11/07/2025
2025 Federal Budget, A Turn Of The Page
This budget analysis is entitled “A Turn Of The Page" because it does not contain additional taxes for private business. This breaks a trend which began in 2016 and continued relentlessly, with tax increases in one form or another, for private businesses and their family owners. In the past, we have seen restrictions to the small business deduction, rules to prevent sharing income as a family, the alternate minimum tax, and the proposal, now defunct, to increase the taxable portion of capital gains from 1/2 to 2/3.
It is refreshing to see a budget which is focused on investment, incentives, and growth, even if it comes far from being a balanced budget. It is set against the backdrop of worldwide economic uncertainty, a declining economic situation in many countries including Canada, rising unemployment, and challenges with respect to affordability. Rather than polarize the nation, with a budget for the middle class, this budget is for Canadians, whoever they are.
The budget lays out many economic and investment incentives and ambitious plans to strengthen the Canadian economy. Even if only half of this materializes, it should still have positive economic benefits for years to come.
In terms of 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 (SRED) tax credits, and the 100% expensing of buildings used in manufacturing and processing.
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 is increased from the previously announced $4.5 million limit (that limit itself being an increase from the long-standing expenditure limit of $3 million, that increase being 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:
1. 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.
2. In addition, certain capital expenditures used in SR&ED will qualify for a 100% deduction, and investment tax credits as well.
This is an important cornerstone of the budget, focusing on enhancing the tax system to encourage SR&ED and innovation in Canada.
An issue in the past in claiming SR&ED tax credits was the scrutiny given to the claims by CRA. 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.
The second major incentive for businesses is the 100% immediate expensing of buildings used in manufacturing and processing. In order to take 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.
Tiered Group Structure
An anti-avoidance rule is to be introduced with respect to tiered corporate structures, which have different year ends. It has become popular to have a holding company with a taxation year different to the subsidiary, particularly where that subsidiary derives investment income (for example from rental real estate). 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.
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 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. Thus, there is time to plan appropriately and make changes as required.
Personal Tax Changes
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. This is welcome news.
However, a proposal to deny 50% of investment council fees for alternate minimum tax (AMT) purposes may still proceed. It is not certain when it will be effective.
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. 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. In 2024, a special incentive called the Canadian Entrepreneurs’ Incentive was announced, which provided for a reduced inclusion rate on capital gains. It is not mentioned in the budget papers and seems to be dropped.
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 in 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.
Taxes Repealed/Deferral
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.
The underused housing tax (UHT) will be repealed entirely for 2025 onwards. Nobody will be sad to see this go. Note however that the 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.
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.
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, making up court cases and principles which do not exist. This is called hallucination, and hopefully this AI approach will be thoroughly tested before it is relied upon in any way.
CRA had been allocated $75 million over 4 years to pursue non-compliance in the trucking industry, particularly with respect to the incorporation of truck drivers, who take the position that they are self- employed. This project, which may extend to looking at personal services businesses, has the potential to broaden beyond the trucking industry, and become a major source of controversy.
Conclusions
This budget is designed to stimulate economic growth, fund infrastructure projects, and help businesses in a difficult environment. It is relieving to see that there were no significant adverse tax changes in this budget. It appears that in terms of the tax policy agenda, this government has turned the page.
