2025 will be remembered as a year of transition for Canadian taxpayers. The newly elected federal government pivoted away from many controversial Canadian tax policies of the early 2020s, while reaffirming its commitment to various international tax initiatives going forward.
Meanwhile, the audit environment in Canada remains in a state of evolution as new legislation has been proposed that would significantly expand the audit powers of the Canada Revenue Agency (CRA).
On the case law front, guidance is expected from the country’s highest Court in 2026 on principles of statutory interpretation in a tax case that has the propensity to affect any Canadian taxpayer.
Below are the highlights.
Reaffirmed Commitment to Global Tax Initiatives
Prime Minister Mark Carney ushered in his first year with a shift away from many tax policies of the predecessor government and a reaffirmed commitment to various tax initiatives spearheaded by the Organisation for Economic Co-operation and Development (OECD).
Within weeks of taking power, the new government announced that it would scrap both the proposed hike to the capital gains inclusion rate and the consumer carbon tax — two of the most controversial policies of the previous regime. These changes are in the process of being implemented through the introduction of revised legislation.
Looking forward, the Carney government has signalled its intention to prioritize alignment with OECD initiatives in 2026 and beyond, including by:
- Proposing a new “consistency” rule, which would explicitly tie Canada’s transfer pricing legislation to the 2022 OECD Transfer Pricing Guidelines, requiring the legislation to be interpreted “so as to best achieve consistency” with them
- Repealing Canada’s unilateral digital services tax, which has been a point of contention between Canada and its international partners
While it appears that implementing OECD initiatives will continue to be a priority, it remains to be seen if the current government will further pivot away from other policies of its predecessor and to what extent those changes will impact Canadian tax policy.
More Expansive Audit Powers
2025 also came with more challenges for taxpayers in the trenches of the Canadian audit environment.
Draft legislation was released that would implement certain amendments to further expand the CRA’s audit powers. This legislation would allow the CRA to, among other things, (1) require taxpayers to give information under oath or affirmation, (2) issue notices and impose financial penalties for non-compliance with information requests, and (3) pause the normal limitation period for reassessment in certain circumstances involving non-compliance.
This expansion of audit powers comes at a time when the general anti-avoidance rule has been amended to expressly require consideration of “economic substance” in determining whether transactions are abusive, and draft legislation has been proposed that would implement a significant rewrite of Canada’s transfer pricing provisions.
A key feature of the anticipated new transfer pricing legislation is a more explicit focus on the parties’ “actual conduct.” Going forward, transactions between related parties will accordingly have to be analyzed with reference to a non-exhaustive list of “economically relevant characteristics” that are not limited to contractual terms. As a practical matter, courts have always considered such factors in transfer pricing cases; however, this change is likely to result in even more expansive audits for multinationals operating in Canada.
Looking Ahead to 2026
If enacted, the various reforms proposed in 2025 are likely to add complexity and uncertainty to an already contentious audit environment and to increase compliance pressure in the immediate term. Future cases will establish the precise contours of such legal reforms, both with respect to substantive questions of tax interpretation as well as in audit and compliance matters. Hope is already on the horizon as certain key cases currently make their way through the courts.
Under appeal to the Supreme Court of Canada is the decision of the Federal Court of Appeal in Bank of Nova Scotia (BNS). The question before the Court is whether a taxpayer is liable to pay arrears interest on a “phantom” tax debt that has accumulated daily over the course of a multi-year audit by the CRA.
The taxpayer in this case applied a loss against an income adjustment made by the CRA after an audit spanning several years. Applying the loss instantly nullified any tax liability that would have arisen from the adjustment. Nevertheless, the CRA sought to collect arrears interest on the full amount of the tax debt that would otherwise have been owing, as if the loss had not been applied, and for the entire audit period.
BNS will be heard in January 2026. Blakes is representing the Business Council of Canada as an intervener in the appeal.
As well, there appears to be a record number of other applications for leave currently before the Supreme Court of Canada, each brought by the taxpayer to appeal a decision of the Federal Court of Appeal. These cases include Grenon, Vefghi and, most recently, Husky Energy.
- The central issue in Grenon was whether certain trusts each qualified as a “mutual fund trust” for tax purposes. The Court determined that exempt market distributions of the trust units to certain investors were “unlawful distributions” under securities laws and therefore could not be counted in satisfying the relevant tax requirements. Although arising in a tax context, this decision addresses important securities law concepts and has raised broader concerns from a capital markets perspective.
- Vefghi dealt with the timing for determining when two corporations, interposed by a trust, must be “connected” for purposes of applying Part IV tax. The Court held that the relevant time for determining when two corporations are connected is the end of the trust’s taxation year in which the dividend is received. This case carries significant practical implications in various corporate transactions involving control and connectivity.
- Husky Energy focused on the concept of “beneficial ownership” in the context of Canada’s tax treaty with Luxembourg. The Court concluded that the treaty-reduced withholding tax rate did not apply because certain dividend recipients were not the beneficial owners of the dividends received. The legal test for beneficial ownership has widespread relevance in the international and treaty context, and has not previously been considered by the Supreme Court of Canada.
Key interpretive principles are in play in each of these cases. Given the fundamental role of statutory and treaty interpretation in tax cases, these decisions will likely have significant ripple effects for both tax disputes and planning.
For more information, please contact any member of our Tax Controversy & Litigation group.
