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Introduction: Canada's 2025 Draft Tax Legislation Overview
On August 15, 2025, the Department of Finance released over 250 pages of draft legislation and explanatory notes, signalling significant changes to Canada's tax landscape. These measures aim to broaden the tax base, close perceived loopholes, and raise revenue in a challenging fiscal environment. Among the most notable proposals is an increase to the top marginal personal income tax rate, affecting high-net-worth individuals, professionals, and entrepreneurs. As a seasoned and knowledgeable Canadian tax lawyer, I will highlight the key provisions and their potential impact on individuals, corporations, and trusts.
Individual Tax Changes: Top Marginal Rates and Key Updates
Increase in the Top Federal Marginal Tax Rate
The proposal raises the top federal marginal income tax rate by two percentage points to 35%. Combined with provincial taxes, this could push top earners' rates above 56% in provinces like Ontario and Quebec. High-net-worth individuals, professionals, and entrepreneurs should consider immediate tax planning adjustments. As a knowledgeable Canadian tax lawyer, I advise reviewing income splitting, timing of capital gains, and trust structures in light of these changes.
Other Individual Tax Updates
The draft legislation also proposes lowering the lowest federal marginal tax rate from 15% to 14%, effective July 1, 2025. This benefits lower- and middle-income Canadians, enhancing take-home pay and optimizing withholding.
Other key updates include tightened Alternative Minimum Tax (AMT) rules, restrictions on charitable donation credits, a higher capital gains inclusion rate of 67% on gains above $250,000, and enhanced compliance requirements for foreign asset reporting in RRSPs and TFSAs. Experienced Canadian tax lawyers recommend assessing individual exposure and planning accordingly.
Corporate Tax Changes: Key Measures and Planning Considerations
Targeted Corporate Rate Adjustments
Certain sectors, such as financial institutions and resource companies, face an additional 1.5% surtax, reflecting government priorities in revenue collection. Seasoned Canadian tax lawyers advise corporate clients to evaluate after-tax profits and potential rate mitigation strategies.
Interest Deductibility Limitations
The draft reduces the EBITDA threshold for interest deductibility from 30% to 25%, affecting leveraged corporations and multinational groups operating in Canada. Proper debt planning with guidance from an experienced Canadian tax lawyer is recommended.
Strengthened Anti-Avoidance Rules
The General Anti-Avoidance Rule (GAAR) has been expanded, lowering the threshold for transactions considered tax avoidance. Penalties and reassessment risks are increased.
Inter-Corporate Dividend Restrictions
Cross-border structures using inter-corporate dividends may lose access to tax-free treatment under the proposed rules. Expert Canadian tax lawyer advice is crucial for multi-entity planning and cross-border structuring.
Trust and Estate Tax Updates: Reporting, Distributions, and Compliance
Expanded Reporting Requirements
All trusts, including small family trusts, must disclose settlors, beneficiaries, trustees, and protectors. Non-compliance carries penalties.
Non-Resident Beneficiary Distribution Rules
Canadian trusts making distributions to non-residents face withholding obligations, designed to prevent offshore tax leakage.
Graduated Rate Estate Adjustments
Restrictions on the preferential graduated rate estates (GREs) will limit opportunities to delay distributions and reduce taxes.
Charitable Trust Anti-Avoidance
Charitable trusts face new anti-avoidance rules to prevent improper use of donation credits, especially to shelter capital gains.
Pro Tax Tips
- Review high-income strategies in light of top marginal rate increases with a seasoned Canadian tax lawyer.
- Adjust withholding and projected income for the reduction in the lowest federal tax rate.
- Assess corporate debt and financing in light of reduced interest deductibility thresholds.
- Trustees should implement robust reporting systems to comply with expanded disclosure obligations.
- Consult an experienced Canadian tax lawyer for cross-border and trust-related planning to navigate AMT, capital gains, and compliance risks.
Frequently Asked Questions
What is the proposed top federal marginal tax rate?
The draft legislation proposes increasing it to 35%, combined with provincial taxes potentially exceeding 56% in some provinces.
What is the new lowest federal tax rate?
The lowest federal rate is proposed to decrease from 15% to 14%, effective July 1, 2025.
Who is most impacted by the capital gains inclusion rate change?
Investors, business sellers, and those with large real estate gains above $250,000 will be most affected.
Do these measures take effect immediately?
No, they are draft proposals under consultation, but could be enacted in 2026.
What changes apply to family trusts?
Expanded reporting obligations and non-resident distribution rules increase compliance and tax responsibilities for family trusts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
