2025 Canada Federal Budget: A Summary Of Key Tax Proposals

Introduction

On November 4, 2025, Canada's Minister of Finance and National Revenue, the Honourable François-Philippe Champagne, tabled the 2025 Federal Budget ("Budget 2025") in the House of Commons.

Presented against a backdrop of slower economic growth, rising unemployment, ongoing affordability pressures and global business uncertainty, Budget 2025 proposes significant investments and targeted tax relief while emphasizing fiscal discipline. The Government has described its plan as one involving "generational investments" in housing, infrastructure and defence, while maintaining fairness and tax integrity as central policy objectives.

We note that Budget 2025 does not introduce any across-the-board increases to personal or corporate income tax rates under the Income Tax Act (Canada) ("Act"). Rather, it includes a range of targeted tax measures affecting corporations, trusts and individual taxpayers, including some that focus on tax compliance and a number that are relieving or beneficial in nature. The proposals include: immediate expensing for certain manufacturing and processing buildings to support capital investment, enhanced measures related to targeted tax credits and scientific research and experimental development (SR&ED) expenditures, updated transfer pricing rules to align more closely with international standards, and the elimination of the Underused Housing Tax and parts of the Luxury Tax.

Miller Thomson's Tax Group has reviewed the tax measures proposed in Budget 2025. In the summary that follows, we outline provisions of relevance to our clients and the sectors we serve across Canada.

Personal Income Tax Measures

Budget 2025 proposes several changes to personal tax credits, rebates and benefits, as well as changes to the qualified investment rules for registered plans, and measures related to trusts.

Personal Support Workers Tax Credit

Eligible personal support workers will be able to claim 5% of their yearly eligible earnings, to a maximum of $1,100, under a new refundable tax credit. This credit is proposed to apply for the 2026 through 2030 taxation years. In order to qualify, the person must work for an eligible health care establishment, and their main employment duties must include helping patients with activities of daily living and mobilization. They must ordinarily provide one-on-one care and essential support for health, well-being, safety, autonomy and comfort, as directed by a regulated health care professional or provincial community health organization.

The credit will not be available for earnings with respect to duties performed in British Columbia, Newfoundland and Labrador, and the Northwest Territories, as those jurisdictions have funding agreements in place with the federal government to increase personal support workers' wages.

Home Accessibility Tax Credit

Currently, it is possible to claim both the Home Accessibility Tax Credit (for eligible home renovations and alterations) and the Medical Expense Tax Credit (for qualifying medical and disability-related expenses) for the same expenses, provided that the criteria for both credits are met. Budget 2025 proposes that for 2026 and future taxation years, an expense claimed under the Medical Expense Tax Credit will not concurrently be eligible for the Home Accessibility Tax Credit.

Top-Up Tax Credit

In May 2025 the federal government announced a reduction in the lowest marginal tax rate, which is currently before Parliament in Bill C-4. This reduction will decrease the value of non-refundable tax credits, which are generally based on the lowest marginal tax rate. Budget 2025 proposes a new Top-Up Tax Credit to address the possibility that the reduction in the value of tax credits could exceed the tax savings from the tax rate reduction, such as where an individual has a large one-time credit for tuition or medical expenses.

The Top-Up Credit would effectively maintain the current 15% rate for credits claimed on amounts in excess of the lowest income tax bracket threshold, for taxation years from 2025 to 2030.

Automatic Federal Benefits for Lower-Income Individuals

Budget 2025 proposes to augment Canada's self-reporting taxation system by allowing the Canada Revenue Agency (CRA) discretionary authority to file a tax return for lower-income individuals (other than a trust) with specified income sources, where the individual has not filed a return for the particular year, and also has not filed a return in at least one year out of the preceding three years. For these purposes, a lower-income individual is one whose taxable income for the taxation year is below the lower of either the federal basic personal amount or provincial equivalent (plus the age amount and/or disability amount, where applicable).

The Minister of National Revenue could determine additional criteria for automatic filing. The tax return and resulting assessment would then be used to determine the individual's credit and benefit entitlements, although payments may require confirmation of basic information such as marital status.

Individuals would have 90 days to review the CRA's information and submit changes, and also an opportunity to opt out of automatic filing.

Consultation regarding this measure is open until January 30, 2026.

Canada Carbon Rebate (CCR)

The CCR, which has been a mechanism to return the federal fuel charge to Canadians in provinces where the federal fuel charge applied, is ending due to the removal of the federal fuel charge as of April 1, 2025. Eligible households received their final quarterly payment of the CCR beginning in April 2025. No claims or adjustment requests for CCR payments will be made in respect of tax returns filed after October 30, 2026.

Qualified Investments for Registered Plans

Budget 2025 proposes amendments to simplify, harmonize and streamline the qualified investment rules, under which registered plans can only invest in certain qualifying assets. Qualifying assets include mutual funds, publicly traded securities and corporate bonds.

Currently registered plans can invest in small businesses under two sets of rules. One set of rules applies for Registered Retirement Savings Plans ("RRSP"), Registered Retirement Income Funds ("RRIF"), Tax Free Savings Accounts ("TFSA") Registered Education Savings Plans ("RESP") and First Home Savings Account ("FHSA"). This set of rules allows for investment in specified small business corporations, venture capital corporations and specified cooperative corporations. A second set of rules applies only to RRSPs, RRIFs, RESPs, and Deferred Profit Sharing Plans ("DPSP") and allows for investments in eligible corporations, small business investment limited partnerships, and small business investment trusts. Currently neither set of rules apply to Registered Disability Savings Plans ("RDSP").

Budget 2025 proposes to extend the first set of rules to RDSPs and to repeal the second set of rules. However, although shares of eligible corporations, small business investment limited partnership and small business investment trusts will no longer be qualified investments, such interests acquired before 2027 under the current rules will continue to be qualified investments. These amendments are proposed to apply as of January 1, 2027.

Currently "registered investments" as defined in subsection 248(1) are qualified investments for all registered plans. In order for a corporation or trust to be a registered investment, it must register with the Canada Revenue Agency. Currently units of a mutual fund trust are qualified investments. A trust may not be sufficiently widely held to qualify as a mutual fund trust but may apply to be a registered investment if the investments of the trust are comprised exclusively of investments which would be qualified for the types of registered plans for which it is registered.

Budget 2025 proposes to replace the registered investment regime in Part X.2 of the Act with two new categories of qualified investments which would not require registration: (i) units of a trust that is subject to requirements of National Instrument 81-102 published by the Canadian Securities Administrators and (ii) units of a trust that is an investment fund as defined in existing subsection 251.2(1).

In addition, technical amendments are proposed for simplification. The qualified investment rules are proposed to be consolidated into one definition applicable to RRSPs, RRIFs, TFSAs. RESPs, FHSAs and RDSPs, and the list of qualified investments prescribed in the Income Tax Regulations would be reorganized by asset class to make the rules simpler and clearer.

21-Year Rule for Personal Trusts

Except for certain specific types of trusts, trusts are deemed to have disposed, in general, of each property of the trust at its fair market value every 21 years (the "deemed disposition rule") thereby resulting in net accrued capital gains being taxed in the trust on a regular basis. Where one trust directly transfers trust property, before its 21^st anniversary, to another trust on a tax deferred basis, subsection 104(5.8) prevents starting the clock again for another 21 year deferral by using the new trust's 21^st anniversary. This "anti-avoidance" rule effectively provides that the second trust inherits the first trust's 21^st anniversary. To address certain tax planning techniques which have developed in response, Budget 2025 proposes to expand the application of this "anti-avoidance" rule where capital property, land included in inventory, Canadian resource property or foreign resource property is transferred, "directly or indirectly in any manner whatever," from one trust to another trust, thereby also applying to indirect transfers. This would apply to transfers on or after November 4, 2025.

Reporting Requirements for Bare Trusts

Budget 2025 indicates that the government intends to proceed with certain previously announced measures. One of these relates to the announcement on August 15, 2025 respecting technical tax amendments to the Act and the Income Tax Regulations, but subject to a deferred application date for reporting by bare trusts, so that it would apply to taxation years ending on or after December 31, 2026.

Business Income Tax Measures

Immediate Expensing for Manufacturing and Processing Buildings

Budget 2025 proposes to provide for 100% immediate expense deduction for certain manufacturing and processing buildings effective for property acquired on or after Budget day and first used for manufacturing and processing before 2030.

Under the capital cost allowance (CCA) rules, a business is entitled to deduct certain amounts in respect of the capital cost of its depreciable property. The CCA regime divides depreciable property into classes each allowing for deductions at a specific rate and the amount of a given deduction is determined based on the class to which the relevant depreciable property belongs.

Under the current rules, eligible buildings used to manufacture or process goods for sale or lease have a prescribed CCA rate of 10%. Budget 2025 proposes a temporary immediate expensing for the cost of eligible buildings (including the cost of eligible additions or alterations made to eligible buildings), which would allow a 100% deduction in the first taxation year that the eligible building is used for manufacturing and processing.

To be eligible, 90% of the floor space of a building must be used for the manufacturing or processing of goods for sale or lease. In addition, two further conditions must be met for property that has been used, or acquired for use, for any purpose before acquired by the taxpayer: (i) neither the taxpayer nor a non-arm's length person previously owned the property; and (ii) the property has not been transferred to the taxpayer on a tax-deferred or rollover basis.

Scientific Research and Experimental Development (SR&ED) Tax Incentive Program

Budget 2025 proposes to expand the availability of enhanced tax credits available under the SR&ED rules. The SR&ED rules provide that qualifying expenditures are fully deductible in the year incurred and generally eligible for an investment tax credit. The tax credit is available at two rates: a fully refundable credit at an enhanced rate of 35% for CCPCs, up to $3 million of qualifying expenditures; and (ii) a non-refundable tax credit of 15% for non-CCPCs and for qualifying expenditures that do not qualify for the enhanced credit.

On December 16, 2024 and as part of the Fall Economic Statement, it was announced that the limit for the enhanced refundable credit would be increased to $4.5 million. Budget 2025 proposes to increase the availability of the enhanced refundable credit (35%) from its current $3 million cap to $6 million for taxation years that begin on or after December 16, 2024.

Agricultural Cooperative Patronage Dividends Paid in Shares

The 2005 amendments to the tax rules, allowing for the deferral of income taxes and withholding obligations on patronage dividends received as eligible shares until the disposition of the eligible shares, set to expire at the end of 2025, have been extended to the end of 2030.

Critical Mineral Exploration Tax Credit

Flow-through shares allow corporations to transfer Canadian exploration expenses (CEE) (including Canadian renewable and conservation expenses) and Canadian development expenses to investors. Investors are then able to deduct the expenses in calculating their taxable income.

The Critical Mineral Exploration Tax Credit (CMETC) provides an additional tax benefit equal to 30% of specified mineral exploration expenses incurred in Canada and renounced to investors. Currently the critical minerals eligible for the CMETC are nickel, cobalt, graphite, copper, rare earth elements, vanadium, tellurium, gallium, scandium, titanium, magnesium, zinc, platinum group metals, uranium and lithium.

For flow-through shares agreements entered into after Budget Date and on or before March 31, 2027, Budget 2025 proposes to expand CMETC eligibility to include bismuth, cesium, chromium, fluorspar, germanium, indium, manganese, molybdenum, niobium, tantalum, tin and tungsten.

Investment Tax Credit for Carbon Capture Utilization and Storage ("CCUS")

The CCUS is a refundable tax credit for certain expenses related to carbon capture use and storage. The CCUS is available at three different rates depending upon the purpose of the equipment. Currently the rates for expenditures incurred from the beginning of 2022 to the end of 2030 are 60% for eligible capture equipment used in a direct air capture project; 50% for all other eligible capture equipment; and 37.5% for eligible transportation, storage and use equipment. The rates are set to decrease from the start of 2031 to the end of 2040. Budget 2025 proposes to extend the deadline for the higher credit rates to the end of 2035. The lower credit rates would apply for expenditures incurred between 2036 and 2040.

Clean Electricity Investment Tax Credit and Canada Growth Fund

Budget 2025 proposes to, among other things, extend the clean electricity investment tax credit ("CEIITC") to the Canada Growth Fund (by making the fund an eligible entity). The Canada Growth Fund, is a Crown Corporation and wholly-owned subsidiary of Canada Development Investment Corporation. The CEIITC is a refundable credit equal to 15% of the capital cost of certain investments in equipment for low-emitting electricity generation, electricity storage and electricity transmission between Provinces and Territories.

Currently the CEIITC is available to taxable Canadian corporations, provincial and territorial Crown corporations, corporations owned by municipalities or Indigenous communities, pension investment corporations and the Canada Infrastructure Bank.

Tax Deferral Through Tiered Corporate Structures

Budget 2025 proposes to introduce new restrictions into the Act to prevent certain tax planning techniques designed to defer the tax liability on investment income.

The rules in Part IV of the Act prevent the use of Canadian-controlled private corporations for the deferral of personal income tax on investment income. CCPCs earning investment income are subject to an additional refundable tax ("Part IV Tax") that increases the corporation's tax rate to approximately equal the highest personal marginal tax rate. A CCPC that pays the additional refundable tax is generally entitled to a partial refund when it pays a taxable dividend.

Generally inter-corporate dividends are included in the income of the recipient corporation, but off-set by a full dividend deduction. Part IV imposes refundable tax on a recipient corporation that receives a taxable dividend from a connected corporation (generally a corporation that owns 10% of the votes and value of the dividend paying corporation). In this case, the recipient corporation is subject to refundable tax corresponding to the amount of the payer corporation's dividend refund. A recipient corporation is required to pay this refundable Part IV tax on the balance-due day for its taxation year in which the dividend is received, which can be after the balance-due date for the payer corporations taxation year in which the dividend was paid.

Certain tax planning techniques have been designed to defer the tax liability on investment income by interposing corporations with staggered year ends into a corporate chain. Budget 2025 proposes to restrict such planning techniques by suspending the dividend refund that could be claimed by a payer corporation on the payment of a taxable dividend to an affiliated recipient corporation if the recipient corporation's balance-due day for the taxation year in which the dividend was received ends after the payer corporation's balance-due day for the taxation year in which the dividend was paid. The rule would not apply if each corporate dividend recipient in the tier corporate structure paid a subsequent dividend on or before the payer's balance-due day.

Eligible activities – CEE

Currently, CEE includes expenses incurred for the purpose of determining the existence, location, extent or quality of mineral resource.

A recent decision of the BC Supreme Court held that the reference to "quality" under the provincial equivalent of the federal CEE could be interpreted to include economic viability and not only the physical characteristic of the resource.

Budget 2025 proposes to amend the Act to clarify that expenses incurred for the purpose of determining the existence, location, extent or quality of a mineral resource do not include expenses related to assessing economic viability or engineering feasibility of the resource.

International Tax Measures

Transfer Pricing

The transfer pricing rules have been the subject of public consultation, initiated by Budget 2021. In response to comments received in the consultation process, Budget 2025 proposes to amend the transfer pricing rules to better align with international norms as articulated in the OECD's Transfer Pricing Guidelines. Some of the Department of Finance recommendations in their consultation paper dated June 6, 2023 are included in these amendments . These amendments are estimated to raise a total of $510 million of tax revenues over the next 5 years.

The amendments would provide more detail on how to analyse cross-border transactions between non-arm's length entities, a new interpretation rule designed to ensure consistency with the OECD Transfer Pricing Guidelines, and a new transfer pricing adjustment rule.

Transfer pricing requires analysing an in-scope transaction to ensure that its terms are consistent with terms that would apply in an arm's length transaction. The new rules would provide that a transaction (or series of transactions) will be characterized as inconsistent with arm's length terms if (i) the actual transaction or series of transactions does not include a condition that would have been included by arm's length parties or (ii) arm's length participants would not have entered into the transaction or series of transactions or would have entered into a different transaction or series of transactions.

The new rules require that a transaction (the actual transaction and the hypothetical arm's length transaction to which it would be compared) be analyzed with reference to "economically relevant characteristics", which would be defined to include five comparability factors: contractual terms, functional profile, characteristics of the property or service, economic and market context and business strategies.

The new transfer pricing adjustment rule would require that any amounts relevant in applying the provisions of the Act for a taxpayer's taxation year be adjusted to the quantum or nature of amounts arising in a transaction consistent with arm's length terms.

Budget 2025 also proposes to amend administrative rules applicable to the transfer pricing regime. In particular:

• The threshold for the transfer pricing penalty would be increased which would provide some relief to taxpayers. Currently the penalty applies if there is a $5 million transfer pricing adjustment. The threshold would be increased to $10 million.
• Transfer pricing documentation requirements would be clarified and amended to be more closely aligned with the new definitions and analytic rules.
• A simplified documentation requirement would be permitted if prescribed conditions are satisfied.
• The time required for the production of transfer pricing documentation would be reduced from 3 months to 30 days. However, the requirement to make or obtain appropriate records by the documentation due-date for a given year would be unchanged.

The amendments would be effective for taxation years beginning after November 4, 2025.

Investment Income Derived from Assets Supporting Canadian Insurance Risks

The foreign accrual property income ("FAPI") rules apply to passive income earned by a foreign affiliate of a Canadian taxpayer. Where applicable such FAPI is included in the income of the Canadian taxpayer and subject to Canadian income tax as it is earned by the foreign affiliate. The underlying policy of the FAPI rules is to discourage Canadian taxpayers from shifting income to other jurisdictions.

The FAPI regime includes base erosion deeming rules which apply to characterize certain types of income earned by a foreign affiliate as passive income. Budget 2025 proposes to amend paragraph 95(2)(a.2), the base erosion rule applicable to insurance companies. The amendment would clarify that investment income is included in FAPI, where it is earned in respect of assets held by a foreign affiliate to back Canadian risks, regardless of which entity owns the assets. The investment income includes income from the assets directly backing those risks and the regulatory surplus assets related to them. These changes are estimated to raise a total of $255 million of tax revenues over the next 5 years. The amendment would be effective for taxation years beginning after November 4, 2025.

Commitment to Action 2 Report of the BEPS Action Plan – Hybrid Mismatch Arrangements

The Federal government in Budget 2025 committed to legislative amendments to implement the hybrid mismatch arrangement rules. The hybrid mismatch arrangement rules have been adopted for financial instruments, but other rules dealing with, among other things, hybrid and reverse hybrid entities have not yet been introduced. The announcement in Budget 2025 indicates these additional measures will be introduced in the future.

Sales and Excise Tax Measures

Underused Housing Tax ("UHT") Eliminated

Budget 2025 proposes to repeal the UHT for the 2025 calendar year. UHT will still apply in respect of the 2022, 2023, and 2024 calendar years, including interest and penalties.

The UHT is an annual tax, generally payable by non-resident, non-Canadian owners, at a rate of 1% of the value of the residential property. However, for the 2022 calendar year, many Canadian corporations, partnerships, and trusts are required to file even though no tax was payable. (See our previously published articles: The new Underused Housing Tax: Are you tax exempt? and Underused housing tax – Canada Revenue Agency publishes additional guidance.)

Luxury Tax on Aircraft and Vessels Eliminated

Budget 2025 proposes to amend the Select Luxury Items Tax Act to repeal the luxury tax on the sale and importation of subject aircrafts and subject vessels for tax payable after Budget Day. Luxury tax will continue to apply to subject vehicles.

Currently, the federal government imposes luxury tax on the sale and importation of subject vehicles and aircraft with a value above $100,000 and subject vessels with a value above $250,000. The tax is equal to the lesser of (i) 10% of the total value of the relevant vehicle, aircraft or vessel and (ii) 20% of the value above a set threshold level.

Registered vendors of subject aircraft and subject vessels would be required to a final return for the reporting period including Budget Day. Registrations would be maintained to allow affected registered vendors to claim rebates until February 1, 2028, at which time registrations will be automatically cancelled. (See our previously published article: Luxury tax draft legislation (finally) released: May apply to certain vehicles, aircraft, and boats.)

Carousel Fraud and Introduction of Reverse Charge Rules for Certain Telecommunication Supplies

In an effort to combat carousel fraud schemes, Budget 2025 proposes changes to the Excise Tax Act (Canada) to introduce a new reverse charge mechanism ("RCM"), beginning with very specific supplies in the telecommunication sector made to registered recipients. The proposed new rules will allow for additional supplies to be subject to the RCM by way of regulations.

Where the RCM is applicable, suppliers would not be required to collect the GST/HST payable on the supply and registered recipients will be required to self-assess and report the GST/HST payable in their own GST/HST return. If entitled, the recipient can then claim a corresponding input tax credit.

Interested stakeholders are invited to share feedback on the proposals. The consultation period ends January 12, 2026.

Clarification on the GST/HST Treatment of Manual Osteopathic Services

Budget 2025 proposes to clarify that only the supply of osteopathic services rendered by osteopathic physicians are exempt from GST/HST. Osteopathic services rendered by other individuals, such as qualifying manual osteopathic service providers that are not osteopathic physicians, are subject to GST/HST.

Charities and Non-Profits

Budget 2025 proposes several measures that will affect, and be of interest to, Canada's charities and non-profit organizations (NPOs). These proposals include:

• Revising the new NPO reporting requirements and delaying their application to the 2027 tax year or later.
• Extending anti-money laundering prohibitions to donations.
• Piloting a program that allows a duty drawback for certain goods when they are donated to a registered charity.
• Addressing integrity issues related to private educational institutions.
• Addressing the rise in hate-related crimes through reforms and engagement with impacted communities.
• Making it faster to dissolve federal NPOs that are listed as terrorist entities.
• Developing a regulatory framework governing stablecoins—a potential new way to give to charity.

Budget 2025 also confirms that Ottawa will move forward with several previously announced measures and existing legislative proposals that are relevant to the sector. These include several technical amendments to the Act that were proposed in August 2024, as well as draft legislation to extend the 2024 charitable donation deadline.

As with previous federal budgets, Budget 2025 contains both new and ongoing funding opportunities for charities and NPOs operating in almost every sector. Please see our Social Impact Group's special Federal Budget issue, which shares more details about these funding opportunities and the above-noted Budget proposals.

Previously Announced Measures

In Budget 2025, the Government confirmed their intention to proceed with numerous previously announced measures, as modified to take into account consultations and deliberations since their release, including the following measures.

• Legislative proposals released on August 15, 2025 including the capital gains rollover on small business investments, tax exemption for sales of shares to employee ownership trusts, non-compliance with information requests, excessive interest and financing expenses limitation rules, substantive CCPCs, trust reporting rules (subject to a deferral of reporting for bare trusts until the 2026 taxation year) and technical amendments to the Global Minimum Tax Act.
• Legislative proposals announced in the 2024 Fall Economic Statement including exempting the Canada Disability Benefit from income, changes to a number of tax credits and extension of the accelerated investment incentive and immediate expensing measures.
• Legislative proposals announced in August 2024 including changes to the alternative minimum tax, rules related to withholding for non-resident service providers, registered education savings plans, rules respecting the avoidance of tax debts, changes to certain tax credits and technical tax amendments that were released at that time. While not specifically mentioned in today's Budget papers, we note the technical tax amendments referenced in Budget 2025 included a beneficial change to subsection 164(6) of the Act that would allow capital losses incurred in the first three years rather than only in the first taxation year of a graduated rate estate to be carried back to offset capital gains realized in the final taxation year of the deceased taxpayer.
• The proposed increase in the lifetime capital gains exemption to apply to up to $1,250,000 of eligible capital gains that was initially announced in Budget 2024.
• Legislative proposals to implement hybrid mismatch arrangements rules initially announced in Budget 2021.

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.