Federal Budget 2025: Key Tax Updates For Taxpayers

On November 4, 2025, the federal government tabled Canada Strong: Budget 2025 (Budget 2025), the first federal budget tabled by Finance Minister François-Philippe Champagne under the leadership of Prime Minister Mark Carney.

The following summary highlights some of the key business and international tax measures proposed by Budget 2025. For a more detailed description of these measures (and others), please download a complimentary special report here prepared by the Dentons Tax group in collaboration with Wolters Kluwer here.

Modernization of Canada's transfer pricing rules

Following consultations initiated in Budget 2021 and the release of a Department of Finance consultation paper in June 2023, Budget 2025 proposes a comprehensive modernization of Canada's transfer pricing regime to align it more closely with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and existing international standards. The new rules would apply to taxation years beginning after Budget Day. The changes will include replacing the existing operative provision in subsection 247(2) of the Income Tax Act with a series of new rules that provide more detail on how cross-border transactions between non-arm's length persons must be analyzed.

Under the new rules, a transfer pricing adjustment may apply to a taxpayer or a partnership if the taxpayer or partnership and a non-resident person with whom the taxpayer or partnership does not deal at arm's length are participants to a transaction or series of transactions, and the transaction or series includes "actual conditions" that differ from arm's length conditions.

The actual conditions of a transaction or series are the conditions that actually apply between any of the participants in the transaction or series. The transaction or series must be analyzed with reference to the "economically relevant characteristics" of the transaction or series, including the contractual terms of each other transaction or series that is relevant to the transaction or series and that involves at least one of the participants or any other member of the multinational group, as well as other economically relevant characteristics, including the conduct of the parties. The actual conditions of a transaction or series would be deemed to differ from arm's length conditions if the transaction or series omits a condition that would be present in an arm's length transaction.

Arm's length conditions include the possibility that no transaction or series, or a different transaction altogether, would have been entered into by the arm's length participants.

If a transaction or series falls into the scope of the transfer pricing rules, then any amounts relevant for applying the provisions of the Income Tax Act may be adjusted to the quantum and nature of the amounts that would have been determined if arm's length conditions had applied to the transaction or series.

Budget 2025 also proposes administrative updates to the transfer pricing rules, such as increasing the penalty threshold for transfer pricing adjustments from CA$5 million to CA$10 million, simplifying contemporaneous documentation requirements (including a new simplified documentation process where prescribed conditions are met) and requiring taxpayers to provide contemporaneous documentation to the Canada Revenue Agency (CRA) within 30 days of a written request.

Temporary immediate expensing for manufacturing and processing buildings

Budget 2025 proposes to introduce temporary, immediate expensing for the cost of eligible manufacturing or processing buildings in Canada (including eligible additions or alterations). Businesses may deduct 100% of the cost of qualifying, newly acquired buildings during the first taxation year they are used for manufacturing or processing, provided that at least 90% of the building's floor space is dedicated to such activities.

Immediate expensing will not apply to previously owned properties or properties acquired on a "rollover" basis. If a building's use changes after immediate expensing is claimed, CCA recapture rules may apply.

This measure would apply to eligible property acquired on or after Budget Day and first used for manufacturing or processing before 2030. The deduction will gradually be phased down: 75% for property first used in 2030 or 2031, and 55% for property first used in 2032 or 2033. No enhanced allowance will be available after 2033.

Accelerated CCA for low-carbon LNG facilities

Budget 2025 proposes to reintroduce and modernize accelerated CCA incentives for liquefied natural gas (LNG) buildings and equipment, which had previously expired in 2024.

Under the new regime, accelerated depreciation rates will depend on the emissions performance of the facility:

• Top 25% of facilities by emissions performance: 30% CCA for liquefaction equipment and 10% for non-residential LNG buildings.
• Top 10% of facilities by emissions performance: 50% CCA for liquefaction equipment and 10% for non-residential LNG buildings.

Eligibility will also require meeting specified low-emission standards.

These incentives apply to property acquired on or after Budget Day and before 2035.

Expansion of the SR&ED tax incentive program

Budget 2025 includes a proposal to confirm and expand upon previously announced enhancements to the Scientific Research and Experimental Development (SR&ED) tax incentive program, originally outlined in the 2024 Fall Economic Statement.

Key measures in this regard include:

• Higher capital thresholds for the enhanced 35% refundable credit: The phase-out range for taxable capital employed in Canada will increase from CA$10-50 million to CA$15-75 million.
• Expanded eligibility: The refundable 35% SR&ED tax credit will be extended to certain eligible Canadian public corporations, as well as to Canadian-resident subsidiaries wholly or substantially owned by such corporations.
• Reinstatement of capital expenditure eligibility: Capital expenditures will be available for both the income deduction and the investment tax credit components of the SR&ED program.
• Increased expenditure limit: The annual limit on qualifying SR&ED expenditures eligible for the enhanced 35% refundable credit will rise to CA$6 million, up from the previously announced CA$4.5 million and the prior CA$3 million limit. This change will apply retroactively to taxation years beginning on or after December 16, 2024.
• Administrative modernization: Effective April 1, 2026, several measures will reduce the administrative burden on claimants, including an elective pre-claim technical approval process, greater use of artificial intelligence in program administration and a streamlined review process.

Changes to critical mineral exploration and clean economy investment tax credits

Budget 2025 proposes measures to expand access to the critical mineral exploration tax credit and some of the clean economy investment tax credits:

• Critical mineral exploration tax credit: Eligibility would be available in respect of the exploration for bismuth, cesium, chromium, fluorspar, germanium, indium, manganese, molybdenum, niobium, tantalum, tin and tungsten.
• Clean technology manufacturing investment tax credit: Eligibility would be available in respect of the cost of property to extract, process or recycle critical minerals which would include antimony, indium, gallium, germanium and scandium.
• Carbon capture, utilization and storage: The availability of the full credit rate would be extended by five years (i.e., until 2035) with the half credit rate being available thereafter until 2040.
• Clean electricity investment tax credit: Canada Growth Fund would be eligible to claim the credit, and financing received from the Canada Growth Fund would not reduce the cost of eligible property for the purposes of claiming the investment tax credit.

Expansion of FAPI rules for insurance of Canadian risks

Currently, foreign accrual property income (FAPI) includes income earned by a foreign affiliate from insurance or reinsurance of Canadian risks. Budget 2025 proposes to expand the FAPI inclusion to investment income derived from assets held by a foreign affiliate in connection with the insurance or reinsurance of Canadian risks, regardless of which entity actually provides the insurance. Budget 2025 will also expand the current 90% arm's length test from applying to gross premium revenue to gross revenue, thereby encompassing all income related to the insurance business.

Measures to combat GST/HST carousel fraud

Budget 2025 proposes targeted amendments to the Excise Tax Act to address carousel fraud schemes, which exploit the design of the goods and services tax/harmonized sales tax (GST/HST) system through chains of real or fraudulent transactions involving a "missing trader" who collects but does not remit tax.

To counter these schemes, the government plans to introduce a new reverse charge mechanism (RCM), initially applying to specified telecommunication services such as voice-over internet protocol minutes and similar real-time communication services. Other prescribed supplies may become subject to an RCM.

Under the proposed rules, suppliers would not collect GST/HST on affected transactions. Instead, recipients that are GST/HST registrants and acquiring the services primarily for resale would be responsible for self-assessing and remitting the applicable tax in their GST/HST return, while remaining eligible to claim input tax credits in the same return if conditions are met. Rebate eligibility for tax paid in error would be restricted to cases where the amount was remitted to the Receiver General; otherwise, if the recipient paid the tax to the supplier, the recipient must seek a refund directly from the supplier. Invoices would need to clearly indicate that a supply is subject to the RCM, ensuring recipients know to account for the tax themselves.

Public consultations on the design of the new rules are open until January 12, 2026, with implementation details to follow in enacting legislation.

Simplification of qualified investment rules for registered plans

Currently, the rules determining what constitutes a "qualified investment" vary among registered plans such as RRSPs, RRIFs, TFSAs, RESPs, RDSPs, DPSPs and FHSAs, creating uncertainty, particularly in relation to small business investments.

In order to simplify and streamline the rules relating to registered plans in small business investments, Budget 2025 proposes to retain and expand one set of rules to apply to RDSPs, while repealing the second set of rules. As a result, RDSPs could acquire shares of specified small business corporations, venture capital corporations and specified cooperative corporations, and eligible corporations, small business investment limited partnerships and small business investment trusts would cease to be qualified investments.

Budget 2025 also proposes to eliminate the registered investment regime. Currently, for a corporation or a trust to be a registered investment (which is a qualified investment for all registered plans), it must be registered with the CRA. Budget 2025 proposes to repeal this regime as of January 1, 2027 and, as of Budget Day, replace it with two categories of qualified investments that do not require registration: units of trusts governed by NI 81-102 and units of investment funds managed by a registered investment fund manager under NI 31-103. Corporations or trusts that were previously registered as registered investments would continue to qualify.

Other notable measures

Budget 2025 also proposes the following measures:

• Suspension of a payer corporation's dividend refund on taxable dividends paid to affiliated corporations with later balance-due days, until the recipient pays a taxable dividend to a non-affiliated corporation or individual shareholder;
• Clarification that expenses incurred to determine the economic viability or engineering feasibility of a mineral resource do not qualify as Canadian Exploration Expenses;
• Broadening the 21-year deemed disposition rule for direct trust-to-trust transfers to also capture indirect transfers of trust property to another trust;
• Deferral of bare trust reporting to taxation years ending on or after December 31, 2026;
• A tax credit for certain personal support workers equal to 5% of their eligible earnings (up to a maximum credit of CA$1,100);
• Discretionary authority for the CRA to file income tax returns for certain low-income individuals to ensure such individuals receive federal benefits and credits;
• Elimination of the underused housing tax as of the 2025 calendar year;
• Elimination of the luxury tax under the Select Luxury Items Tax Act on subject aircraft and vessels; and
• Clarification that osteopathic services rendered by individuals who are not osteopathic physicians are taxable under the Excise Tax Act.

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