2025 Canadian Federal Budget

1. Extension and Expansion of Previously Announced Clean Economy Incentives

• Budget 2025 proposes to expand the Clean Technology Manufacturing investment tax credit by adding to the list of critical minerals essential for clean technology supply chains, the cost of new machinery and equipment used in the extraction, processing or recycling of which gives rise to a 30% refundable tax credit. Antimony, indium, gallium, germanium, and scandium would be added to the list. This measure would apply to property acquired and that becomes available for use on or after Budget Day.
• The Carbon Capture, Utilization, and Storage (CCUS) refundable investment tax credit currently offers higher credit rates applicable to expenditures on equipment relating to CCUS incurred from the beginning of 2022 to the end of 2030 than the rates applicable to expenditures incurred from the beginning of 2031 to the end of 2040. Budget 2025 proposes to extend eligibility for the higher credit rate to expenditures incurred by the end of 2035 (rather than 2030), and to review the CCUS investment tax credit rates before 2035 (rather than 2030).
• The Clean Electricity investment tax credit is a 15% refundable tax credit 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. Budget 2025 proposes to add the Canada Growth Fund to the list of eligible entities and to provide that financing from the Canada Growth Fund is not to be treated as government assistance (which would otherwise reduce the cost of eligible property for the purpose of computing the credit).

2. Adoption of Previously Announced SR&ED Enhancements and Improved Administration of SR&ED Program

In Budget 2025, the government reiterated its intention to introduce legislation to implement changes to the scientific research and experimental development (SR&ED) program proposed in the 2024 Fall Economic Statement. Budget 2025 also proposes an increase to the expenditure limit on which the enhanced 35% tax credit can be earned to $6 million (as contrasted with the increase from $3 million to $4.5 million proposed in the 2024 Fall Economic Statement). This measure would apply for taxation years beginning on or after the Fall Economic Statement, being December 16, 2024.

Budget 2025 also announced very significant, and what we think will be very welcome, reforms to administering the SR&ED program that will be implemented as of April 1, 2026. These reforms include the CRA implementing an elective pre-claim approval process that will provide businesses with an up-front technical approval of their eligible SR&ED projects, increasing certainty of outcomes for claimants and their investors and lenders. It is expected that processing times for expenditure reviews for claims submitted through this elective process will be cut in half.

CRA intends to increase its use of artificial intelligence to avoid unnecessary audit interventions for low-risk claims and streamline the review process. Budget 2025 also announced that CRA would be engaging in targeted consultations regarding potential improvements to administering the SR&ED program, including a review of the SR&ED claim form.

3. Immediate Expensing for Manufacturing and Processing (M&P) Buildings

Budget 2025 proposes a temporary accelerated deduction of 100% (increased from 10%) of the cost of eligible manufacturing and processing buildings where at least 90% of the floorspace is used to manufacture or process goods for sale or lease. Used property would be eligible for immediate expensing only if (i) neither the taxpayer nor a non-arm’s length person previously owned the property, and (ii) the property was not transferred to the taxpayer on a tax-deferred basis. The accelerated deduction would be effective for eligible property acquired on or after Budget Day and first used for manufacturing or processing before 2030. The accelerated deduction would be reduced to 75% for property first used in 2030 or 2031, 55% for property first used in 2032 or 2033 and completely phased out after 2033. Recapture rules may apply where the use of the eligible property is subsequently changed.

4. Modernization of Canada’s Transfer Pricing Rules

Budget 2025 proposes significant changes to Canada’s transfer pricing regime resulting from consultations announced in 2021. The proposed amendments aim to better align Canada’s transfer pricing rules with international consensus and provide interpretive rules to ensure the transfer pricing rules in the Income Tax Act (the Tax Act) are applied consistent with the guidelines published by the Organisation for Economic Co-operation and Development (the Guidelines).

The changes include a new comparability analysis, which determines what conditions would have existed had the parties been dealing at arm’s length. This analysis goes beyond contractual terms, incorporating “economically relevant characteristics” such as the actual conduct of participants. This is intended to ensure the factual substance of the transaction or series is considered (instead of just its legal form). 

A new transfer pricing adjustment rule would provide that, where certain conditions are met, the nature or existence of a transaction or series may be adjusted or replaced with either an alternative transaction or series, or no transaction or series. The adjustment would reflect that, in some cases, had the participants been dealing at arm’s length, they would either have (i) entered into a different transaction or series or (ii) not entered into a transaction or series. In accordance with the Guidelines and proposed interpretation rule, an in-scope transaction or series, accurately analyzed and determined, should only be replaced with an alternative transaction or series, or no transaction or series, in exceptional circumstances.

In addition, certain administrative provisions will be revised, including:

• increasing the transfer pricing adjustment threshold at which transfer pricing penalties will apply from $5 million to $10 million,
• clarifying the documentation requirements and aligning them with the new definitions and requirements to select and apply the most appropriate method,
• providing in some cases for simplified documentation requirements, and 
• reducing the time to provide transfer pricing documentation from 3 months to 30 days.

These measures will apply to taxation years that begin after Budget Day. Multi-national enterprises will have to review and update their transfer pricing policies, and potentially change their intercompany agreements, to reflect these proposals.

5. Anti-avoidance Rule to Limit Part IV Tax Deferral Through Tiered Corporate Structures

Budget 2025 proposes to limit certain tax planning techniques using tiered corporate structures with mismatched year ends to defer the Part IV tax liability on investment income.

The proposals would suspend the dividend refund that would otherwise be available to the 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.

This rule would not apply if each corporate dividend recipient in the chain of affiliated corporations pays a subsequent dividend on or before the payer's balance-due day, such that no deferral is achieved by the affiliated corporate group. This rule would also not apply to a dividend payer that is subject to an acquisition of control where it pays a dividend within 30 days before the acquisition of control.

The payer corporation would generally be entitled to claim the suspended dividend refund in a subsequent taxation year when the recipient corporation pays a taxable dividend to a non-affiliated corporation or an individual shareholder. This measure would apply to dividends paid in taxation years that begin on or after Budget Day.

6. Anti-avoidance Rule Regarding the 21-year Deemed Disposition Rule for Personal Trusts

Under the so-called 21-year rule, personal trusts are generally deemed to have disposed of their capital property on the 21st anniversary of their creation and any subsequent 21st anniversary. This rule is designed to prevent using personal trusts to indefinitely postpone the taxation of accrued capital gains.

The Tax Act currently provides that where property is transferred from a personal trust on a tax-deferred basis to a new personal trust, the new trust inherits the earlier 21st anniversary of the old trust.

Budget 2025 proposes to broaden this anti-avoidance rule to include indirect transfers of trust property to other trusts. This would include transfers of trust property to a beneficiary that is a corporation owned by a new trust. This rule would apply to transfers of property made on or after Budget Day. 

7. FAPI From Assets Backing Canadian Insurance Risks

The foreign accrual property income (FAPI) rules provide that certain income earned by a controlled foreign affiliate of a taxpayer resident in Canada is taxable in the hands of the Canadian taxpayer on an accrual basis. The current FAPI regime contains rules intended to prevent the avoidance of Canadian tax by shifting income derived from a business involving the insurance of Canadian risks into a foreign affiliate by ensuring that such income is included in the affiliate’s FAPI. Budget 2025 proposes to clarify that investment income derived from assets held by a foreign affiliate to back Canadian risks, which encompasses both income from assets held to back such risks and assets included in regulatory surplus that back such risks, is included in FAPI regardless of which entity holds those assets. This measure would apply to taxation years that begin after Budget Day.

8. Streamlining Qualified Investments for Registered Plans

Budget 2025 proposes to streamline the “qualified investment” regime applicable to registered plans, such as RRSPs and TFSAs, following a consultation process launched in connection with Budget 2024.

In addition to consolidating and harmonizing the various rules, which will be a very welcome improvement, Budget 2025 proposes to (i) extend the investment rules for specified small business corporations, venture capital corporations and specified cooperative corporations to Registered Disability Savings Plans; and (ii) remove “qualified investment” designation for interests in small business investment limited partnerships and small business investment trusts, effective January 1, 2027.

Interests in small business investment limited partnerships and small business investment trusts that were “qualified investments” acquired before 2027 would be grandfathered and continue to be treated as such. Budget 2025 also proposes to repeal Part X.2 and the “registered investment” regime, which required registration with the CRA, and instead permit as qualified investments (without registration with the CRA) units of a trust that is either (i) subject to the requirements of National Instrument 81-102, or (ii) is an “investment fund” managed by a registered investment fund manager described in National Instrument 31-103.

9. Elimination of the Underused Housing Tax

Budget 2025 proposes to eliminate the underused housing tax (UHT) for the 2025 and subsequent calendar years. Budget 2025 also confirms that obligations under the Underused Housing Tax Act (UHTA), including filing UHT returns and paying UHT, along with applicable penalties and interest continue to apply for the 2022 to 2024 calendar years.

10. Removal of Luxury Tax on Subject Aircraft and Vessels

Budget 2025 proposes to amend the Select Luxury Items Tax Act to end the luxury tax on subject aircraft and vessels after Budget Day (for all instances, including the tax on sales, importations, and improvements). Transitional rules will apply regarding returns covering the reporting period that includes Budget Day and rebate claims (e.g., for exports). The luxury tax would continue to apply for subject vehicles.

11. Other Select Tax Measures

• Quality of a Mineral Resource for CEE Purposes – Budget 2025 proposes to clarify that the reference to the “quality” of a mineral resource in the definition of “Canadian exploration expense” (CEE), refers only to the mechanical or physical properties of the mineral resource and not its economic viability or engineering feasibility.
• Carousel Fraud – Budget 2025 proposes to introduce a reverse charge mechanism to address carousel fraud – a scheme that uses a chain of transactions in which a party collects GST/HST on supplies of goods or services but fails to remit the tax to the government. When applicable, the recipient of a supply, rather than the supplier, would be required to self-assess and report the tax payable in its GST/HST return. 
• Patronage Paid by Agricultural Cooperatives – Budget 2025 proposes to extend the existing deferral of taxes on patronage dividends paid in shares by agricultural cooperatives until 2030. 
• Top-Up Tax Credit – A transitional “top-up” tax credit is proposed for certain individuals who may be entitled to a non-refundable tax credit that would be computed at the recently lowered first marginal income tax rate (currently 14.5%, with further reduction to 14% for 2026 and subsequent years). The intent is to ensure the reduced marginal rate does not make certain individuals worse off with respect to investment tax credits that would have previously been calculated using a 15% rate. 
• Personal Support Workers Tax Credit – A new refundable tax credit available to certain eligible support workers working in hospitals or other “health care establishments,” equal to 5% of their eligible earnings, up to $1,100 per year.