2025 Federal Budget Highlights

On November 4, 2025, Finance Minister François-Philippe Champagne tabled the Government’s 2025 Federal Budget. Read below for a summary of key tax changes: 

Underused Housing Tax (UHT)

The UHT applies to certain owners (generally non-resident, non-Canadians) of vacant or underused residential property in Canada. The UHT generally imposes an annual tax of 1% of the value of the property. 

Budget 2025 proposes to eliminate the UHT as of the 2025 calendar year, meaning no UHT would be payable, and no UHT returns would be required to be filed in respect of the 2025 calendar year or later years. 

Bare Trust Reporting

Effective for tax years ending on or after December 31, 2023, bare trusts became subject to the annual reporting requirements applicable to express trusts. The CRA subsequently removed the requirement for bare trusts to file an annual return for the 2023 and 2024 tax years.   

Budget 2025 confirms the government’s intention to proceed with the annual filing requirements for bare trusts. However, the application date for reporting by bare trusts will be deferred to tax years ending on or after December 31, 2026. Thus, bare trusts should not be required to file an annual return for the 2025 tax year. 

Business Income Tax Measures

Immediate Expensing for Manufacturing and Processing Buildings 

Under the current rules, eligible buildings in Canada used to manufacture or process goods for sale or lease are subject to a capital cost allowance (CCA) rate of 10 per cent. This is generally comprised of the regular 4 per cent rate under Class 1, plus an additional 6% allowance for manufacturing or processing buildings where at least 90% of the building’s floor space is used to manufacture or process goods for sale or lease.

Budget 2025 proposes an enhanced 100 per cent deduction in the first tax year for eligible manufacturing or processing buildings provided the 90 per cent floor space requirement is met.

This measure would be effective for eligible property acquired on or after Budget Day and is first used for manufacturing or processing before 2030. Used property purchased after Budget Day must not be previously owned by the taxpayer nor a non-arm’s length person and must not have been acquired on a tax-deferred rollover.  This enhanced CCA measure will be phased out based on the following schedule:

  • 75 per cent enhanced first-year CCA rate for eligible property first used in 2030 or 2031;
  • 55 per cent enhanced first-year CCA rate for eligible property first used in 2032 or 2033; and
  • No enhanced rate available for eligible property that is first used after 2033.

Scientific Research and Experimental Development (SRED) Tax Incentive Program 

Under the SRED program, qualifying expenditures are deductible in the year incurred and are generally eligible for an investment tax credit. Canadian-controlled private corporations (CCPCs) may be eligible for a 35 per cent refundable tax credit on up to $3 million of qualified expenditures, and a non-refundable tax credit of 15 per cent is available for corporations other than CCPCs and for qualified expenditures of a CCPC that do not qualify for the enhanced tax credit.

The $3 million limit is subject to reduction based on a CCPC’s taxable income and taxable capital employed in Canada, calculated on an associated corporate group basis.

The 2024 Fall Economic Statement proposed several changes to the SRED program that included:

  • Increasing the expenditure limit from $3 million to $4.5 million and increasing the lower and upper prior-year taxable capital phase-out boundaries to $15 million and $75 million, respectively;
  • Extending the eligibility for the enhanced tax credit to eligible Canadian public corporations; and
  • Restoring the eligibility of SRED capital expenditures for both the income deduction and tax credit components of the program.

Budget 2025 confirms the government’s intention to introduce legislation to implement these measures and proposes to further increase the expenditure limit from the previously announced $4.5 million to $6 million. This measure would apply to tax years that begin on or after December 16, 2024.

Tax Deferral Through Tiered Corporate Structures 

CCPCs that earn investment income are generally subject to a refundable tax. This tax is refunded to the corporation as it pays taxable dividends. Where an intercorporate taxable dividend is paid to a connected corporation (generally, a recipient corporation that holds more than 10 per cent of the voting and value shares of the payer corporation), the recipient corporation may be subject to the refundable tax corresponding to the amount of the payer corporation’s dividend refund. This tax is referred to as Part IV tax.

Where the payer corporation and the recipient corporation have different year ends, there may be an opportunity to defer the Part IV tax liability.  Budget 2025 proposes to limit this deferral of Part IV tax where there is a tiered corporate structure and the corporations have mismatched year ends. Generally, this measure proposes to suspend 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 tax balance-due date for the recipient corporation is after the payer corporation’s tax balance due date for the tax year in which the dividend is paid. There will be exceptions for bona fide commercial transactions and situations where each corporate dividend recipient in the chain of affiliated corporations pays a subsequent dividend on or before the payer’s balance due date.

This measure would apply to taxation years that begin or after Budget Day.

Critical Mineral Exploration Tax Credit (CMETC) 

The CMETC provides an income tax benefit for individuals who invest in eligible flow-through shares. It is equal to 30 per cent of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors. Certain critical minerals are eligible for the CMETC. Budget 2025 proposes to expand the eligibility of the CMETC to include additional critical minerals. This measure would apply to expenditures renounced under eligible flow-through share agreements entered into after Budget Day and on or before March 31, 2027.

Other Clean Energy Initiatives 

The Clean Technology Manufacturing (CTM) investment tax credit provides a refundable tax credit equal to 30 per cent of the cost of new machinery and equipment used in qualifying clean-tech manufacturing or in the extraction, processing, or recycling of designated critical minerals. Budget 2025 proposes to expand the list of eligible critical minerals. This measure would apply to property that is acquired and becomes available for use on or after Budget Day.

The Clean Energy Investment Tax Credit is a refundable credit equal to 15 per cent of the capital cost of eligible investments in equipment related to low-emitting electricity generation, electricity storage, and the transmission of electricity between provinces and territories. Budget 2025 proposes to have this tax credit be available for the Canada Growth Fund. This measure would apply to eligible property that is acquired and becomes available for us on or after Budget Day.

The Carbon, Capture, Utilization, and Storage (CCUS) investment tax credit is a refundable tax credit that provides support for eligible expenditures related to CCUS. There are three different credit rates depending on the purpose of the equipment with higher tax credit rates applicable for eligible expenditures from 2022 – 2030 and a lower credit rate for eligible expenditures from 2031 – 2040. Budget 2025 proposes to extend the time the higher tax credit rates are available such that they will apply from 2022 – 2035. Eligible expenditures incurred from 2036 – 2040 would remain subject to the lower tax credit rate.

Personal Income Tax Measures

Automatic Federal Benefits for Lower-Income Individuals 

Budget 2025 proposes to grant the CRA with discretionary authority to file a tax return on behalf of an individual (other than a trust) who meets all the following criteria:

  • The individual’s taxable income for the year is below the lower of either the federal basic personal amount or the provincial equivalent;
  • All income of the individual for the year is from sources for which specified returns have been filed with the CRA;
  • The individual has not filed a return at least once in the preceding three tax years;
  • The individual has otherwise not filed a return for the tax year prior to, or within 90 days following, the tax filing deadline for the year; and
  • Any other criteria as determined by the Minister of National Revenue.

This measure would apply to the 2025 and subsequent tax years.

Qualified Investments for Registered Plans 

Registered plans are restricted to investing in certain ‘qualified investments’ and there are currently two sets of rules for registered plan investments in small business. Neither set of rules apply to Registered Disability Savings Plans (RDSPs).

The first set of rules provides for investments in specified small business corporations, venture capital corporations, and specified cooperative corporations. The second set of rules provides for investments in eligible corporations, small business investment limited partnerships, and small business investment trusts. There is duplication and complexity in these rules which has led to certain investment categories being underutilized.

Budget 2025 proposes to maintain the first set of rules and extend them to RDSPs, and to repeal the second set of rules.

These amendments would apply as of January 1, 2027. Interests in small business investment limited partnerships and small business investment trusts that are acquired before 2027 under the current rules would continue to be qualified investments.

Registered Investment Regime 

A registered investment is a qualified investment for all registered plans. A corporation or a trust must be registered with the CRA to be a registered investment. Budget 2025 proposes to replace this regime with two new categories of qualified investments which do not involve registration:

  • Units of a trust that is subject to the requirements of National Instrument 81-102 published by the Canadian Securities Administrators; and
  • Units of a trust that is an investment fund managed by a registered investment fund manager as described in National Instrument 31-103 published by the Canadian Securities Administrators.

The new qualified investment trust rules would apply as of Budget Day and the registered investment regime would be repealed as of January 1, 2027.

Other Personal Income Tax Measures 

Budget 2025 proposes the following other personal income tax measures:

  • Broadened anti-avoidance rules for tax planning that includes transferring trust property indirectly to a new trust to avoid both the 21-year deemed disposition rule and the current anti-avoidance rules. This measure would apply to transfers of property that occur on or after Budget Day.
  • A temporary Personal Support Workers Tax Credit that provides eligible personal support workers working in eligible health care establishments with a refundable tax credit of 5 per cent of eligible earnings, up to $1,100. This measure would apply to the 2026 – 2030 tax years.
  • A top-up tax credit to ensure that an individual’s tax liability is not inadvertently increased due to the middle-class tax cut that was announced in May of 2025. This credit would apply for the 2025 – 2030 tax years.

International Tax Measures

Transfer pricing rules are used to determine how profits are allocated among entities in a multinational enterprise (MNE) group to ensure that each jurisdiction receives its fair share of taxable income and income taxes. The international standard is based on the arm’s length principle, as reflected in the Organization for Economic Co-operation and Development (OECD) Model Tax Convention on Income and Capital.

Budget 2025 proposes to modernize Canada’s transfer pricing rules to better align with the international consensus on the application of the arm’s length principle. The revised rules would introduce a new analytical and interpretive framework to determine the most appropriate method in applying the arm’s length principle.  New “economically relevant characteristics” (including contractual terms, functional profile, property or service features, market context, and business strategies) and “arm’s length conditions” definitions will apply in the comparability analysis and allow transfer pricing adjustments to reflect different transactions or no transactions at all, had the participants been dealing at arm’s length.

Further, the proposed changes include certain administrative measures:

  • Relief for taxpayers through an increased threshold for the transfer pricing penalty to apply from an assessment (from a $5 million transfer pricing adjustment to a $10 million adjustment);
  • Clarifying the transfer pricing documentation requirements and aligning them with new definitions;
  • Providing simplified documentation requirements when prescribed conditions are met; and
  • Reducing the time to provide transfer pricing documentation from 3 months to 30 days.

This measure would apply to tax years that begin after Budget Day.

Investment Income Derived from Assets Supporting Canadian Insurance Risks 

Canada’s foreign accrual property income (FAPI) regime is designed to prevent Canadian taxpayers from avoiding domestic tax by shifting passive or certain business income to controlled foreign affiliates (CFAs). One specific rule of FAPI targets situations where income from the insurance of Canadian risks is earned through a foreign affiliate. Under this rule, the insurance business income is included in computing FAPI of the foreign affiliate. Some taxpayers have taken the position that investment income earned by a foreign affiliate on assets indirectly backing Canadian risks does not fall within this FAPI rule.

Budget 2025 proposes to clarify that investment income derived from assets held by a foreign affiliate to back Canadian risks is included in FAPI, regardless of which entity holds those assets.

This measure would apply to taxation years that begin after Budget Day.

Sales and Excise Tax Measures

Luxury Tax on Aircraft and Vessels 

There is currently a luxury tax imposed on subject vehicles and aircraft with a value over $100,000 and subject vessels with a value over $250,000. Budget 2025 proposes to eliminate the luxury tax on subject aircraft and vessels. This tax would cease to be payable after Budget Day.

Registrations in respect of subject aircraft and vessels would be maintained after Budget Day to allow registered vendors to claim rebates for which they are eligible.  All registrations in respect of subject aircraft and vessels would be automatically cancelled on February 1, 2028, after which time, registered vendors would no longer be able to claim rebates.

Other Measures

Budget 2025 confirms the government’s intention to proceed with certain measures announced by the previous government, as modified to take into account consultations and deliberations since their release. These measures include:

  • The proposed increase in the lifetime capital gains exemption up to $1,250,000;
  • Capital gains rollover on small business investments;
  • Tax exemption for sales to Employee Ownership Trusts;
  • Excessive interest and financing expenses limitation rules;
  • Substantive CCPCs;
  • Extension of the accelerated investment incentive and immediate expensing measures;
  • Accelerated capital cost allowance for productivity enhancing assets and for purpose-built housing;
  • Alternative minimum tax (other than changes related to resource expense deductions); and
  • Non-compliance with information requests.

If you have any questions or would like further information relating to the 2025 Budget and its impact on you, please contact your Smythe advisor.

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