2025 Federal Budget: Selected Tax Measures

On November 4, 2025 (Budget Day), the Government of Canada released its 2025 federal budget (Budget 2025), which proposes to introduce a number of noteworthy tax measures, including:

• Updated proposals for an overhaul of Canada’s transfer pricing rules
• Temporary immediate expensing of the cost of manufacturing and processing buildings
• Several important proposals regarding energy, resource taxation and the clean economy
• Simplification and streamlining of the qualified investment rules for registered plans
• Deferral of two new reporting regimes, rules for non-profit organizations and for crypto assets, to taxation years beginning on or after January 1, 2027
• Confirmation that bare trusts are intended to be required to comply with the beneficial ownership regime, after several deferrals, starting in taxation years ending after December 31, 2026

Noticeably absent from Budget 2025 were information regarding the repeal of Canada’s Digital Services Tax Act, procedures for taxpayers seeking refunds of digital services tax already paid, or details of how Canada intends to exempt United States-headquartered groups from certain aspects of Canada’s Global Minimum Tax (i.e., Pillar 2) through the proposed “side-by-side” referenced in the G7 statement on June 28, 2025.

This bulletin analyzes the most significant tax measures included in Budget 2025.

Table of Contents

International Income Tax Measures

• Transfer Pricing
• Insurance Investments Supporting Canadian Risks

Business Income Tax Measures

• Immediate Expensing of the Cost of Manufacturing and Processing Buildings
• Scientific Research and Experimental Development
• Suspended Dividend Refund – Tiered Corporation Structures

Energy, Resource Taxation and Clean Economy Measures

• Critical Minerals Sovereign Fund & First and Last Mile Fund
• Critical Minerals Tax Initiatives
• Clean Economy Tax Initiatives

Personal Income Tax Measures

• Qualified Investments for Registered Plans
• Information Sharing – Employee Characterization

GST/HST and Excise Tax Measures

• Elimination of Underused Housing Tax and Luxury Tax on Aircraft and Vessels
• Reverse Charge Mechanism to Combat Carousel Fraud for Telecommunication Services

Previously Announced Measures – Deferrals

International Income Tax Measures

1. Transfer Pricing

The Canada Revenue Agency (CRA) has long expressed dissatisfaction with the narrow construction (according to the CRA) given by Courts to the transfer pricing rules in section 247 of the Income Tax Act (Canada) (ITA) (note: all statutory references are to the ITA unless indicated otherwise). This resulted in the Department of Finance releasing a consultation paper on June 6, 2023, outlining various proposals for the revision of Canada’s transfer pricing rules. A number of stakeholders provided extensive comments in the course of the consultation period, which ended on July 28, 2023. Budget 2025 contains the Department of Finance’s updated proposals for the revision of Canada’s transfer pricing rules. These proposals are, unfortunately given the previous criticisms of the draft rules in the consultation paper, largely in line with the proposals set out in the consultation paper.

The proposed revisions to section 247 include several significant changes, including:

(i) A New Threshold for the Application of the Transfer Pricing Rule. Under the revised rule, the transfer pricing rule would apply to any transaction or series of transactions between a taxpayer and a non-arm’s length non-resident that “includes actual conditions different from arm’s length terms and conditions.” The new rule not only emphasizes the actual conduct of the parties, beyond the four corners of any written contractual terms, but also emphasizes the need to have regard to economically relevant characteristics of the parties and the transactions.

The new proposals lack any acknowledgement that non-arm’s length parties often enter into transactions where conditions are different than those entered into by arm’s length parties. This notion is specifically acknowledged in the Organisation for Economic Co-operation and Development’s (OECD) Transfer Pricing Guidelines (TPG), which require that such “unique” transactions be respected and priced, if possible. As currently drafted, taxpayers may need to rely on the new rule proposed in Budget 2025 that provides that the identification of arm’s length conditions and any transfer pricing adjustments are to be interpreted so as to best achieve consistency with the TPG (the Consistency Rule) in order to defend “bespoke” transactions from transfer pricing adjustment.

(ii) Deletion of a Separate Recharacterization Rule. Current paragraphs 247(2)(b) and (d) permit the CRA to recharacterize a transaction in the narrow circumstances where: (i) the transaction cannot reasonably be considered to have been entered into for bona fide purposes other than to obtain a tax benefit, and (ii) it is the case that arm’s length parties would not have entered into the transaction or series of transactions. The government was particularly critical of the narrow interpretation given by the Federal Court of Appeal in Cameco to the second of these requirements. Budget 2025 proposes to remove any separate recharacterization rule.

The power to recharacterize transactions would now be inherent in the expansive definition of “arm’s length terms and conditions,” which, as noted above, would include the possibility that no transactions would have been entered into by arm’s length parties, or that a different transaction or series of transactions would have been entered into by arm’s length parties. The safeguards currently included in paragraphs 247(2)(b) and (d) described above are completely absent from the rules proposed in Budget 2025. Further, Budget 2025 does not include any reference to the concept in the TPG that recharacterization should be an approach of last resort, typically applicable where taxpayers intentionally enter into unusual transactions for the sake of frustrating the tax authorities’ ability to accurately price a transaction. This is the largest single change from the consultation paper.

Taxpayers may, again, derive some small comfort from the Consistency Rule. This is the position taken by Budget 2025, which notes that consistent with the TPG and the Consistency Rule, a transaction or series of transactions should be replaced with an alternative transaction or series, or no transaction or series at all, only in “exceptional circumstances.” However, given the government’s stated goal of expanding the scope of the recharacterization power, this may be small comfort indeed.

(iii) A New Consistent Interpretation Rule. The Consistency Rule states that the analysis and determination of the nature of a transaction or series of transactions, the identification of arm’s length terms and conditions, and the determination of the amount and nature of any adjustments under the new transfer pricing rules “are to be made so as to best achieve consistency with the [TPG].” As drafted, it is not clear how proscriptive this interpretive rule is meant to be, nor the conditions under which a departure from the TPG would be permitted. This is an important point given that multiple courts have noted that transfer pricing is not an exact science. The proposals define the TPG for these purposes to be the TPG published by the OECD on January 7, 2022, or any other text prescribed by regulation. This approach allows Canada’s transfer pricing rules to remain consistent with the international standards of the OECD as they develop over time, with the requirement to prescribe future texts presumably being intended to counter any challenge that this interpretive rule represents an impermissible delegation of Canada’s legislative authority regarding tax matters to the OECD.

(iv) A New Choice of Method Rule. Budget 2025 proposes to introduce a new requirement that a transfer pricing analysis be conducted using “the” most appropriate transfer pricing methodology, in accordance with the TPG. The inclusion of this idea as a mandatory requirement opens up one more area for disagreement between taxpayers and the CRA. It is unfortunate that the new proposals appear to require a positive determination of the one single methodology that is most appropriate, as opposed to a more realistic standard of reasonable application of the TPG.

(v) Increased Penalty Thresholds. A transfer pricing penalty of 10% of the amount of any income adjustment can currently apply only if the amount of an adjustment exceeds the lesser of 10% of a taxpayer’s gross revenue (pre-transfer pricing adjustment) or C$5-million. Budget 2025 proposes to increase the monetary threshold to C$10-million.

(vi) Revised Contemporaneous Documentation Requirements. Budget 2025 proposes to shorten the period within which taxpayers are required to provide contemporaneous documentation from the current 3-month period following a request to just 30 days. All of the transfer pricing proposals are proposed to be effective for tax years beginning after Budget Day. Presumably, this means that audits of prior taxation years, even those conducted after these proposals are ultimately enacted, would still rely on the existing 3-month delivery deadline, but that is not entirely clear. Budget 2025 also proposes to introduce the ability to prescribe by regulations categories of transactions for which documentation, or at least the full form of documentation, may not be required.

These changes are proposed to apply to taxation years beginning after Budget Day. No specific consultation on these proposals has been announced, presumably because of the extensive comments already received by the Department of Finance in response to the 2023 consultation paper. Notwithstanding the lack of formal consultation on these revised proposals, we expect that there may be many interested parties that will provide comments to the Department of Finance regarding these proposals.

2. Insurance Investments Supporting Canadian Risks

The ITA currently includes in “foreign accrual property income” (FAPI) the income of a foreign affiliate from the insurance or re-insurance of specified Canadian risks. Budget 2025 proposes to expand this rule to include in FAPI any investment income of a foreign affiliate from property held by the affiliate in connection with the insurance or reinsurance of specified Canadian risks by any person. This measure is proposed to be effective for taxation years of a foreign affiliate beginning after Budget Day.

Business Income Tax Measures

1. Immediate Expensing of the Cost of Manufacturing and Processing Buildings

The provision of accelerated depreciation rates on targeted asset classes for capital cost allowance purposes has been a popular tool of the Canadian government in recent years to try to foster economic growth and/or investment in particular sectors. Budget 2025, as was rumoured to be the case, proposes to utilize this tool once again.

Buildings used by taxpayers primarily for manufacturing and processing activity are currently eligible for 10% capital cost allowance (CCA) rates (comprising 4% as Class 1 property plus an additional allowance of 6% for manufacturing and processing buildings). Budget 2025 proposes to allow temporary immediate expensing (i.e., 100% deduction) for the cost of eligible manufacturing and processing buildings in the first year in which such buildings are used for manufacturing and processing activities. This would include the cost of eligible additions and renovations. This measure is proposed to apply to property first acquired on or after Budget Day and first used for manufacturing and processing activity before 2030.

The measure would be phased out by providing a 75% deduction rate for property first used for manufacturing and processing in 2030 or 2031, and a 55% deduction rate for property first used in 2032 or 2033. No enhanced rate is proposed to be available for property first used for manufacturing and processing activity after 2033.

2. Scientific Research and Experimental Development

Budget 2025 proposes to further increase the expenditure limit on which the enhanced 35% scientific research and experimental development (SR&ED) tax credit can be earned, to C$6-million, retroactively for taxation years that begin on or after December 16, 2024 (the date of the 2024 Fall Economic Statement, which had announced a proposal to increase this limit from the current C$3-million to C$4.5-million). Budget 2025 also confirms the government’s intent to proceed with previously announced measures relating to the SR&ED regime, including increases to the taxable capital thresholds for phasing out entitlement to the enhanced 35% credit and extending eligibility for the enhanced 35% credit to certain public corporations.

3. Suspended Dividend Refund – Tiered Corporation Structures

Budget 2025 proposes a new anti-avoidance rule to combat tax planning using tiered corporations with staggered tax year ends to allow a dividend-paying corporation to receive a dividend refund (in respect of refundable tax otherwise payable by it) while deferring what should be the resulting Part IV tax liability for a “connected” corporation receiving a portion of that dividend. The new rule would suspend the dividend refund on dividends paid to an affiliated corporation until the recipient corporation (and if applicable each affiliated corporation that directly or indirectly received all or a portion of the relevant dividend) pays taxable dividends directly or indirectly to non-affiliated corporations or individuals.

A payer corporation will not suffer a suspended dividend refund to the extent the recipient corporation pays taxable dividends before the balance due date of the payer corporation (so that no deferral would be achieved in that circumstance), or in respect of dividends paid within 30 days before an acquisition of control, so as to facilitate the extraction of corporate surplus (through safe income or other dividends) prior to a sale transaction. Dividends would also be exempted from the proposed suspension rule if the “butterfly” rules in either of paragraphs 55(3)(a) or (b) of the ITA apply.

The new anti-avoidance rule does not include a purpose test, raising the possibility that “innocent” circumstances may be subject to a suspended dividend refund.

This measure is proposed to apply to taxation years beginning after Budget Day.

Energy, Resource Taxation and Clean Economy Measures

Budget 2025 includes a number of important proposals relating to energy and resource taxation and the clean economy. These include:

1. Critical Minerals Sovereign Fund & First and Last Mile Fund

Budget 2025 announces funding to Natural Resources Canada to create the Critical Minerals Sovereign Fund and the First and Last Mile Fund.

The Critical Minerals Sovereign Fund will make strategic investments (including equity investments, loan guarantees and offtake agreements) in critical minerals projects and companies.

The First and Last Mile Fund is created to foster the development of Canada’s critical minerals value chains with the intention to increase supply chain efficiency and develop new market opportunities in the mining sector.

2. Critical Minerals Tax Initiatives

Critical Mineral Exploration Tax Credit

A flow-through share permits corporations to renounce or “flow through” Canadian exploration expenses to investors, who can deduct those expenses in computing their taxable income. The Critical Mineral Exploration Tax Credit provides an additional income tax benefit for individuals who invest in eligible flow-through shares and is equal to 30% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors.

Budget 2025 proposes to expand the definition of critical minerals relevant for the Critical Mineral Exploration Tax Credit to include the following additional critical minerals: bismuth, cesium, chromium, fluorspar, germanium, indium, manganese, molybdenum, niobium, tantalum, tin and tungsten.

This expanded definition would apply to expenditures renounced under eligible flow-through share agreements entered into after Budget Day and on or before March 31, 2027.

Eligible Activities Under the Canadian Exploration Expense (CEE)

A “Canadian exploration expense,” as defined in the ITA, generally includes expenses incurred by a taxpayer for the purpose of determining the existence, location, extent or quality of a mineral resource in Canada. The determination of a mineral resource’s “quality” for CEE purposes historically has been interpreted by the CRA to relate to the resource’s underlying physical characteristics.

A recent decision from the Supreme Court of British Columbia interpreted the term “quality” in the provincial equivalent of the federal CEE in an expansive manner. In Seabridge Gold, the Court stated that an interpretation of the word “quality” includes not just the direct physical characteristics of the mineral resource but also the broad range of factors that inform the economic viability of its extraction.

In response to this decision, Budget 2025 proposes to amend the ITA to clarify that expenses incurred for the purpose of determining the quality of a mineral resource in Canada do not include expenses related to determining the economic viability or engineering feasibility of the mineral resource. This amendment would apply as of Budget Day.

3. Clean Economy Tax Initiatives

Clean Technology Manufacturing Investment Tax Credit (CTM ITC)

Generally, the CTM ITC is a refundable tax credit equal to 30% of the capital cost of eligible property, such as new machinery and equipment, associated with certain eligible activities, such as the extraction, processing or recycling of critical minerals, including lithium, cobalt, nickel, graphite, copper and rare earth elements.

Budget 2025 proposes to expand the list of critical minerals eligible for the CTM ITC to include antimony, indium, gallium, germanium and scandium.

The expanded list of critical minerals would apply in respect of property that is acquired and becomes available for use on or after Budget Day.

Carbon Capture, Utilization, and Storage Investment Tax Credit (CCUS ITC)

Generally, the CCUS ITC is a refundable tax credit that supports the adoption of carbon capture, utilization and storage technologies. The rate of the credit varies and generally depends on the use of eligible equipment as part of an eligible CCUS project (for example, if the equipment is used in a direct air capture project or for transportation).

Budget 2025 proposes to extend the availability of the full CCUS ITC rates by five years, such that the full rates apply to eligible expenditures incurred from the start of 2022 to the end of 2035. Eligible expenditures that are incurred from the start of 2036 to the end of 2040 are subject to the lower rates, and eligible expenditures that are incurred after 2040 are subject to a rate of 0%.

The review of the CCUS investment tax credit rates will be postponed by five years and will now be undertaken before 2035 rather than before 2030.

Clean Electricity Investment Tax Credit (CE ITC) and Canada Growth Fund

Generally, the CE ITC is a refundable credit equal to 15% of the capital cost of eligible investments in low-emitting electricity generation systems, electricity storage systems, and equipment for the transmission of electricity between provinces and territories.

Budget 2025 proposes to include the Canada Growth Fund as an eligible entity for purposes of the CE ITC. Furthermore, Budget 2025 provides that financing provided by the Canada Growth Fund would not reduce the cost of eligible property for the purpose of computing the CE ITC.

These measures would apply to eligible property that is acquired and that becomes available for use on or after Budget Day.

Funding to Administer the Clean Economy Investment Tax Credits

Budget 2025 announces funding for the CRA to administer the clean economy investment tax credits and address the backlog for processing claims associated with these tax credits.

Canada Carbon Rebate

In connection with the removal of the federal fuel charge as of April 1, 2025, the final Canada Carbon Rebate payment was distributed starting in April 2025 to eligible households. To affect the winding down of this program, Budget 2025 proposes to amend the ITA to provide that no Canada Carbon Rebate payments would be made in respect of tax returns, or adjustment requests, filed after October 30, 2026.

Accelerated Capital Cost Allowance for Low-Carbon Liquified Natural Gas Facilities

Prior to 2025, liquefied natural gas (LNG) equipment and related buildings were eligible for accelerated CCA: 30% for liquefaction equipment (increased from 8%) and 10% for non-residential buildings used in LNG facilities (increased from 6%).

Budget 2025 proposes accelerated CCAs for LNG equipment and related buildings acquired on or after Budget Day and before 2035 if the facility meets new high standards of emissions performance sufficient to be considered a low-carbon facility. It is expected that details regarding the new emissions performance requirements for these accelerated CCAs will be provided at a later date.

Facilities that are in the top 25% in terms of emissions performance would be eligible for accelerated CCAs with the same rates as the previous measures (30% for liquefaction equipment and 10% for non-residential buildings used in LNG facilities).

Facilities that are in the top 10% in terms of emissions performance would be eligible for accelerated CCAs of 50% for liquefaction equipment and 10% for non-residential buildings used in LNG facilities.

Personal Income Tax Measures

1. Qualified Investments for Registered Plans

Following Budget 2024, the Department of Finance held a consultation focused on improving the clarity and coherence of the qualified investments regime for registered plans (e.g., RRSPs, RESPs and TFSAs), which governs what instruments registered plans can invest in. Budget 2025 proposes several amendments following from this consultation.

Budget 2025 proposes to introduce two new categories of qualified investments targeted at collective investment vehicles (new categories), being units of a trust:

• that is subject to, and substantially complies with, the requirements of National Instrument 81-102 published by the Canadian Securities Administrators; and
• that is an “investment fund,” as defined in the ITA, managed by a registered investment fund manager as described in National Instrument 31-103 published by the Canadian Securities Administrators (investment fund/IFM test).

If enacted, the new categories would come into force as of Budget Day.

Related to the introduction of the new categories, Budget 2025 proposes to repeal the current registered investment regime as of January 1, 2027. Accordingly, managers of trusts that currently rely on registered investment status will need to review whether those trusts would meet one of the new categories. Budget 2025 states that it is generally expected that units of funds that were registered investments would continue to qualify under existing rules or the new categories set out above; however, a number of commentators have previously noted that the definition of “investment fund” is arguably overly restrictive. Accordingly, units of certain trusts that are not subject to NI 81-102 may no longer be qualified investments for registered plans. On the other hand, certain trusts that did not previously qualify as registered investments (most commonly because they hold investments that are not qualified investments) may meet one of the new conditions and therefore may be able to have units that are qualified for investment, providing new planning opportunities for investment fund managers.

Unlike the registered investment regime, the new categories do not require registration with the CRA or annual filing of T3RI returns, which will significantly reduce the compliance burden for managers as compared to the current registered investment regime.

In Budget 2024, the Department of Finance invited stakeholders to comment on whether crypto-backed assets should be qualified investments, which suggested that the Department of Finance was considering whether units of funds that invest in cryptocurrency should continue to be eligible to be qualified investments. Budget 2025 does not propose any changes that would apply specifically to crypto-backed assets, including to limit the ability of crypto-backed assets to be eligible to be qualified investments.

Budget 2025 also proposes several amendments to simplify and streamline the rules relating to registered plan investments in small businesses, which would apply as of January 1, 2027. In general, the existing rules relating to small business corporations, venture capital corporations and specified cooperative corporations will be expanded to also apply to registered disability savings plans, and the rules relating to “eligible corporations,” small business investment limited partnerships and small business investment trusts will be repealed.

Finally, Budget 2025 proposes to simplify the qualified investment rules by way of several technical amendments to the ITA and the Income Tax Regulations (Regulations), including the consolidation of qualified investment rules for all registered plans (except Deferred Profit Sharing Plans) into one definition in the ITA.

These changes would come into force on January 1, 2027, giving time for registered plans and their holders to assess the ongoing qualified investment status of their respective investments under the new proposals.

2. Information Sharing – Employee Characterization

Budget 2024 announced that Employment and Social Development Canada (ESDC) and the CRA would enter into data-sharing agreements to address worker misclassification (i.e., the misclassification of employees as independent contractors), which is a particular concern in the trucking industry. Presently, ESDC shares information with the CRA, but restrictions in the ITA and Excise Tax Act (ETA) prevent the CRA from sharing required information with ESDC.

Budget 2025 proposes to amend the information-sharing provisions of the ITA and the ETA to allow the CRA to share taxpayer information (under the ITA) and confidential information (under the ETA) with ESDC in order to facilitate such data-sharing agreements. This change could signal additional coordination between the CRA and ESDC, which could result in additional audits regarding employee/independent contractor status if there are discrepancies between the positions taken opposite the two authorities. These changes would come into force on royal assent of the enacting legislation.

GST/HST and Excise Tax Measures

Budget 2025 introduces some welcome GST/HST and Excise Tax proposals. Of note, after a year focused on tariffs, Budget 2025 did not include any proposals relating to Customs, and it appears that the Department of Finance has decided not to proceed with the previously proposed joint venture rules.

1. Elimination of Underused Housing Tax and Luxury Tax on Aircraft and Vessels

Budget 2025 proposes to end two federal sales and excise taxes: (1) the Underused Housing Tax (UHT), which is a 1% annual tax on vacant or underused residential properties in Canada targeting non-Canadian owners and (2) the federal luxury tax applicable on aircraft and vessels valued at over C$100,000 and C$250,000, respectively.

Budget 2025 proposes to:

• Eliminate the UHT for the 2025 calendar year, though all filing and payment obligations remain in effect for the 2022–2024 tax years
• Eliminate the luxury tax on aircraft and vessels effective Budget Day, with vendors required to file a final return covering the reporting period that includes Budget Day and registrations automatically cancelled by February 1, 2028

The luxury tax on vehicles remains in effect.

2. Reverse Charge Mechanism to Combat Carousel Fraud for Telecommunication Services

To address carousel fraud (or “missing trader” schemes), Budget 2025 proposes to implement a reverse charge mechanism (i.e., self-assessment) for certain industries where the fraud has been identified, starting with specified telecommunication services (e.g., voice-over internet protocol (VoIP) minutes). Under this proposal, purchasers would be required to self-assess and report the applicable GST/HST on these supplies in their GST/HST return, and, if eligible, claim the corresponding input tax credit in the same return resulting in no net cash remittance to the CRA (and therefore no opportunity to claim GST/HST refunds that may be tainted by the fraudulent schemes). The proposed measures are open for public consultation until January 12, 2026.

Previously Announced Measures – Deferrals

As usual, Budget 2025 has a long list of previously announced measures that the government intends to continue pursuing. In itemizing these, Budget 2025 announces deferral of three measures of note. In particular:

• Budget 2025 announces that the effectiveness of proposed reporting regimes for non-profit organizations and for crypto assets will be deferred to taxation years beginning on or after January 1, 2027
• Budget 2025 confirms that bare trusts will be required to comply with the beneficial ownership regime, after several ad-hoc deferrals, but that this requirement will be deferred to taxation years ending after December 31, 2026

For more information on these measures, please contact any member of our Tax group.