Federal Budget 2025: Key Tax Takeaways

A luxury tax is currently imposed by the Federal Government on sales, importations, leases, and certain improvements of vehicles and aircrafts with a value above $100,000, and boats with a value above $250,000. Budget 2025 proposes to end the luxury tax on subject aircraft and vessels. The tax would cease to be payable after Budget Day (November 4, 2025). The luxury tax is still expected to apply to vehicles.

The CEI introduced in Budget 2024 was intended to reduce the tax rate on eligible capital gains realized from selling certain qualifying business shares. Budget 2025 proposes cancelling the CEI.

Budget 2025 proposes to defer certain bare trust reporting, such that these changes would only apply to taxation years ending on or after December 31, 2026 (technical amendments previously announced in August 2025).

Eligible buildings in Canada used to manufacture or process goods for sale or lease currently have a capital cost allowance (CCA) rate of 10 per cent. To be eligible for this 10 percent CCA rate, at least 90 per cent of the building’s floor space must be used to manufacture or process goods for sale or lease.

Budget 2025 proposes to provide temporary immediate expensing for the cost of eligible manufacturing or processing buildings, including the cost of eligible additions or alterations made to such buildings. This would allow for a 100 per cent deduction, provided the minimum 90 per cent floor space threshold is met, effective for eligible property that is acquired on or after November 4, 2025 and is first used for manufacturing or processing before 2030. A phase-out period will commence in 2030, with the enhanced rate no longer available after 2033.

The 2024 Fall Economic Statement proposed an expansion to the SR&ED program. Budget 2025 proposes to further increase the expenditure limit on which the 35 per cent tax credit can be earned, from $4.5 million to $6 million. This measure would apply for tax years that begin on or after December 16, 2024.

Canadian-Controlled Private Corporations (CCPC) are subject to an additional refundable tax on investment income. This tax is generally refunded when sufficient taxable dividends are paid out of the corporation. However, where the recipient of the dividend is a corporation that is “connected” to the payor corporation, a refundable tax is levied on the recipient corporation corresponding to the amount of the payor corporation’s dividend refund. Where the payor corporation and recipient corporation have staggered year-ends, there is a potential timing benefit as the payor corporation could get a dividend refund several months ahead of the recipient corporation being required to pay the corresponding refundable tax. The use of multiple corporations with staggered year-ends could result in a deferral spanning several years.

Budget 2025 proposes to limit this deferral opportunity by suspending the dividend refund that could be claimed by the payor corporation on the payment of a taxable dividend to a recipient corporation who is affiliated (as defined in the Income Tax Act) with the payor corporation, if the use of staggered year-ends would have otherwise allowed for a significant deferral opportunity. The payor corporation would be entitled to claim the suspended dividend refund in the tax year when the recipient corporation pays a taxable dividend to a non-affiliated corporation or an individual shareholder. Certain other exceptions do also apply. This measure would apply to taxation years that begin on or after November 4, 2025.

Budget 2025 proposes to grant the Canada Revenue Agency (CRA) the discretionary authority to automatically file a personal income tax return on behalf of certain lower-income individuals. The CRA would provide an eligible individual with the information it has available prior to filing a return on behalf of the individual. The eligible individual would have 90 days to review the information and submit any changes to the CRA. Eligible individuals would also be able to opt out of automatic tax filings.

The middle-class tax cut previously announced in May 2025 reduced the first marginal personal income tax rate from 15 per cent to 14.5 per cent for 2025 (and 14 per cent for 2026 and subsequent taxation years). Budget 2025 proposes to introduce a new non-refundable Top-Up Tax Credit aimed at maintaining the current 15 per cent rate for non-refundable tax credits claimed on amounts more than the first income tax bracket threshold. This Top-Up Tax Credit would apply for the 2025-2030 years.

The HATC is a non-refundable tax credit available for eligible home renovation or alteration expenses (incurred to improve the safety, accessibility, or functionality of an eligible home). The medical expense tax credit is a non-refundable tax credit available for eligible medical expenses. Currently, if the eligibility criteria for both credits are met, taxpayers may claim both credits in respect of the same expenses. Budget 2025 proposes to eliminate the ability to claim both credits in respect of the same expense.

Budget 2025 proposes to update Canada’s transfer pricing rules to better align with international consensus on certain transfer pricing principals. Notable amongst the proposed changes are new rules that would modify certain existing CRA administrative measures:

• The transfer pricing penalty that may be applied by the CRA only applies if the net transfer pricing adjustment exceeds the lesser of $5 million and 10 per cent of the taxpayer’s gross revenue. Budget 2025 proposes to provide an increase in the threshold for the transfer pricing penalty to apply from an assessment (from a $5 million transfer pricing adjustment to a $10 million adjustment);
  
  
• Transfer pricing documentation must currently be provided to the CRA within three months of receiving a written request. Budget 2025 proposes to reduce the time to provide transfer pricing documentation from three months to thirty days (the existing requirement for taxpayers and partnerships to make or obtain the appropriate records or documentation for a given year by their tax return filing due date would remain unchanged);
  
  
• Budget 2025 proposes to clarify certain transfer pricing documentation requirements and have the requirements better align with new definitions (and the requirements to select and apply the most appropriate transfer pricing method); and
  
  
• Budget 2025 proposes to provide simplified documentation requirements when prescribed conditions are met.

Canada’s Foreign Accrual Property Income (FAPI) regime contains rules that require certain types of income earned by controlled foreign affiliates to be immediately taxable in the hands of the Canadian taxpayer. These rules are aimed to deter Canadian taxpayers from shifting income to other jurisdictions to avoid Canadian tax. This includes income earned by the controlled foreign affiliate relating to the insurance of Canadian risks.

Budget 2025 proposes to provide clarifications that investment income derived from assets held by a foreign affiliate to back Canadian risks would also fall into the FAPI regime, including in cases where these assets are held by another foreign affiliate. This would also include income from assets held to back Canadian risks for actuarial and regulatory reporting purposes.

This measure would apply to tax years that begin after Nov 4, 2025.