Introduction: Overview of Canada's 2025 Draft Tax Legislation
On August 15, 2025, the Department of Finance released over 250 pages of draft legislation outlining major tax changes for individuals, corporations, and trusts. The proposals aim to broaden the tax base, increase revenues, and enhance compliance. Among the most notable is an increase in the top federal marginal tax rate. As a seasoned and knowledgeable Canadian tax lawyer, I summarize the most significant measures and their potential impact.
Individual Tax Changes: Key Updates
Top Federal Marginal Tax Rate Increase
The draft legislation proposes raising the top federal marginal income tax rate to 35%, which, combined with provincial taxes, may exceed 56% in some provinces. High-income earners should review income splitting, capital gains timing, and trust planning with an experienced Canadian tax lawyer.
Reduction in the Lowest Federal Tax Rate
The lowest federal tax rate is proposed to drop from 15% to 14%, benefiting lower- and middle-income Canadians.
Other Individual Updates
Other changes include tightened Alternative Minimum Tax (AMT) rules, a higher capital gains inclusion rate (67%) on gains above $250,000, and enhanced reporting of foreign assets in RRSPs and TFSAs. Proper tax planning with a knowledgeable Canadian tax lawyer is advised.
Corporate Tax Changes
Corporate Rate Adjustments and Surtaxes
Certain sectors, like financial institutions and resource companies, face a 1.5% surtax, emphasizing careful planning with an experienced Canadian tax lawyer.
Interest Deductibility and Anti-Avoidance Rules
The EBITDA threshold for interest deductibility drops from 30% to 25%. Additionally, the GAAR is strengthened, increasing reassessment and penalty risks.
Inter-Corporate Dividend Restrictions
Cross-border inter-corporate dividends may lose tax-free treatment, requiring expert Canadian tax lawyer guidance.
Trust and Estate Tax Updates
Expanded Reporting and Compliance
All trusts must now disclose settlors, beneficiaries, trustees, and protectors. Non-resident distributions are subject to withholding obligations.
Graduated Rate Estate Changes
GRE trust restrictions limit opportunities to defer distributions and reduce taxes. Charitable trusts face tighter anti-avoidance rules.
Pro Tax Tips
- Review high-income strategies in light of top rate increases.
- Adjust withholding for the lower federal tax rate.
- Plan corporate debt considering reduced interest deductibility.
- Trustees should enhance reporting systems to meet new disclosure obligations.
- Consult an experienced Canadian tax lawyer for cross-border, trust, and corporate tax planning.
Frequently Asked Questions
What is the proposed top federal marginal tax rate?
The draft proposes 35%, with combined provincial rates potentially exceeding 56%.
What is the new lowest federal tax rate?
It is proposed to decrease to 14%, effective July 1, 2025.
Who is most affected by capital gains changes?
Investors and business sellers with gains above $250,000.
Do these changes take effect immediately?
No, they are draft proposals under consultation, likely to be enacted in 2026.
How are family trusts impacted?
Expanded reporting and non-resident distribution rules increase compliance responsibilities.