Budget fédéral 2025

Earlier today, the Honourable François-Philippe Champagne, Minister of Finance and National Revenue, delivered the Liberal Party’s first federal budget under Prime Minister Mark Carney (Budget 2025). Budget 2025 does not propose any changes to the personal and corporate tax rates under the Income Tax Act (ITA), or to the alternative minimum tax imposed under the ITA.

Budget 2025 does propose a number of tax measures which appear intended to improve Canada’s productivity and international competitiveness. Budget 2025 also contains a number of technical amendments to the ITA, repeals the underused housing tax and “luxury tax” with respect to aircraft and vessels and confirms the intention to proceed with several previously announced measures, including the intended repeal of the Digital Services Tax.

Accelerated Capital Cost Allowance Deductions

Coined the “Productivity Super-Deduction,” Budget 2025 proposes a set of tax incentives which permit accelerated deductions for certain capital expenditures. The incentives include immediate expensing of manufacturing or processing buildings acquired on or after Budget Day, providing they are used for manufacturing or processing before 2030. This measure includes a four-year phase out from 2030 to 2033. Additionally, the incentives extend the enhanced capital cost allowance rates for liquefied natural gas equipment and related buildings where certain (yet to be announced) emissions performance measures are met. 

The Productivity Super-Deduction also includes certain previously announced measures, which include the following:

• reinstatement of the “accelerated investment incentive” which provides an enhanced first-year write-off for certain capital assets;
• immediate expensing of clean energy generation and energy conservation equipment, and zero-emission vehicles;
• immediate expensing of patents, data network infrastructure and computers; and
• immediate expensing of capital expenditures for scientific research and experimental development.

SR&ED Incentives

The 2024 Fall Economic Statement proposed a number of changes to Canada’s scientific research and experimental development (SR&ED) regime, namely (i) increasing the expenditure limit that benefits from the enhanced 35% refundable tax credit from $3 million to $4.5 million; (ii) increasing the phase-out thresholds for the enhanced 35% tax credit from $10-$50 million to $15-$75 million; (iii) allowing eligible Canadian public corporations to claim the enhanced 35% tax credit (in addition to Canadian-controlled private corporations); and (iv) restoring the ability of taxpayers to claim an investment tax credit in respect of SR&ED capital expenditures and to deduct such expenditures from income.

Budget 2025 confirms the federal government’s intention to move forward with the above changes, and proposes a further enhancement to the expenditure limit from $4.5 million to $6 million, effective for taxation years beginning on or after December 16, 2024, for the stated purpose of encouraging investment in Canadian innovation.

Budget 2025 also proposes to improve the predictability, speed and administration of the SR&ED program, namely by (i) implementing an elective pre-claim approval process that would allow businesses to obtain advance technical approval of eligible SR&ED projects before commencing work or incurring costs; (ii) processing low-risk claims without unnecessary audit intervention through the use of artificial intelligence; and (iii) streamlining the review process by eliminating unnecessary steps and reducing burdensome information requirements that can delay the final determination of claims. These improvements are proposed to be implemented as of April 1, 2026. Further improvements to the administration of the SR&ED program, including possible revisions to the SR&ED claim form (Form T661), are expected to be implemented after a targeted consultation process.

Qualified Investments for Registered Plans

The 2024 federal budget announced a review of the investments that could be held in RRSPs, TFSAs and other registered plans. Following a consultation, Budget 2025 proposes several simplifications to the categories of investments that may be held in RRSPs, TFSAs and other registered plans. These include units of a trust that comply with the requirements of National Instrument 81-102 and units of a trust classified as an investment fund (as defined by existing tax rules) managed by a registered investment fund manager as described in National Instrument 31-103, both published by the Canadian Securities Administrators.

Foreign Accrual Property Income (FAPI) and Canadian Insured Risks

The Budget proposes to amend the rules applicable to foreign affiliates of Canadian insurers to clarify that investment income derived from assets held by a foreign affiliate that back certain insured Canadian risks are included in the foreign affiliate’s FAPI.

21-Year Planning for Trusts

Budget 2025 proposes to expand the scope of the anti-avoidance rule in subsection 104(5.8) of the ITA to address perceived deficiencies relating to indirect trust-to-trust transfers in advance of the 21-year disposition date. The rule may now apply, for example, to a trust distribution made to a corporation owned by another trust, which could otherwise extend the deemed disposition date for a further 21-year period. This proposed measure would apply to transfers occurring on or after Budget Day.

Part IV Tax

Budget 2025 proposes to amend the ITA to prevent private corporations from deferring Part IV tax payable on investment income through the use of tiered corporations having staggered taxation year-ends.

Transfer Pricing

Following a lengthy consultation process first announced in the 2021 federal budget, Budget 2025 proposes to “modernise Canada’s transfer pricing rules to better align with the international consensus on the application of the arm’s length principle.” The proposed changes to the transfer pricing rules in section 247 of the ITA include a heightened focus on economic characteristics (rather than legal form) for purposes of comparing a transaction or series to a hypothetical arm’s length transaction. Budget 2025 also modifies certain administrative measures relating to the transfer pricing rules, including increasing the threshold for the transfer pricing penalty from $5 million to $10 million and revising the contemporaneous documentation requirements.

Clean Technology and Critical Minerals Tax Incentives

Budget 2025 proposes certain enhancements and extensions to existing clean technology and critical minerals tax incentives, namely the critical mineral exploration tax credit, the clean technology manufacturing investment tax credit, the carbon capture, utilization and storage investment tax credit and the clean electricity investment tax credit. 

Canadian Entrepreneurs’ Incentive

Budget 2025 appears to confirm the federal government’s intention to cancel the Canadian Entrepreneurs’ Incentive that was previously proposed in Budget 2024.

Elimination of Underused Housing Tax

Budget 2025 proposes to eliminate the 1% underused housing tax, effective for the 2025 calendar year. The decision to eliminate the tax appears to have been driven by the government's view that the tax has become unnecessary in light of similar measures implemented by other levels of government, the federal foreign buyer ban and its desire to reduce compliance costs for taxpayers and administrative costs for government. 

Elimination of Luxury Tax on Aircraft and Vessels

Budget 2025 proposes to eliminate the “luxury tax” with respect to aircraft and vessels, effective after Budget Day, to provide relief to the aviation and boating industries. It appears that the luxury tax will continue to apply to other vehicles.

Introduction of GST/HST Reverse Charge Mechanism for Certain Supplies

As part of an initiative to combat GST/HST fraud, Budget 2025 proposes a new "reverse charge mechanism" that will require GST/HST-registered recipients to self-assess GST/HST when certain supplies are acquired for the purpose of resupply. This mechanism will initially apply to certain telecommunications services, including supplies of Voice-Over Internet Protocol (VoIP) minutes, but may be extended to other items in the future.

Bare Trust Reporting

Budget 2025 announced that the application date for the proposed “bare trust” reporting rules will be deferred to apply to taxation years ending on or after December 31, 2026.

Adoption of AI by Canada Revenue Agency (CRA)

Budget 2025 includes a comprehensive review of the federal government’s expenditures to generate a 15% operational savings across all departments, including the CRA. However, Budget 2025 does not propose material changes to CRA’s budget related to income tax or GST/HST matters. Instead, it indicates that the CRA expects to generate operational savings from the wind-down of the business units that administered the underused housing tax, “luxury tax” on aircraft and vessels and the Digital Services Tax. The CRA also proposes to spend approximately $500 million in the next five years on AI technologies to automate certain internal processes. It is unclear how AI will be implemented by the CRA, and whether these changes will address the recent criticisms made by the Auditor General of Canada that the CRA call centres and existing AI chatbot provide slow, inaccurate and incomplete information.

The Department of Justice expenditure review indicates that it will consider expanding access to informal procedure for certain income tax and GST/HST matters to reduce the costs to the Department and taxpayers.