2025 Federal Budget Highlights

NOVEMBER 4, 2025

The Liberal government under Prime Minister Carney has released its fall 2025 budget, reaffirming several previously announced measures while introducing new initiatives that will impact both corporate and personal tax planning.

The budget introduced positive measures aimed at enhancing competitiveness of Canadian businesses which include an increase of the Scientific Research and Experimental Development (SR&ED) expenditure limit and the immediate expensing of manufacturing buildings. However, the budget also introduced corporate anti-deferral measures that will affect the timing of dividend refunds.

Individuals will benefit from the introduction of a personal support worker tax credit, greater clarity surrounding the $20,000 home accessibility tax credit, and a new non-refundable top-up tax credit designed to ensure that the reduction in the marginal income tax rate does not result in higher taxes.

Corporate Tax Measures

Immediate Expensing for Manufacturing Buildings

Manufacturing and processing buildings acquired after November 4, 2025, as well as the cost of eligible additions made to these buildings before 2030, may now qualify for 100% first-year expensing (previously 10% per year), provided at least 90% of the building’s floor space is used for eligible activities. Reduced expensing rates will apply from 2030 to 2033. This measure does not apply to non-arm’s length transfers or tax-deferred rollovers.

SR&ED Enhancements

For Canadian Controlled Private Corporations (CCPCs) eligible for the 35% refundable SR&ED tax credit, the current expenditure limit is $3M and the taxable capital limit is $15M. Proposals announced in 2024 and revisited through the 2025 budget would increase the expenditure limit to $6M and the taxable capital limit to $75M. These changes will allow more corporations to qualify for the refundable tax credit.

Anti-Deferral Rules for Tiered Corporations

To limit tax deferral opportunities within corporate groups, dividend refund claims will now be deferred until the recipient corporation is required to pay the related refundable tax. Currently, when a subsidiary earns investment income and pays a dividend to its parent corporation particularly where the subsidiary and parent have different year-ends, there is potential for tax deferral. The subsidiary may claim a dividend refund while the corresponding refundable tax in the parent corporation is not yet payable. The budget proposes to defer the subsidiary’s dividend refund claim until the parent corporation becomes liable to pay the associated refundable tax.

Transfer Pricing Adjustments

Previously, penalties applied when a transfer pricing adjustment exceeded $5M. This threshold is now being increased so that penalties will only apply when the adjustment exceeds $10M. In addition, transfer pricing documentation requirements will be clarified and simplified, while the timeline to provide documentation upon request will be reduced from 3 months to 30 days.

Trust Tax Measures

21st Anniversary Rule Clarification

Personal trusts are deemed to dispose of their capital property at fair market value on the 21st anniversary, which generally creates a tax liability within the trust. The 2025 Budget introduces anti-avoidance rules targeting planning strategies used to circumvent the deemed disposition. For example, transferring property to a corporate beneficiary held by a new trust will now be caught under these rules.

Personal Tax Measures

Top-Up Tax Credit - a new non-refundable credit will ensure that individuals who don’t benefit from the reduction in the lowest personal marginal tax rate still receive a tax reduction.

Home Accessibility Tax Credit - expenses claimed under the Medical Expense Tax Credit can no longer be claimed again under the Home Accessibility Tax Credit.

Personal Support Worker Tax Credit - a new credit has been introduced to support individuals who rely on personal support workers, offering additional relief for caregiving expenses.

Underused Housing Tax (UHT) - the UHT will be eliminated starting in the 2025 tax year. No returns or payments will be required from 2025 onward, however outstanding returns for 2022 to 2024 must still be filed and related tax paid.

Bare Trust Reporting Deferred - the requirement for bare trusts to file trust returns has been deferred for taxation years ending on or after December 31, 2026 making the first year a bare trust is required to file 2027.

Previously Announced Measures Confirmed

The government has confirmed it will proceed with several previously proposed tax measures, including:

  • Tax-free Canada Carbon Rebates for Small Businesses – the filing deadlines were extended to October 2026.

  • Lifetime Capital Gains Exemption - increased to $1.25M

  • Tax Exemption for Sales to Employee Ownership Trusts

  • Deferral of new reporting rules for non-profit organizations (NPOs) – NPOs with total assets greater than $200k are required to file annual returns. Previously, it was announced that, starting in 2026 NPOs with gross revenues greater than $50k would also need to file annual returns as well as small NPOs below the revenue threshold would be required to submit a new short-form return. These changes have now been deferred to 2027.

  • Other technical amendments – includes a possible extension of the estate loss carry back period from 1 to 3 years.