After 18 long awaited months, the new Liberal government released their first Federal Budget on November 4, 2025. Perhaps most importantly, there are no proposed changes to personal or corporate tax rates (including capital gains).
In terms of personal and corporate tax changes, there are relatively few, and the more relevant ones are described below.
Incentives For Business
The Budget contains two major incentives for business: the enhancement of scientific research and experimental development (“SR&ED”) tax credits; and the immediate expensing of buildings used in manufacturing and processing (“M&P”).
SR&ED Tax Credit Enhancement
The Budget proposes an important increase in the incentives for SR&ED. The amount of expenditures qualifying for the higher investment tax credit rate of 35%, will now be $6 million annually. This has increased from the previously announced $4.5 million limit (that limit itself being an increase from the long-standing expenditure limit of $3 million, which was an increase proposed in the 2024 Fall Economic Statement). This essentially doubles the amount of SR&ED expenditures eligible for the 35% enhanced investment tax credit rate. The increased limit applies to taxation years beginning on or after December 16, 2024, the date of the 2024 Fall Economic Statement. For example, a corporation with a December 31, 2025 year-end can obtain the full $6 million at the 35% rate in 2025.
In addition, the Budget confirms the government’s intention to implement the following proposed changes announced in the 2024 Fall Economic Statement:
- The enhanced investment tax credit rate will also apply to certain small Canadian public companies and to larger private companies. The 35% rate (vs. the lower 15% rate) is phased out based on taxable capital. The phase out will start at $15 million and be eliminated at $75 million.
- In addition, certain capital expenditures used in SR&ED will qualify for a 100% deduction, and investment tax credits as well.
This revamp of the SR&ED program will reward those businesses that are driving innovation in Canada and hopefully encourage more business to do the same.
An issue in the past in claiming SR&ED tax credits was the scrutiny given to the claims by CRA that would slow down how fast applicants got their refunds. The Budget contains a plan for an elective pre-claim approval process whereby proposed SR&ED projects can be vetted, and their eligibility (or lack thereof) determined by CRA in advance, with a review time of 90 days. This should go a long way to reducing the amount of controversy and disputes on eligibility of R&D tax credit claims.
Enhanced Tax Write-Off for M&P Buildings
The second major incentive for businesses is the 100% immediate expensing of buildings used in manufacturing and processing, including the cost of eligible additions or alterations made to such buildings. In order to obtain this 100% deduction, a minimum of 90% of the floor space must be used for manufacturing or processing of goods for sale or lease. In addition, unless the property is new, it must be acquired at arm’s length, and not on a so called “rollover” basis.
The proposal applies to buildings acquired on or after November 4, 2025, and must be placed in use before 2030. Otherwise, the rate of depreciation is reduced to 75% (for 2030 and 2031) and 55% (for 2032 and 2033). After that, the enhanced rate of deduction will not be available.
This should create a significant incentive for expansion of manufacturing facilities and acquisition of new facilities. For profitable companies, the deduction may produce very significant tax benefits.
A company which purchases a building that qualifies for 100% deduction may have such a large deduction that it will create a loss for tax purposes. Such a loss would be eligible to be carried back, to recover tax paid in the past three taxation years.
Enhanced Tax Write-Off for Computers and Systems Software
The other major change for tax write-offs will result in less tax savings, but will be more widely available to businesses as it relates to the immediate write-off for productivity enhancing assets such as computers and systems software; this would generally apply to assets in classes 44, 46 and 50.
Other Changes Potentially Impacting Tax Planning
Tiered Group Structure – Delay in Dividend Refunds
An anti-avoidance rule is to be introduced with respect to tiered corporate structures, which have different year ends. In some cases, there may be a holding company with a taxation year different to a subsidiary company, particularly where that subsidiary derives investment income (for example from rental real estate or a portfolio). In such a situation, the subsidiary will commonly earn income which is subject to the refundable tax system.
Under this system, the corporate tax rate is approximately 50%, but where a dividend is paid, a corporate tax refund, called a “dividend refund”, can be claimed. This dividend refund of around 30% of income cascades through the structure, producing equivalent tax to the holding company and so on up the chain.
Having different year ends can provide a tax deferral, generally of up to 11 months. It is conceivable that there could be multiple companies in a chain, all with different year ends, extending the tax deferral further; this practice has now been targeted.
In such a structure, the corporate tax refund (or dividend refund) will be suspended until a payment is made from the top company in the chain to individual shareholders, or to companies which have less than a 10% shareholding (referred to as non-connected corporations).
This rule will have limited impact for corporations in general but will be a major issue for structures that have made use of this plan. We will continue to monitor developments in this area as draft legislation is prepared and implemented.
In order to avoid the implications of this rule, two alternatives can be considered. The first is to request a change of year end. If the year ends are aligned, the rule will not apply. The second alternative is to pay the dividend earlier, so it is not received in a later year-end, but rather in one which ends before the year-end of the subsidiary.
The rule will apply to dividends paid in taxation years that begin on or after November 4, 2025. Therefore, planning can be implemented if this is expected to be an issue in advance of the implementation date.
21 Year Rule for Trust Dispositions
Trusts are deemed by subsection 104(4) to dispose of their property every 21 years, in order to prevent an indefinite deferral of tax on accrued capital gains on properties held by the trust. It has come to the government’s attention that taxpayers have engaged in planning to effectively reset the 21-year anniversary through distributions to corporate beneficiaries owned by a new trust.
CRA has indicated in the past that this type of planning would be subject to the general anti-avoidance rule to deny the tax benefit that would otherwise arise. Budget 2025 goes one step further to introduce a rule in the Tax Act that would disallow this type of planning altogether.
This rule will have limited impact for most clients as the government has already targeted this type of planning through other means, such as the mandatory disclosure rules. It is also important to note that this measure deals with the distribution of assets to essentially reset the 21-year anniversary, and not annual income and/or capital gains incurred in the trust and allocated.
Personal Tax Changes
No Changes to Capital Gains Tax
As mentioned earlier, the proposal to change the inclusion rate on capital gains from a 1/2 to 2/3 is not included in the list of previously announced measures which the government intends to pursue. While this was expected to be the case, it is still worth mentioning given the magnitude of the impact.
Special Loss Carry Back Rules for Estates
One proposal announced in 2024 was to extend a special loss carry back rule for estates from the first taxation year to the first three taxation years, to appropriately allow for more time to implement the carry-back planning. This was introduced as a technical change, and it seems that this will proceed with retroactive effect to deaths on or after August 12, 2024.
Other Measures
In 2024, a special incentive called the “Canadian Entrepreneurs’ Incentive” was announced, which provided for a reduced inclusion rate on capital gains on the sale of certain, very specific, kinds of shares. It is not mentioned in the Budget papers and seems to be dropped at this point.
A special tax credit is to be given for certain healthcare workers starting in 2026. It will provide a tax credit of 5% of eligible remuneration to a maximum of $1,100. This is designed to recognize the contribution of these workers within the healthcare system.
Starting in 2025, persons with income below the personal exemption amount will have their tax returns completed automatically by CRA, if they meet certain conditions. Many people with little or no income do not file income tax returns, and therefore do not obtain certain tax credits to which they would be entitled, such as the GST credit.
Other Tax Filings
Deferral of Bare Trust Reporting
Reporting for bare trust arrangements was to be required for the 2025 taxation year, with tax returns due in March 2026. This has now been deferred again for one year. This will be welcome news, greeted enthusiastically by all who may be affected as the government works to narrow down what, if any, reporting they want on this front going forward.
Underused Housing Tax Filing Cancelled
The underused housing tax (“UHT”) will be repealed entirely for 2025 onwards. Nobody will be sad to see this go. Note, however, that the UHT filing requirements for 2022 to 2024 remain for the taxpayers who are not exempt, with penalties and/or interest for failing to file if applicable.
Luxury Tax
As an incentive for people to purchase boats and aircraft, the 10% luxury tax will be removed from such purchases, but will remain applicable to vehicles costing over $100,000.
Previously Announced Measures
The government has stated its intent to proceed with several previously announced measures; some of the key items as follows:
- The proposed increase in the Lifetime Capital Gains Exemption to apply to up to $1.25 million of eligible capital gains announced in Budget 2024;
- Legislative proposals released on June 30, 2025, to ensure that all Canada Carbon Rebates for Small Businesses are provided tax-free, and to extend the filing deadline for the 2019 to 2023 calendar years;
- Extension of the Accelerated Investment Incentive and Immediate Expensing Measures;
- Capital Gains Rollover on Small Business Investments;
- Scientific Research and Experimental Development Tax Incentive Program;
- Tax exemption for sales to Employee Ownership Trusts;
- Excessive Interest and Financing Expenses Limitation Rules; and
- Substantive CCPCs.
Administrative Changes
Certain changes are being made to Canada’s transfer pricing rules, in particular, the rules will align more closely to international standards.
CRA will start to make increased use of AI in the future, in an effort to better target noncompliance situations, and to streamline its work. In particular, in determining the eligibility of SR&ED claims, CRA may use AI applications. One can also expect that CRA will make greater use of AI in looking at possible situations of unreported income or non-compliance. It will be interesting to see how this evolves, because AI can produce a completely mythical analysis on occasion, otherwise referred to as hallucinations making up court cases and principles which do not exist. Hopefully this AI approach will be thoroughly tested before it is relied upon in any way.
Given the recent media attention to the trucking industry and the classification of drivers, CRA has been allocated $75 million over 4 years to pursue non-compliance. This program will be targeted to the trucking industry, particularly with respect to the incorporation of truck drivers, who take the position (or are forced to take the position) that they are self- employed.
Conclusion
Overall, the 2025 Federal Budget strikes a cautious but encouraging balance between fiscal restraint and targeted incentives for growth. With no changes to personal or corporate tax rates, the government has chosen stability over sweeping reform, providing reassurance to both individuals and business owners. The enhancements to SR&ED and accelerated write-offs for manufacturing, processing, and technology-related investments send a clear signal that innovation and productivity remain national priorities. While certain anti-avoidance measures and administrative updates will require attention from advisors and taxpayers alike, the overall direction of the Budget emphasizes modernization, compliance, and competitiveness within a global economy.
If you have questions about how these changes may impact your business or personal tax planning, connect with your GGFL advisor or reach out to our team to discuss your specific situation.
