30, 2026. The CCR was a mechanism intended to return proceeds from the federal fuel charge directly to eligible Canadians. This amendment to the CCR is intended to support the winding down of this mechanism as the federal fuel charge was removed as of April 1, 2025.
Underused Housing Tax
The Underused Housing Tax (UHT) rules will no longer apply after the 2024 calendar year. This measure will end the three-year program aimed at increasing the Canadian housing supply. Currently, the federal UHT rules require affected owners to file a UHT return with the CRA annually for each reportable property. Unless the owner is eligible to claim an exemption, the tax is collected at 1% of the fair market value of vacant or otherwise underused residential property. While the UHT rules will no longer apply for 2025 and beyond, returns and remittances, as well as applicable interest and penalties will still be enforced for the 2022 to 2024 calendar years.
Luxury tax
Budget 2025 eliminates the luxury tax on specified aircraft and vessels, including sales, imports, and improvements on these items. However, the tax will continue to be payable on vehicles valued in excess of $100,000. The luxury tax continues to apply at a rate that is equal to the lesser of 10% of the total value of the vehicle and 20% of the value above $100,000.
Registered vendors of specified aircraft and vessels are required to file a final return that includes November 4, 2025 and registrations will be maintained after this date to allow vendors to claim their eligible rebates. Registrations for aircraft and vessels/boats will be cancelled on February 1, 2028 with no rebate claims available after this date.
These changes will be effective after November 4, 2025.
GST rebate on housing for first-time home buyers
GST is being removed for first time buyers on new homes valued at no more than $1 million and for new homes valued between $1 million and $1.5 million the GST is reduced. This change is currently before parliament, included in Bill C-4.
GST/HST on manual osteopathic services
Budget 2025 clarifies that osteopathic services provided by anyone other than an osteopathic physician are considered a taxable supply for GST/HST purposes. This clarification stems from the recent establishment of a provincial regulatory body to govern the practitioners of manual osteopathy in New Brunswick causing osteopathic services provided by individuals that were not physicians to qualify as tax-exempt.
Fraud prevention for specific telecommunication services
A reverse charge mechanism (RCM) targeting the telecommunications industry will be introduced for the first time to combat “carousel fraud” schemes.
The RCM would apply to specific supplies of telecommunication services that allow forspeech communication and 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, these rules will apply to voice-over internet protocol (VoIP). This is a departure from how suppliers generally invoice and remit GST/HST. Instead, the suppliers of these services will no longer charge GST/HST but need to note on their invoices that the RCM applies and the customer will have to self-assess the GST/HST that applies on their return. At this point in time, RCM will only apply to qualifying purchases of telecommunication services acquired for the sole purpose of resupply by the purchaser.
These proposals are subject to a consultation period ending January 12, 2026.
Duty relief for goods donated to charities
A duty drawback will be allowed on certain goods that are donated to a registered charity, if the goods will be used in the charities’ programs rather than resold. This change will be made through amendments to the Customs Tariff Act.
Transfer pricing
The 2025 reforms represent a significant modernization of Canada’s transfer pricing regime, bringing it into alignment with international standards and increasing both the clarity and the compliance burden for affected taxpayers. Early preparation and proactive review of transfer pricing policies and documentation are essential to manage risk under the new rules. The new rules will require a more detailed, two-step analysis of cross-border transactions between Canadian taxpayers and non-arm’s length non-residents to align more closely with the latest version of the OECD’s transfer pricing guidelines. Transactions must now be “delineated” with reference to their “economically relevant characteristics,” including contractual terms as well as the conduct of the parties, functions performed, assets used, risks assumed, characteristics of property or services, economic circumstances, and business strategies. The “conditions” of a transaction will be interpreted more broadly, going beyond price and contractual terms to include all relevant commercial and financial information relevant to the determination of the initial or adjusted amounts. This is a significant shift from the previous focus on the terms and conditions of contractual arrangements.
The new rules clarify that the comparison for transfer pricing purposes is to the conditions that would have existed had the actual parties to the transaction been dealing at arm’s length in comparable circumstances, rather than to hypothetical unrelated parties.
A new non-recognition and replacement rule allows the CRA to disregard and replace the actual transaction with an alternative arm’s length transaction if the actual transaction includes conditions different from arm’s length conditions.
The budget also introduces an explicit requirement to interpret and apply the transfer pricing rules in a manner consistent with the OECD’s latest transfer pricing guidelines, providing greater certainty and alignment with international standards.
Budget 2025 also proposes to:
Canadian multinational businesses that have transactions related foreign entities should review relevant cross border transactions and determine whether and how these new transfer pricing rules may impact these transactions. The reduced number of days taxpayers have to respond to the CRA for request of transfer pricing documentation makes it imperative for affected businesses to prepare complete transfer pricing documentation on a contemporaneous basis. These proposed changes to the transfer pricing rules will take effect for taxation years and fiscal periods that begin after November 4, 2025.
Investment income derived from assets supporting Canadian insurance risks
Budget 2025 clarifies that a taxpayer must include a foreign affiliate’s investment income derived from assets held to back specified Canadian risks in foreign accrual property income (FAPI). Under current rules, a foreign affiliate’s income from a business involving the insurance or reinsurance of Canadian risks may be deemed to be from a non-active business (resulting in FAPI and inclusion in taxable surplus).
This change expands this deeming rule to apply to income from any property held in connection with the insurance or reinsurance of specified Canadian risks—regardless of which entity holds the property.
This proposed measure will apply to taxation years of a foreign affiliate that begin after November 4, 2025.
Budget 2025 confirms the government’s intention to proceed with several previously announced measures in Budget 2024, the 2024 Fall Economic Statement, and in certain draft legislation, as modified from consultations with stakeholders. Some key previously announced proposals include:
Notably absent from this list is the proposed Canadian Entrepreneur’s Incentive announced in Budget 2024, which appears to be cancelled under this budget.
|
Our National Tax Leader, Tara Benham, discusses these measures and more. Watch here: Federal Budget 2025 | Doane Grant Thornton |
Have questions? Let’s talk. Contact your local advisor or reach out to us here.
Visit our Budget 2025 hub to learn about the tax measures introduced in this year's federal and provincial budgets.
Disclaimer
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.
Get the latest information in your inbox.
Subscribe to receive relevant and timely information and event invitations.