Buckle-Up Canada: The Government Is Maxing Out The Country's Credit Card

Well, if you were expecting a big tax change budget, you'll be disappointed. But if you're a fan of big government spending shrouded around the use of the phrase "investments" vs using the plain language of "spending", then this is the budget for you. In addition, if you believe huge government intervention into the economy is necessary and good, well, you've got the budget of your dreams.

Economic Highlights

• If you want to play a drinking game by taking a shot of alcohol for every time the budget mentions the word "invest" and the vacuous phrase "spend less to invest more", you will be on the floor very quickly and likely only to get through less than 10% of the 493-page budget document (not including the Notice of Ways and Means Motion);
• Projected total deficit for the fiscal year (purposely ignoring the deceptive "capital" vs "operating" budget) is $78.3 billion for the current year, decreasing to $57.9 billion for 2028-29. This is simple recklessness;
• Public debt charges are expected to increase from $55.6 billion in 2025-26 to $76.1 billion in 2029-30 due to projected increases in the "stock of debt and higher interest rates". That's a $20.5 billion projected increase in 5 years or 36.9%. Again, that is reckless;
• Total spending cuts is apparently going to be $60 billion over the next 5 years. From the budget: From a peak of almost 368,000 in 2023-24, the public service population is expected to reach roughly 330,000 by the end of 2028-29—a decline of about 40,000 positions or 10 per cent. This reflects normal attrition through retirements, voluntary departures, and previous savings exercises, as well as further action the government is taking to slow spending and return the public service to a sustainable size. These are not the deep cuts that many were asking for especially when you consider the new spending; and
• The spending in this budget is eye-popping and includes $450 billion in spending over the next 5 years. Again, if you like government intervention, you'll love what the government is "investing" in;

Tax Highlights

• No personal or corporate tax rate adjustments;
• No "expert" corporate tax review as promised by the Liberal Party during the spring election campaign;
• The elimination of the Underused Housing Tax for 2025 forward. This was a ridiculous tax, and its elimination is welcome;
• No reintroduction of the 1970s "multiple-unit residential building" ("MURB") tax shelter as had been promised...that's good, we don't need old tax shelters;
• The elimination of the luxury tax for aircraft and boats, but retaining it for automobiles (not sure why the retention for automobiles.... this should be eliminated as well);
• A commitment to implement the increased capital gains deduction of $1.25 million effective June 25, 2024;
• An explicit statement that the Canadian Entrepreneur's Incentive – as originally announced in the 2024 budget – will not move forward. Thank goodness – such a ridiculous proposal;
• A proposal to "reform and modernize" Canada's transfer pricing rules;
• A proposal to"limit the deferral of refundable tax on investment income through the use of tiered corporate structures with staggered year ends, for taxation years that begin on or after Budget Day". The draft legislation released on this seems like a bit of overkill, with some practical problems on how this will be administered;
• Reinstatement of the Accelerated Investment Incentive, which provides an enhanced first-year write-off for most capital assets;
• Immediate expensing (i.e., 100-per-cent first-year write-off) of manufacturing or processing machinery and equipment;
• Immediate expensing of productivity-enhancing assets, including patents, data network infrastructure, and computers;
• Immediate expensing of capital expenditures for scientific research and experimental development;
• A proposal to introduce a new "non-refundable Top-Up Tax Credit", which is complementary to the 1% tax rate cut on the lowest personal tax bracket brought forward by the government last spring. The credit would effectively maintain the current 15-per-cent rate for non-refundable tax credits claimed on amounts in excess of the first income tax bracket threshold;
• Various SR&ED tax incentive adjustments;
• Expand eligibility for the Critical Mineral Exploration Tax Credit to include an additional 12 critical minerals necessary for defence, semiconductors, energy, and clean technologies;
• "Clarification" that expenses incurred for determining the economic viability or engineering feasibility of a mineral resource shall not be considered "Canadian Exploration Expenses";
• Progress on automatic tax filing for certain low-income Canadians. However, the government plans to continue to "consult" with Canadians on this issue;
• A new temporary "Personal Support Workers Tax Credit" effective for 2026 and for a further four years, 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/year;
• Various proposals to simplify and streamline the rules relating to registered plan investments in small businesses, while maintaining the ability of registered plans to make such investments;
• Home accessibility expenses will no longer qualify for both the medical expense tax credit and the home accessibility tax credit;
• Proposals to legislate against planning to avoid the 21-year deemed disposition rule for trusts that involved trust property being transferred on a tax-deferred basis to a beneficiary that is a corporation owned by a new trust;
• A statement that the August 12, 2024 proposed amendments to the Alternative Minimum Tax will proceed (other than changes related to resource expense deductions); and
• A commitment to technical amendments related to the enhanced trust reporting rules (proposed on August 15, 2025), but further deferring reporting requirements for bare trusts to tax years ending on or after December 31, 2026.

A. Analysis of Select Tax Matters in the 2025 Budget

1. Personal Support Worker Tax Credit

The 2025 Federal Budget proposes to introduce a "Personal Support Worker Tax Credit", which will provide eligible "Personal Support Workers", in qualifying provinces and territories, with a refundable tax credit in the sum of 5% of their eligible earnings, up to a maximum of $1,100, for each taxation year from 2026 to 2030 inclusive.

The "Personal Support Worker Tax Credit" legislation is contained in proposed section 122.93. As it stands, to qualify for the credit as a Personal Support Worker, an individual must be employed by an "eligible health care establishment" (defined as a hospital, nursing, care facility, residential care facility, community care facility for the elderly, home health care establishment, and similar regulated healthcare establishments), wherein they are employed to routinely deliver individualized care, assisting patients with activities of daily living and facilitating their mobility, in accordance with directives from a regulated health care professional or a provincial or community health organization. Only wages (including salaries and benefits) earned by an "eligible personal support worker" in provinces other than British Columbia, Newfoundland and Labrador, and the Northwest Territories (as these provinces have signed agreements with Canada to receive funding designed to increase support workers' wages). Additionally, the support worker's employer will be required to certify the eligibility of the wages.

The obvious question here is: are nurses considered "eligible personal support workers"? Based on our initial reading and interpretation of the proposed legislation, some may, and, in our view, most likely won't. A nurse working in a hospital or other "eligible health care establishment" does not automatically qualify. The specifics of their duties matter in determining their eligibility for the Personal Support Worker Tax Credit. Nurses who work primarily in administration would likely not qualify as their "main duties" (which is a new concept introduced into the Income Tax Act if this legislation passes and would thus need to be interpreted) may not include "assisting individuals with activities of daily living and mobilization". This proposal at first glance appears relatively broad, but the number of conditions that must be analyzed and interpreted to determine eligibility are numerous and robust.

A $1,1000 credit would be fully realized at $22,000 of eligible wages (assuming all other criteria are met). Using the 2025 Budget's financial projections, an estimated 275,000 individuals are expected to be eligible for the "Personal Support Worker Tax Credit". The Canadian Nurses Association's statistics indicate that there were 477,980 regulated nurses in 2023, it seems clear to us that the government does not expect all or even a majority of nurses to be eligible for this credit.

2. Non-Refundable Top-Up Credit

The 2025 Federal Budget proposes to include the "Non-Refundable Top-Up Tax Credit," which is intended to preserve the benefit of the reduction to the lowest federal personal income tax rate on the first federal income bracket (taxable income from $0.00 to $57,375), which was 15% in 2024 and is proposed to be reduced to 14.5% for 2025, and further reduced to 14% for the 2026 to 2030 taxation years, inclusive (expected to be passed in Bill C-4 "Making Life More Affordable for Canadians Act").

At first glance, the reduction of the lowest federal tax rate appears to substantially benefit all Canadians, as the net federal tax payable for the lowest federal tax bracket would decrease as follows:

1 Assumed the lowest federal tax bracket will remain $0.00 to $57,375 inclusive

In unpacking this further, we note that the tax savings from the reduction of the lowest federal marginal rate are offset by a corresponding reduction in non-refundable personal tax credits ("Personal Tax Credits"). This is because the lowest federal marginal tax is also used to calculate the value of the Personal Tax Credits that reduce an individual's taxable income (referred to as the "appropriate percentage").

For instance, the spousal or common-law partner tax credit is a commonly used Personal Tax Credit, available where one spouse or common-law partner supports a non-earning spouse or common-law partner. The decrease in the federal tax rate would reduce the net benefit of this credit. For example, the table below details the diminishing reduction in the value of the spouse or common law partner tax credit due to the decrease in the federal lowest marginal tax rate:

The reduction of the lowest federal marginal rate does not provide the benefits it appears to have at first glance. The reduction of the lowest federal marginal rate is effectively clawed back through the taxpayer's use of Personal Tax Credits to reduce their taxable income. This impact can be quite substantial, as Personal Tax Credits range from the basic personal amount, spouse or common-law partner amount, and eligible dependant amount, to credits for age, pension income, employment income, disability, medical expenses, charitable donations, and caregiving.

The table below details how the Non-Refundable Top-Up Credit only applies in the unlikely circumstances where the sum of an individual's non-refundable tax credits is substantial:

Effectively any benefit from the reduction of the federal marginal rate is clawed back as a taxpayer uses their Personal Tax Credits to reduce their taxable income. The Non-Refundable Top-Up Credit only applies to avoid the event where the tax consequences of the lowered value of the Personal Tax Credits exceed the benefit of a lower marginal tax rate. To use the words of the Government of Canada, the Non-Refundable Top-Up Credit is only used:

For most Canadians, the Non-Refundable Top-Up Credit does not apply, which, from a policy perspective, makes sense as basic credits should theoretically not provide greater benefit than the amount of tax paid on income taxed in the lowest bracket.

This proposal is welcomed.

3. Immediate Expensing for Manufacturing and Processing Buildings

According to the revenue impacts of the 2025 Budget Measures, one of the biggest benefits relates to the immediate expensing of manufacturing and processing buildings, which intends to accelerate the amount of capital cost allowance ("CCA") deducted for taxpayers on certain buildings.

CCA rules allow for a taxpayer to deduct the cost of depreciable property over a period of time, as set out in the Income Tax Regulations. Depreciable properties are grouped in different classes, each having its own rate of deduction generally in accordance with its approximate useful life.

The current CCA rate for buildings, of which 90% or more are used to manufacture or process goods for sale or lease ("Eligible Building"), allows a CCA rate of 10%.

The 2025 Federal Budget proposes to temporarily bump the CCA rate for these Eligible Buildings to 100%. In other words, the taxpayer can claim a 100% deduction in the first taxation year, provided all of the following is met:

• at least 90% of the minimum floor space is used for manufacturing or processing;
• the taxpayer and any non-arms length party of the taxpayer (e.g. family members, corporations under common control, etc.) did not previously own the building; and
• the building has not been transferred to the taxpayer on a tax-deferred basis (also known as a "rollover", wherein legal ownership of property is transferred to another party typically at the transferor's cost).

A caveat to claiming a 100% CCA rate is that if the building is later sold or its use is changed (for example, from manufacturing and processing goods to personal use), then the recapture rules may apply. Recapture would deem income in the hands of the taxpayer when the proceeds of disposition (or the deemed proceeds at fair market value in the case of a change in use) exceed the undepreciated capital cost (UCC) of the building at the time of disposition. This to prevent a tax advantage in the event of a change of use or disposition of the building in excess of the taxpayer's UCC.

This immediate expensing measure is intended to apply to eligible property that is acquired on or after November 4, 2025, and is used in manufacturing or processing before 2030. For Eligible Buildings first used in manufacturing or processing in 2030, an enhanced 75% CCA rate should be provided. For Eligible Buildings brought into use in 2031 or 2032, an enhanced 55% CCA rate should be provided. Beginning in 2033, no immediate or enhanced CCA rate will be provided. No draft legislation was included for this measure in the notice of ways and means motion (which is odd, as recent years have seen many accelerated CCA provisions), so scrutiny will be needed to ensure the legislation matches the Budget proposals.

Overall, this will be welcomed by the manufacturing and processing sectors, but time will tell if this proposal moves the needle in any meaningful way.

4. Tax Deferral Through Tiered Corporate Structures

The 2025 budget introduces amendments to the Income Tax Act that would impact the availability of the "dividend refund" that corporations with investment income can become entitled to when they pay taxable dividends to their shareholders. The proposed amendments to section 129 of the Act (and other related provisions) appear to target certain tax planning strategies that achieve a short-term deferral of refundable corporate tax on investment income by paying taxable dividends to corporate shareholders with staggered tax year ends.

The refundable corporate tax regime

To understand the mischief targeted here, we need to understand how the refundable corporate tax regime operates in Canada. The Act imposes an especially high rate of tax on Canadian-controlled private corporations ("CCPCs") or substantive CCPCs that earn certain types of "investment income" in the year. If a corporation were to realize a capital gain or earn some other form of passive income from property (for instance, rent, interest, royalties, etc.), it would be taxed federally at an effective rate of 38 2/3% on that income, which is significantly higher than the general federal tax rate of 15% for corporations. (This does not include any provincial tax that the corporation may also be subject to).

This heightened corporate tax is intended to be temporary in nature, meaning a corporation should be able to recover the additional tax it must pay on investment income by issuing sufficient taxable dividends to its shareholders. The mechanics of this dividend refund are provided for under section 129 of the Act, which provides that the refund becomes payable to the corporation at the rate of 38 1/3% of the taxable dividends it pays in the year, up to a maximum refund amount of 30 2/3% of its "aggregate investment income" for the year (this is referred to as its "non-eligible dividend tax on hand" or "NERDTOH" balance).

Paying taxable dividends to recover NERDTOH generally means the recipient taxpayer will incur tax on the dividend income they receive from the corporation. Corporations that receive dividends from subsidiary corporations are generally able to deduct that dividend from their taxable income in the year under subsection 112(1), but where a subsidiary corporation pays the dividend to a "connected" corporation (i.e. one that controls the subsidiary corporation or that holds shares representing at least 10% of the votes and fair market value ("FMV") of the subsidiary corporation) and receives a dividend refund because of the payment of that dividend, the refunded tax gets passed onto the payee corporation in the form of Part IV tax. That Part IV tax is then added to the payee corporation's own NERDTOH balance, which could then be recovered by paying its own taxable dividends to its shareholders.

To illustrate, consider the case of "SubCo" that realizes a capital gain of $100,000 in the year, ½ of which, or $50,000, is included in its taxable income and in the calculation of its aggregate investment income. As a result of this capital gain, SubCo has $15,333 of NERDTOH and must pay taxable dividends to its shareholder, ParentCo, of at least $40,000 to be able to fully recover its NERDTOH balance. As a result of paying the $40,000 dividend to ParentCo, SubCo's NERDTOH balance has been fully refunded, but ParentCo has incurred Part IV tax of $15,333, which is added to its NERDTOH balance, meaning ParentCo must now pay dividends of $40,000 to its own shareholders to be able to recover that refundable tax.

If ParentCo's shareholder, GrandparentCo, were also a corporation, then the payment of the $40,000 dividend by ParentCo to GrandParentCo would refund ParentCo's NERDTOH balance while passing the Part IV tax liability up the chain to GrandParentCo and added to its NERDTOH balance. The Part IV tax liability would only be fully eliminated once the $40,000 taxable dividend were finally paid to a shareholder that was not subject to Part IV tax (i.e. an individual shareholder).

The proposed legislation adds provisions to section 129 of the Act that could deny the dividend refund in the "tiered corporate structures" described above.

Tax Deferral Via Staggered Corporate Tax Years

According to the supplementary information on the proposed legislative changes in the budget, these changes are aimed at "certain tax planning techniques" that achieve a deferral of the refundable Part IV tax through staggered corporate tax year ends. Part IV tax liability arises on the balance-due date of the corporation's tax year, while the dividend refund mechanism in subsection 129(1) is effectively tabulated at the end of the tax year. If the payee corporation's tax year ends after the tax year of the payer corporation, the payer corporation could issue a dividend to fully recover its NERDTOH balance, and the Part IV tax resulting from that dividend would technically have been deferred until the balance due date for the payee corporation's tax year end.

From the example above, if SubCo's year-end were December 31 and ParentCo's tax year-end were December 30th, then a dividend paid on December 31, 2024, would technically be paid on the last day of SubCo's tax year while also being received by ParentCo on the first day of its new tax year. This means that SubCo would be able to claim a dividend refund for its tax year ending on December 31, 2024, thereby achieving a full recovery of the refundable portion of the tax incurred on its investment income for the year, but Part IV tax which would be incurred by ParentCo as a result of the dividend received from SubCo wouldn't technically fall due until the balance due date for its tax year ending December 30, 2025. This has effectively deferred the Part IV tax liability for almost an entire year. Theoretically, this deferral could be further extended if GrandparentCo's tax year end were December 29th, and ParentCo were to pay its taxable dividend to GrandparentCo on December 30, 2025, which would be the last day of its tax year and the first day of GrandparentCo's new tax year (we wonder if there are structures out there that are attempting to obtain a 365 year deferral).

Proposed Changes

Proposed subsection 129(1.3) deems a dividend not to be a taxable dividend for the purposes of the dividend refund in subsection 129(1) if that dividend is received, directly or indirectly through one or more trusts or partnerships, by another corporation that is:

• Affiliated with the payer corporation immediately before the time the dividend is paid (i.e. that is controlled by the payer corporation, or by the same person or affiliated persons that control the payer corporation);
• Is a private corporation or a subject corporation (defined in subsection 186(3)); and
• Has a balance-due day for the taxation year in which it received the dividend that is after the balance-due day for the taxation year of the payer corporation in which it paid the dividend.

Since a corporation can only receive a dividend refund under subsection 129(1) by paying taxable dividends, the deeming of a dividend paid in the year not to be a taxable dividend would effectively deny the refund that would otherwise be available to the corporation that paid the dividend.

According to the timing criteria in the proposed paragraph 129(1.3)(c), this deeming rule should only be triggered where the tax year of the payer corporation overlaps with the tax year of the affiliated payee corporation. The scenario described above would appear to be captured by the timing criteria in proposed paragraph 129(1.3)(c) since the dividend, which is declared by SubCo on December 31, falls within the tax year of SubCo ending on that day and in the tax year of ParentCo, which ends 364 days later on December 30 of the next calendar year. Presuming SubCo and ParentCo are affiliated private corporations, the dividend would be deemed not to be a taxable dividend pursuant to subsection 129(1.3), and the tax refund associated with that dividend would be suspended.

Proposed subsection 129(1.31) provides exceptions to the deeming rule under subsection 129(1.3). Most notably, subsection 129(1.3) will not apply if ParentCo can pay out its own taxable dividend to a shareholder (other than a shareholder that is an affiliated corporation), for the same amount as the dividend it received from SubCo and can do so by the balance due date for the same tax year. Similarly, a dividend refund which has already been suspended because of subsection 129(1.3) can subsequently be released if a dividend equal to or exceeding the amount of the prior dividend is paid out to a shareholder (other than an affiliated corporation). In essence, both the exception to subsection 129(1.3) and the release of a previously suspended dividend refund provisions allow for the ordinary use of the dividend refund mechanism so long as there is no deferral of the refundable tax being achieved (the proposed rules do also carve out dividends in bona fide commercial transactions where the payer corporation is subject to a loss restriction event within 30 days of the dividend in question having been paid.

Comments

While the proposed changes to section 129 do appear to frustrate the planning strategies targeted by the Finance Department, the changes themselves are drafted in extremely broad terms that will almost certainly capture unintended scenarios (i.e. dividends issued by corporations to recover NERDTOH, but without any intention of actually deferring the refundable tax liability). Corporate directors must now carefully consider when and to whom taxable dividends are issued. If the intended recipient of a taxable dividend happens to have a later year-end than the payer corporation, then there is a risk that the otherwise available dividend refund will be suspended.

These proposed rules could limit the freedom of some existing corporate structures, since corporations in a tiered corporate structure with staggered year ends must essentially choose between paying the refundable tax in the corporation that generated the NERDTOH balance or fully distributing sufficient dividends to recover the refundable tax. How exactly will that be done on tax filings/tax software?

While it is true that the provisions of the Act, without the proposed amendments, do technically allow for an indefinite deferral of a corporation's refundable tax, it is difficult to say how prevalent this targeted tax deferral strategy is (however, according to the budget impact assessment, Finance anticipates that these amendments will generate $470 million in revenues in 2026). The strategy can, at best, only defer refundable tax and does so at the increased cost of corporate maintenance as more corporations are formed to extend the tax deferral.

In our opinion, these proposals seem to be a bit of overkill and need some reworking to make them administratively workable. There will be compliance nightmares because of this proposal, and practitioners will need to brace themselves for tracking these "suspended refunds" in previously inoffensive structures, and increased collaboration will be required where different accountants are preparing returns for entities within a given structure.

5. 21-Year Rule for Trusts and Anti-Avoidance Rule Under Subsection 104(5.8)

Very generally, most inter vivos trusts are subject to the so-called "21-year rule", which deems a trust to have disposed of and to have immediately reacquired all of its capital property (or land inventory) at the end of the day of its 21-year anniversary. This has the effect of triggering all accrued gains on such properties, with the accompanying taxes payable.

Subsection 104(5.8) is a specific anti-avoidance rule designed to prevent the indefinite deferral of the 21-year rule via trust-to-trust transfers. Without this rule, a trust that is about to reach its 21-year anniversary could transfer its property on a tax-deferred basis under subsection 107(2) of the Act to a newly settled trust, thereby restarting the 21-year clock. Subsection 104(5.8) provides that, for such trust-to-trust transfers, the new trust essentially inherits the old trust's 21-year anniversary date.

Nevertheless, subsection 104(5.8) could be sidestepped via certain indirect transfers. As pointed out in Finance's supplementary information to the Budget 2025 tax measures, an existing trust could simply roll out property on a tax-deferred basis to a corporate beneficiary that was owned by a newly settled trust. Such a transfer would not fall directly afoul of subsection 104(5.8) because the provision explicitly requires a transfer from one trust to another. The Canada Revenue Agency ("CRA") has historically stated that it would likely apply the general anti-avoidance rule ("GAAR") against such indirect transfers, given that subsection 104(5.8) is circumvented in a manner that "frustrates the object, spirit and purpose of that provision"[4]. Furthermore, this type of transaction was identified by the CRA as a "notifiable transaction" that would require reporting pursuant to the mandatory disclosure rules laid out in section 237.4 of the Act.

Budget 2025 proposes to broaden subsection 104(5.8) in such a way that CRA would no longer have to rely on GAAR to defeat its circumvention via indirect transfers. Given this, we wonder whether similar transactions will be removed from the "notifiable transaction" list. Nevertheless, the proposed amendment that will broaden subsection 104(5.8) is simple; the only difference is the interjection of the phrase "directly or indirectly in any manner whatever" into the preamble, as follows:

The phrase "directly or indirectly in any manner whatever" is not defined under the Act. It is a phrase that is used relatively sparingly in a few provisions, for example, under the "associated corporations" regime under subsection 256(1), which centers around de facto control of corporations, and pre-2013 section 94[5] for deemed Canadian resident trusts. The latter may be particularly relevant in understanding its use as it applies to trusts, as both the Tax Court of Canada and the Federal Court of Appeal considered its meaning in St. Michael Trust Corp v The Queen (aka Garron).

Section 94 is a provision that causes non-resident trusts to be deemed Canadian residents throughout the year, exposing it to Canadian tax liability. One of the key criteria for the application of pre-2013 section 94 was whether a non-resident trust had "acquired property, directly or indirectly in any manner whatever" from certain Canadian resident beneficiaries and related persons. Under the facts of Garron, Canadian resident individual shareholders of an Opco had undergone a freeze transaction in which they converted their common shares into fixed-value preferred shares. New common shares were then issued to two newly incorporated holding companies. Afterwards, two Barbados trusts (of which the beneficiaries were related to the shareholders that underwent the freeze) subscribed for shares in the holding companies for nominal consideration. The trusts later disposed of their holding company shares for large gains.

At the Federal Court of Appeal ("FCA") level, the court considered that the phrase was to be interpreted broadly, and that the indirect shifting of value of the Opco common shares held by a Canadian resident beneficiary to shares held by the non-resident trust was indeed an acquisition of property by the trust from the beneficiaries.

Consequently, the newly proposed subsection 104(5.8) may impact traditional "thaw and refreeze" transactions, such as the following:

For example, assume Jimmy is the sole shareholder of Opco, owning 100 Class A common shares of the corporation. Concerned about the inevitable tax on the Opco holdings in the event of his death and wishing for the future value of Opco to accrue to his children, Jimmy decides to undergo an estate freeze. He has a family friend settle a family trust (the "Old Trust") with himself as trustee, and the beneficiaries, including himself and his children. On a tax-deferred basis, he exchanges his 100 Class A common shares for 100 Class E preferred shares with an aggregate redemption value equal to the FMV of Opco at the time. Afterwards, the Old Trust subscribes for 100 Class B common shares of Opco for nominal consideration.

Years later, the fair market value of Opco has decreased below the value of the preferred shares and Jimmy wishes to "thaw and refreeze" the current holdings, updating the value of his preferred shares to reflect the current lower valuation of Opco. One way this might be achieved is by having the Old Trust roll out its Opco common shares to Jimmy on a subsection 107(2) tax-deferred basis. Then, Jimmy would exchange all his currently held shares (100 Class B commons and 100 Class E preferred shares) for a new class of preferred shares with an aggregate redemption value reflecting Opco's FMV at the time of the exchange. A new family trust is settled, which then subscribes for Class C common shares for nominal value. Old 104(5.8) would not have applied to the thaw and refreeze, as there was no direct transfer from the Old Trust to the New Trust.

Would the newly proposed 104(5.8) apply to the above thaw and refreeze transaction? The answer is... maybe. Using the same logic as the FCA in St. Michael Trust Corp., the value attributable to the common shares of Opco[6] will have shifted, on a de facto basis, from the Old Trust to the New Trust, and this could be construed to be a transfer, "directly or indirectly in any manner whatever", from the former to the latter.

However, a likely counterargument is that there was no shifting of value from the Old Trust to the New Trust. Since the value of Opco had decreased below the aggregate redemption value of the preferred shares, by implication, the value of the Class B common shares held by the Old Trust prior to the rollout is nil, as would be the value of the Class C common shares held by the New Trust. Without a value shift from shares held by a transferor trust to the transferee trust, there is arguably not a transfer "directly or indirectly in any manner whatever" by the former to the latter.

We recommend practitioners pay some mind to potential indirect transfers to any transaction or series of transactions where there are multiple trusts or the introduction of new trusts.

6. Automatic Tax Filings

The government is proposing to auto-generate tax returns for low-income Canadians, to better ensure they receive and are eligible to receive tax benefits such as the GST/HST Credit, the Canada Child Benefit, and the Canadian Dental Care Plan.

Many of these benefit programs require filing a tax return as an eligibility requirement; however, Statistics Canada estimates up to 17% of Canadians earning under $20,000 in income do not file a tax return.

Previous budgets have proposed automatic tax filing for such individuals, but the progress on this initiative has been painfully slow and impractical as discussed below.

This latest initiative targets individuals with simple tax situations who do not owe tax and do not file themselves. It is expected to reach up to 5.5 million low-income Canadians by the 2028 tax year.

In order to achieve this objective, existing subsection 150.1(4) is proposed to be amended to permit the Minister to file on an individual's behalf, under the eligibility rules in new subsection 150.2(1). Those eligibility rules will require that the individual:

• Has not requested that the Minister not file under these rules;
• Has not filed in at least one of the past three years;
• Is at least 90 days late in filing for the year;
• Has had all income for the year reported on an information return (T4s, T5s, etc.);
• The income for the year does not exceed the aggregate of either the federal or provincial (i) basic personal amount, (ii) seniors' age amount (if any), and (iii) the disability tax credit (if any);
• After notification by the Minister of its intention to file under this program, has not filed a return or notified of corrections that would make the individual ineligible; and
• Any other criteria, as determined by the Minister of National Revenue.

If a return was filed under these rules, and the individual did not actually qualify (presumably based on the low-income requirement), then the Minister's return is deemed to have never been filed. This may result in harsh consequences if an individual is required to repay benefits due to program qualifications not being met because no tax return was filed.

The CRA has been progressing toward automatic returns since at least 2015, when it introduced its "Auto-fill my return" service. In 2018, it started its SimpleFile (formerly File My Return) service, in which the CRA targeted low-income earners and contacted them by telephone to confirm income details. However, by 2022, only 57,000 returns were filed in this manner. In 2024, the SimpleFile service was expanded to online and by paper, with approximately 2 million Canadians eligible to file this way. The automatic tax filing program and consultations were announced in the 2023 and 2024 Budgets, although details were sparse.

Presumably, the CRA's challenges have been contacting non-filers and getting responses to invitations. These proposed automatic filing rules do not require a response (although there is an opportunity to review and correct) and therefore should result in many more returns being filed.

The CRA has likely been following the successes by the United Kingdom and New Zealand, where automatic filing is now the norm for taxpayers (exceptions include the self-employed and landlords, which should be carved out under the proposed requirements in new subsection 150.2(1) as the income earned by these individuals is typically not reported to the CRA on information slips).

We hope that this program is intended to eventually be expanded to most income earners in Canada, and scales as intended, as otherwise this is a fairly large initial investment compared to the expected benefit. The government's projection of $56M in payments for 2028 with 5.5M taxpayers in the program, suggests an average benefit of $10 per participant (perhaps plus reduced tax filing fees) with additional CRA costs of $80M for the first five years and about $10M thereafter.

Unfortunately, despite the draft legislation, the government plans to continue consultations. One thing that should be considered in consultations is whether or not the normal statute barred rules under section 152 of the Act should enable such auto-filed returns to have a longer statute barred period to enable adjustments. One can foresee situations where a return has been auto filed and years later the taxpayer realizes some errors have occurred. Extending the statute barred period may provide much needed flexibility for such situations.

Based on their projected costs, we likely will not see this implemented until at least 2027 or 2028, despite the Budget's claims that this measure will be ready for 2026 filings.

7. Restriction on Home Accessibility Expenses

Budget 2025 proposes to no longer allow "double dipping" credits on home accessibility expenses. At a high-level, the "Home Accessibility Tax Credit" allows a tax credit on up to $20,000 of "eligible expenses" for a "qualifying renovation" to an "eligible dwelling" if you are a "qualifying individual" or an "eligible individual" in respect of a qualifying individual. There is a good amount of legislation on this credit, which is contained in section 118.041 of the Income Tax Act. To briefly summarize the key points:

A qualifying individual is either an individual eligible for the disability tax credit or an individual over the age of 65 by the end of the calendar year. An eligible dwelling is a housing unit located in Canada that is owned by the qualifying individual or an eligible individual. A qualifying renovation is a renovation or alteration to (i) allow the qualifying individual to gain access to, or be mobile or functional within, the dwelling, or (ii) that reduces the risk of harm to the qualifying individual within the dwelling or in gaining access to the dwelling.

Previously, the same eligible home renovation or alteration expenses could qualify for both the medical expense tax credit and the home accessibility tax credit. This will no longer be the case. If eligible expenses qualify for the medical expense tax credit, they will not be eligible for the home accessibility tax credit. This is a loss for the elderly or disabled who modify their home to improve accessibility. We're at a loss as to why this measure is included in Budget 2025.

It is important to note that the changes to the legislation on this measure are scheduled to be effective beginning on January 1, 2026. Therefore, you have a little under two months to start or otherwise incur "eligible expenses" for a "qualifying renovation" and still be entitled to double up on the tax credits.

8. Abolishment of the Underused Housing Tax ("UHT")

Some welcome news announced in Budget 2025 is the government's intention to abolish the Underused Housing Tax ("UHT") for 2025 and subsequent years. As a result, no UHT returns and tax will be required for 2025 and subsequent years.

The UHT saga was short-lived and will not be missed. For background, the UHT regime was enacted on June 9, 2022, and effective retroactive to January 1, 2022. The UHT regime initially mandated an extremely broad filing requirement and a potential 1% tax on the assessed value of the vacant or underused housing in Canada.

The intention of the UHT regime was clear in that it was intended to deter non-Canadian ownership of residential properties from standing vacant. However, in practice, the UHT regime was an absolute debacle, causing excessive administrative costs for entities that would never actually be subject to the tax and extreme penalties for non-compliance.

For the 2022 – 2024 taxation years, every entity that was not an "excluded owner" and owned a residential property located in Canada was required to file a UHT return. Initially, the "excluded owner" definition had a narrow scope, which only included Canadian citizens and permanent residents of Canada holding the property directly. Any Canadian citizens or permanent residents of Canada holding an interest in the residential property through a trust, partnership, or corporation were required to file a UHT return. In this instance, the indirect ownership by Canadian citizens or permanent residents could avail themselves to an exemption (i.e., "specified Canadian corporation", "specified Canadian partnership", or "specified Canadian trust" (collectively referred to herein as the "Specified Entities)) but needed to file a UHT return to declare their exemption. Non-Canadians needed to file a UHT return under all circumstances but could avail themselves of a potential exemption from the tax if the property was considered sufficiently used. Late-filing penalties started at $5,000 for individuals and $10,000 if the person is not an individual.

As the UHT regime progressed through the 2023 taxation year, the Department of Finance announced some relief measures in the 2023 Fall Economic Statement (released in November 2023), including decreasing late-filing penalties to $1,000 for individuals and $2,000 if the person is not an individual and increasing the scope of the "excluded owner" definition to include the Specified Entities, meaning that a Canadian citizen or permanent resident holding the Canadian residential property, either directly or indirectly, did not need to file a UHT return for the 2023 or subsequent years. While these were welcome changes, they were poorly executed as they were enacted on June 20, 2024, for the 2023 and subsequent taxation years, which was after the 2023 UHT return filing deadline of April 30, 2024. While not enacted into law, the CRA updated their instructions attached to the UHT-2900 return for the 2023 taxation year to update the definition of "excluded owner" to include the Specified Entities without providing any formal administrative announcements whether Specified Entities needed to file a UHT return or not. This caused mass confusion and left affected taxpayers either taking a chance in not filing and being subject to potential late-filing penalties or incurring professional fees to submit a filing. To further add to the debacle, the Specified Entities that did file a 2023 UHT return later received CRA correspondence that their return was not required and will not be processed.

It is welcome that the government recognized the administrative burdens the UHT regime imposed – and the likely policy failure of not moving the needle in increasing available housing – in its implementation and is now abolishing it. To confirm, the UHT regime still exists for the 2022 – 2024 taxation years and it appears there is no relief from late-filing penalties. Taxpayers and their advisors need to remain cognizant of potential UHT filings for those years and act accordingly.

The UHT regime was poor policy, poorly executed and caused a significant number of unnecessary filings. Taxpayers incurred large professional fees to get these unnecessary returns filed, and the CRA wasted a significant number of resources to administer such a useless regime. It is clear these costs considerably outweighed any revenue generated from the rare taxpayer who was subject to the UHT.

Curiously, however, the repeal of the UHT Act will not occur until January 1, 2035. Given such, we hope that the amendments to the UHT Act to make it non-applicable are not subsequently repealed.

Goodbye UHT. Won't miss 'ya.

9. Abandonment of the "Canadian Entrepreneur's Incentive" ("CEI")

The CEI which was a proposal to reduce the capital gains inclusion rate to half of the prevailing capital gains inclusion rate (which when first proposed would have been from a 2/3 to a 1/3 inclusion rate, in case you needed to be reminded of the capital gains inclusion rate fiasco of 2024 and most of 2025) for a 'founding investor' on "qualifying shares" (which came with a list of very specific required conditions some of which could be very difficult for the average entrepreneur to meet) to a lifetime cumulative limit of $2M (phased in over a number of years).

The proposal was tinkered with and adjusted over several communications from the Government. The CEI would have applied in very limited cases and would have provided modest tax savings in any event. The complexity of the implementation and required analysis was staggering, and to borrow a phrase, "the juice wasn't worth the squeeze," and there are certainly better ways to appropriately incentivize entrepreneurship.

You can find our initial comments on this proposal in our 2024 budget commentary, https://moodysprivateclient.com/our-review-of-the-2024-federal-budget-an-in-depth-analysis/

Footnotes

1 Assumed that the earning spouse/common law partner earns in excess of $57,375 in the given taxation year, and the non-earning spouse/common law partner had a taxable income of $0.00 and no caregiver amounts contemplated

2 For purposes of illustration and simplicity the letter "F" in the Formula is assumed to be $0.00.

3 See "Top-up Tax Credit" found on: https://budget.canada.ca/2025/report-rapport/nwmm-amvm-1-en.html (the "Formula"). We used the proposed 2026 lowest marginal tax rate of 14%.

4 CRA T.I. 2016-0669301C6.

5 Section 94 was overhauled for tax years 2013 and later, though the spirit and object of the provision remained the same.

6 Or at least the future value accruing to the shares of Opco in excess of the fixed value preferred shares.

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