Federal Budget 2025

2025 Canadian Federal Budget Commentary – Tax Initiatives

Introduction

On November 4, 2025 (Budget Day), Canada's Minister of Finance and National Revenue, François-Philippe Champagne, tabled the Liberal Government's budget, Building Canada Strong, in the House of Commons (Budget 2025).

The stated goals of Budget 2025 are to: (i) build the Canadian economy by increasing competitiveness and supercharging growth; (ii) empower Canadians by reducing costs, decreasing housing costs by investing in affordable housing, and reducing operational spending and increasing capital spending, referred to as "spending less to invest more"; and (iii) protect Canadian sovereignty and keep Canada safe.

Rather than any broad-based corporate tax rate reduction or other sweeping policy changes, Budget 2025 attempts to promote Canadian investment and business through a number of targeted measures, including the accelerated deduction of certain capital expenses. Budget 2025 also contains a number of tax measures impacting Canadian businesses, including: (i) a substantial modernization of Canada's transfer pricing rules; (ii) harmonization of the qualified investment concept for deferred plans, including the replacement of the existing registered investment regime; and (iii) amendments to, or extensions of, the clean technology manufacturing investment tax credit; the carbon capture, utilization and storage investment tax credit; and the clean electricity investment tax credit.

In addition to the measures impacting Canadian businesses, Budget 2025 includes new anti-avoidance rules applicable to the deferral of Part IV tax and indirect trust-to-trust transfers and eliminates the underused housing tax and the luxury tax on aircraft and vessels (but not vehicles).

Our commentary on the tax initiatives in Budget 2025 follows. Unless otherwise stated, all statutory references are to the Income Tax Act (Canada) (Tax Act).

Business Tax Measures

PRODUCTIVITY SUPER-DEDUCTION: TAX INCENTIVES TO SUPERCHARGE GROWTH

Budget 2025 announces the Government's intention to introduce a new "productivity super-deduction." The productivity super-deduction is not a single deduction or tax measure but comprises several enhanced tax incentives to promote investment and innovation in Canada, including the following previously announced measures:

• reinstatement of the accelerated investment incentive, creating an enhanced first-year write-off for most depreciable capital assets;
• immediate expensing of manufacturing or processing machinery and equipment;
• immediate expensing of clean energy generation and energy conservation equipment, and zero-emission vehicles;
• immediate expensing of patents, data network infrastructure, computers and other productivity-enhancing assets; and
• immediate expensing of scientific research and experimental development (SR&ED) capital expenditures.

Additionally, Budget 2025 proposes that the productivity super-deduction include two new measures:

• immediate expensing for manufacturing and processing buildings; and
• reinstatement of the accelerated capital cost allowance (CCA) rates for liquefied natural gas (LNG) equipment and related non-residential buildings.

Immediate Expensing for Manufacturing and Processing Buildings

Budget 2025 proposes to temporarily increase the CCA rate for eligible manufacturing or processing buildings to 100% for the first year that such property is used for manufacturing or processing. To be eligible for immediate expensing:

• the building must be acquired on or after Budget Day;
• the building must become available for use for manufacturing or processing before 2030; and
• at least 90% of the building's floor space must be used to manufacture or process goods for sale or lease.

The cost of eligible additions or alterations made to such buildings acquired on or after Budget Day and used for manufacturing or processing before 2030 will also qualify for the accelerated rate.

Property that is not new property when it is acquired by the taxpayer will be eligible for the accelerated first year deduction provided that:

• the property was not previously owned by the taxpayer (or any person with whom the taxpayer does not deal at arm's length); and
• the property was not transferred to the taxpayer on a tax-deferred basis.

Eligible property acquired on or after Budget Day and first used for manufacturing or processing in 2030 or later will be eligible for enhanced first-year CCA rates as follows:

• eligible property first used for manufacturing or processing between January 1, 2030 and December 31, 2031 will be eligible for an accelerated 75% first-year deduction; and
• eligible property first used for manufacturing or processing between January 1, 2032 and December 31, 2033 will be eligible for an accelerated 50% first-year deduction.

For eligible property that is first used for manufacturing or processing after 2033, the accelerated rate would not apply.

Accelerated CCA Rates for LNG Equipment and Related Buildings

Previously enacted measures providing for accelerated CCA for LNG equipment and related buildings expired at the end of 2024. Those measures increased the CCA rate for LNG equipment to 30%, from 8%, and the rate for non-residential buildings used in LNG facilities to 10%, from 6%.

Budget 2025 proposes to reinstate the accelerated rate for LNG equipment and related buildings acquired on or after Budget Day and before 2035. In order to be eligible for the accelerated rate, the relevant property must be used in low-carbon LNG facilities. The applicable rate for the eligible equipment and related buildings depends on the emissions performance of the LNG facility to which they belong:

• an LNG facility that is in the top 25% of emissions performance is eligible for an accelerated CCA rate of 30% for LNG equipment and 10% for related buildings; and
• an LNG facility that is in the top 10% of emissions performance is eligible for an accelerated CCA rate of 50% for LNG equipment and 10% for related buildings.

An LNG facility that is not in the top 25% of emissions performance will not be eligible for the enhanced rate.

The Government intends to release details regarding the emissions performance requirements at a later date.

Canada's Marginal Effective Tax Rate

Budget 2025 does not propose any change to headline corporate tax rates. However, Budget 2025 asserts that the productivity super-deduction will reduce the marginal effective tax rate (METR) by more than 2% and that this reduction will result in Canada's METR being both (a) the lowest METR in the G7; and (b) below the average METR as measured by the Organisation for Economic Co-operation and Development (OECD). This is stated to make Canada's per-sector METRs competitive with those in the United States, particularly in the manufacturing and processing sectors through the immediate expensing measures proposed in Budget 2025. Further, the productivity super-deduction is expected to make Canada's overall METR lower than the United States' METR, reflecting the Government's commitment to making Canada an attractive destination for investment that is directly competitive with the United States.

SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT: ENHANCED INCENTIVE AND PROCEDURAL CHANGES

Budget 2025 announces the Government's intention to enact previously announced amendments to the SR&ED program to:

• increase the existing $10 million and $50 million taxable capital thresholds at which the 35% refundable tax credit is progressively eliminated to $15 million and $75 million, respectively;
• extend the eligibility for the 35% refundable tax credit to eligible Canadian public corporations; and
• restore the eligibility of certain capital expenditures for the SR&ED program.

Budget 2025 proposes to increase the annual expenditure limit for the 35% refundable tax credit to $6 million, effective for taxation years that begin on or after December 16, 2024. This is an increase from the annual expenditure limit of $4.5 million announced in 2024.

Budget 2025 also announces the following changes to the administration of the SR&ED program:

• implement an elective pre-claim approval process and reduce the time to review such claims to 90 days, from 180 days;
• shorten processing times of low risk claims through the increased use of artificial intelligence (AI); and
• eliminate unnecessary steps and reduce information requirements.

These administrative changes are expected to be implemented as of April 1, 2026.

The Government also intends to conduct targeted consultations, including to review the SR&ED claim form (Form T661).

CANADA'S CLEAN ECONOMY TAX CREDITS

Budget 2025 builds upon the Government's previous commitments to build Canada's clean economy by announcing a new climate competitiveness strategy. The strategy is intended to create an investment environment to position Canadian businesses to compete and succeed on a global scale.

As part of the climate competitiveness strategy, Budget 2025 reiterates the Government's commitment to modernize Canada's electrical grid and build Canada's clean economy through tax credits. The previously enacted clean economy tax credits are:

• the Investment Tax Credit for Carbon Capture, Utilization, and Storage (CCUS ITC) available in respect of the capital cost of eligible property acquired on or after January 1, 2022;
• the Clean Technology Investment Tax Credit (CT ITC) available in respect of the capital cost of eligible property acquired and available for use on or after March 28, 2023;
• the Clean Hydrogen Investment Tax Credit (CH ITC) available in respect of the capital cost of eligible property acquired and available for use on or after March 28, 2023; and
• the Investment Tax Credit for Clean Technology Manufacturing (CTM ITC) available in respect of the capital cost of eligible property acquired and available for use on or after January 1, 2024.

Budget 2025 provides an update on the Government's timeline for delivering the not yet enacted Clean Electricity Investment Tax Credit (CE ITC), proposed to be available in respect of the capital cost of eligible property acquired and available for use on or after April 16, 2024, provided that the project did not begin construction before March 28, 2023. Budget 2025 indicates that the Government intends to release legislation implementing the CE ITC "soon."

Budget 2025 further confirms the Government's commitment to follow through on outstanding proposals to expand eligibility for the CT ITC, CTM ITC and CH ITC with retroactive effect, including the following:

• providing the CT ITC for eligible property acquired for use in certain waste biomass generation projects that is acquired and becomes available for use on or after November 21, 2023;
• expanding eligibility for the CT ITC for property used in small modular nuclear reactors by removing the megawatt electric threshold and modularity requirement and increasing the megawatt thermal threshold for nuclear fission reactors effective for property that is acquired and becomes available for use on or after March 28, 2023;
• expanding the CTM ITC for eligible property acquired for use in polymetallic mining activities that is acquired and becomes available for use on or after January 1, 2024; and
• providing the CH ITC for eligible property acquired for use in methane pyrolysis projects that is acquired and becomes available for use on or after December 16, 2024.

Although the Electric Vehicle Supply Chain Investment Tax Credit (announced in Budget 2024) was included in the Prime Minister's election platform and draft legislation was released on February 21, 2025, Budget 2025 does not mention whether the Government is committed to move forward with the credit, and it is absent from the Government's table outlining the timeline for delivering on the clean economy tax credits included in Budget 2025.

Clean Technology Manufacturing Investment Tax Credit

The CTM ITC is a 30% (subject to gradual phasing-out beginning in 2032) refundable tax credit. The CTM ITC is available in respect of the capital cost to a taxable Canadian corporation of "CTM property" acquired and available after December 31, 2023 and before January 1, 2035, for a "CTM use." The use of property "in a qualifying mineral activity producing all or substantially all qualifying materials" qualifies as a CTM use. "Qualifying material" is defined to mean lithium, cobalt, nickel, copper, rare earth elements, and graphite.

To support investments in the extraction, processing and recycling of co-product and by-product critical minerals, Budget 2025 proposes to expand the "qualifying material" definition to include antimony, indium, gallium, germanium and scandium. The expanded definition will apply in respect of CTM property that is acquired and becomes available for use on or after Budget Day.

Investment Tax Credit for Carbon Capture, Utilization and Storage

The CCUS ITC is an up to 60% refundable tax credit in respect of expenses incurred in a taxation year to acquire or install eligible equipment used in an eligible CCUS project that results in carbon dioxide being used for an eligible use.

The rate of the CCUS ITC depends on the type of expense and when the expense is incurred. Between January 1, 2022 and December 31, 2030, the following rates (full rates) apply:

• 60% for expenses related to eligible equipment used in direct air capture projects;
• 50% for expenses related to eligible equipment used in projects other than direct air capture projects; and
• 37.5% for expenses related to eligible transportation, storage and use equipment.

Between January 1, 2031 and December 31, 2040, the rates are one-half of those rates (reduced rates) described above.

Budget 2025 extends the availability of the full rates until December 31, 2035. Eligible expenditures incurred between January 1, 2036 and December 31, 2040 will be subject to the reduced rates.

Budget 2025 also announces that the Government is postponing its review of the CCUS ITC and that it intends to undertake that review before 2035 instead of before 2030 as previously announced in Budget 2022.

Clean Electricity Investment Tax Credit

The Government announced its intention to introduce the CE ITC in Budget 2023. The CE ITC is an up to 15% refundable tax credit applicable to investments in eligible property that is acquired and becomes available for use on or after April 16, 2024. The 2023 Fall Economic Statement indicated that the Government intended to differentiate between the application of the CE ITC to taxpayers that are publicly owned utilities and its application to taxpayers that are not publicly owned utilities. Budget 2024 announced design and implementation particulars of the CE ITC.

Canada Growth Fund

The CE ITC may be claimed by a "qualifying entity" in respect of the capital cost of "clean electricity property" (each as defined in subsection 127.491(1)) in respect of a project that commenced construction on or after March 28, 2023. Qualifying entities for the CE ITC include taxable Canadian corporations, provincial and territorial Crown corporations, corporations owned by municipalities or Indigenous communities, pension investment corporations, and the Canada Infrastructure Bank.

Subsection 127.491(10) provides that, for purposes of the CE ITC, the capital cost to a qualifying entity of clean electricity property is reduced by the amount of any "government assistance" or "non-government assistance" (each as defined in subsection 127(9)) received in or before the year in which the clean electricity property is acquired, or an amount that the qualifying entity is entitled to or can reasonably expect to receive that would be government assistance or non-government assistance if received by the entity in the taxation year.

Budget 2025 proposes to include the Canada Growth Fund as a qualifying entity for the CE ITC and to specify that financing provided by the Canada Growth Fund will not reduce the capital cost of clean electricity property for purposes of the CE ITC. This is similar to the changes proposed in the 2024 Fall Economic Statement to make the Canada Infrastructure Bank a qualifying entity and to provide that financing provided by the Canada Infrastructure Bank would not reduce the capital cost of clean electricity property for purposes of the CE ITC.

These changes are effective in respect of eligible property that is acquired and becomes available for use on or after Budget Day.

Provincial and Territorial Crown Corporations

The availability of the CE ITC to provincial and territorial Crown corporations was to be conditional on the province or territory in which the Crown corporation makes its investment being a designated jurisdiction. Budget 2024 announced that, in order for a jurisdiction to be a designated jurisdiction, the relevant provincial or territorial government was required to make certain public commitments (i.e., committing to achieve net-zero by 2050 and pass along the benefit of the CE ITC to ratepayers) and meet certain public reporting requirements.

Budget 2025 proposes to "remove the conditions imposed on provincial and territorial governments for their Crown corporations to be eligible to claim the [CE ITC]," with a view to enabling provincial and territorial Crown corporations to – subject to meeting the other conditions – access the tax credit and "effectively and efficiently support clean electricity investment while reducing administrative burden." It is assumed that the conditions being removed include the net-zero commitment and the requirement to pass along the benefit of the CE ITC, in addition to the public reporting; however, this was not expressly stated.

Since the CE ITC is not enacted, presumably the removal of the conditions will be retroactively effective for eligible property acquired and available for use back to April 16, 2024. This should be made clear when the Government releases its revised legislation for the CE ITC. Budget 2025 indicates the Government intends to release legislation implementing the CE ITC "soon."

Domestic Content Consultation

Budget 2025 announces the Government's intention to consult Canadians on the possibility of introducing domestic content requirements for the CT ITC and the CE ITC. Budget 2025 does not provide additional particulars in respect of the consultation.

FLOW-THROUGH SHARES AND CRITICAL MINERAL EXPLORATION TAX CREDIT

The Critical Mineral Exploration Tax Credit (CMETC) is a 30% non-refundable tax credit that can be claimed in respect of flow-through critical mineral mining expenditures. Flow-through critical mineral mining expenditures are generally specified Canadian exploration expenses (CEE) incurred by a principal-business corporation in conducting mining exploration activity primarily targeting designated critical minerals and renounced to an eligible subscriber of a flow-through share.

Budget 2025 proposes to include bismuth, cesium, chromium, fluorspar, germanium, indium, manganese, molybdenum, niobium, tantalum, tin and tungsten as critical minerals eligible for the CMETC. Once enacted, eligible CEE incurred in relation to deposits of such minerals could qualify for the CMETC if renounced to an eligible subscriber of a flow-through share. This expanded eligibility for the CMETC will apply to flow-through share agreements entered into after Budget Day and before April 2027.

Budget 2025 confirms that the Government will proceed with the extension, announced on March 3, 2025, of the Mineral Exploration Tax Credit (METC) for an additional two years until March 31, 2027. The METC is a 15% tax credit in respect of eligible expenses incurred in respect of mineral exploration renounced to an eligible subscriber for flow-through shares. Budget 2025 indicates that the Government will not proceed with amendments to the alternative minimum tax (AMT) announced on August 12, 2024 that would have deleted a rule that limits the deduction of resource expenses (including CEE) in computing adjusted taxable income to specified resource income of the taxpayer.

CANADIAN EXPLORATION EXPENSE DEFINITION

CEE includes certain expenses incurred by a taxpayer for the purpose of determining the existence, location, extent or quality of a mineral resource in Canada. Budget 2025 proposes to codify, as of Budget Day, the long-held Canada Revenue Agency (CRA) administrative position that expenses incurred for the purpose of determining the quality of a mineral resource in Canada do not include expenses related to determining the economic viability or engineering feasibility of the relevant mineral resource. This proposal is a direct response to the Supreme Court of British Columbia's decision in Seabridge Gold Inc. v British Columbia (2025 BCSC 558). In that case, the Court held that the term "quality" within the "qualified mining exploration expense" definition for the mining exploration tax credit under section 25.1 of the Income Tax Act (British Columbia) includes expenses related to determining the economic viability of mineral deposit. The British Columbia qualified mining exploration expense is the provincial equivalent of CEE.

AGRICULTURAL COOPERATIVE PATRONAGE DIVIDENDS PAID IN SHARES

Historically, a patronage dividend paid by an agricultural cooperative corporation to a member thereof by issuing shares of the cooperative was taxable to the member in the taxation year of the member in which the shares were received, and the cooperative was required to withhold and remit an amount on account of the member's resulting income tax liability.

Relieving measures, introduced in 2005, allow for the temporary deferral of (1) the income tax liability of the recipient of a patronage dividend from an agricultural cooperative corporation, and (2) the cooperative's corresponding withholding obligation in respect of that patronage dividend, in respect of dividends paid in-kind by the issuance of tax-deferred cooperative shares. This deferral lasts until the disposition or deemed disposition of the tax-deferred cooperative shares.

The relevant legislation that provides for this relief will expire at the end of 2025. Budget 2025 proposes to extend this relief to the end of 2030.

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