2026 Federal Budget: Selected Tax Measures

On November 5, 2026 (Budget Day), the Government of Canada released its 2026 federal budget (Budget 2026). Budget 2026 announces tax simplification as a core priority of the government, and this theme runs through many of the tax measures proposed. A second tranche of simplification measures is slated to be announced in the 2027 Spring Economic Update.

While the simplification measures announced in Budget 2026 are relatively modest in scope, many are proposed for consultation, and it is hoped that these measures may be improved and expanded with the benefit of stakeholder input.

Budget 2026 also includes measures intended to promote investment in Canadian businesses (including confirming the previously announced Productivity Mega Deduction) and to continue extending and expanding Canada’s clean energy and clean technology incentive programs.

Noteworthy measures in Budget 2026 include: 

• Proposals to streamline withholding and compliance burdens associated with dispositions of “taxable Canadian property” by non-residents of Canada
• A preliminary proposal to introduce a limited scope regime for elective loss transfers within wholly-owned corporate groups
• Proposals to reduce the impact of Part VI.1 tax, applicable to corporations that pay dividends on “taxable preferred shares”
• The “Canada Growth Incentive,” which includes a new exemption for capital gains realized by individuals on dispositions of shares of qualifying corporations carrying on certain active businesses in Canada, and an expansion to the rules for deferred gains on dispositions of eligible small business corporation shares, including specific provisions regarding simple agreements for future equity (SAFEs)
• Proposals to significantly extend the time limit for taxpayers to object to income tax assessments
• A new consultation on potential measures to strengthen Canada’s implementation of the Organisation for Economic Co-operation and Development (OECD) common reporting standard
• Several proposals regarding energy, resource taxation and the clean economy
• Amendments to administrative penalties under federal tax statutes resulting from the review announced in the 2025 Federal Budget

Table of Contents

International Income Tax Measures

• Taxable Canadian Property
• Common Reporting Standard Consultation

Business Income Tax Measures

• Productivity Mega Deduction
• Taxable Preferred Shares
• Corporate Loss Transfers
• Excessive Interest and Financing Expense Limitation
• Scientific Research and Experimental Development Program
• Clean Electricity and Clean Technology Investment Tax Credits
• Helium Exploration, Development and Resource Expenses
• Mineral Exploration Tax Credit and Critical Mineral Exploration Tax Credit
• Corporate Tax Elections

Personal Income Tax Measures

• Canada Growth Incentive
• Rollover for Investments in Small Businesses
• Pension and Registered Plan Measures

Administration and Enforcement

• Extension of the Deadline to File Notices of Objection
• Disclosure of Tax Debt
• Increased Funding
• Increases to Penalties

GST/HST Measures

• Pre-Approval of GST/HST Input Tax Credit Allocation Methods for Qualifying Financial Institutions

International Income Tax Measures

Taxable Canadian Property 

Canada generally taxes non-residents on income and gains from the disposition of “taxable Canadian property” (TCP). TCP generally includes Canadian real estate and resource properties, and certain equity interests the value of which, at the time of disposition or at any time during the preceding five years, is derived primarily from Canadian real or resource properties.

To facilitate the collection of such tax, the Income Tax Act (Canada) (Tax Act) contains a regime that generally requires non-resident vendors of TCP to apply for and obtain a “section 116 certificate” from the Canada Revenue Agency (CRA). Where tax is payable, the vendor must generally pay an amount equal to 25% of the gain in respect of TCP that is generally non-depreciable capital property (or, in the case of “specified” TCP that includes depreciable property and other property the gain on which is taxable at ordinary income tax rates, a higher amount as determined by the CRA) in order to obtain the certificate. Where the amount paid exceeds the vendor’s actual tax liability in respect of the disposition (discussed further below), the vendor can claim a refund when it files its Canadian federal income tax return reporting the disposition.

Unless a section 116 certificate can be obtained by the vendor prior to closing, the purchaser is entitled to withhold from the purchase price, and is required to remit to the CRA, 25% of the gross purchase price (50% in the case of specified TCP) if a certificate is not ultimately obtained. The failure to do so in a timely manner exposes the purchaser to liability for this amount, penalties and interest.

Quebec has a similar regime applicable to a disposition of “TQP” (generally, TCP with a nexus to Quebec), which applies incrementally.

While the TCP or section 116 regime serves an important purpose in safeguarding Canada’s tax base, it has been the subject of significant criticism over the years for its inflexibility. For example, the tax rate in the case of non-specified TCP, and the withholding rates generally, are based approximately on the top rate payable by an individual taxpayer and do not align with the actual tax rate applicable to the particular vendor. This discrepancy is particularly severe where the non-resident vendor is a corporation, as corporations are generally subject to a significantly lower tax rate than individuals.

The foregoing, together with the facts that (1) costs of disposition are not counted for the purpose of calculating the amount payable to obtain a section 116 certificate, (2) it can take the CRA months to process a section 116 certificate application, and (3) it can take months to obtain a refund upon filing a tax return, means that many vendors of TCP must deploy cash well in excess of their actual tax liability to meet their Canadian tax compliance obligations, even if only mostly temporarily. Further, the required purchaser withholding is based on gross purchase price rather than gain, which can amplify the cash flow effect where the vendor is unable to obtain a section 116 certificate in time for closing. This can create significant issues, especially where the disposed property is subject to significant debt financing that must be discharged with the proceeds of disposition.

As another example, in certain circumstances where a vendor disposes of TCP to a Canadian corporation in exchange for consideration that includes shares of the corporation, the vendor can obtain a full or partial tax deferral by jointly electing with the purchaser under section 85 of the Tax Act. Section 116 compliance is still required even where a full tax-deferred rollover is obtained, and a purchaser may insist on withholding from the purchase price until the certificate is issued (though this can be practically challenging in non-cash transactions).

In this regard, Budget 2026 proposes two relieving measures:

• For corporate vendors, the payment required to obtain a section 116 certificate in respect of non-specified TCP will be reduced from 25% of the vendor’s capital gain to 15%, and the withholding rates in respect of non-specified TCP and specified TCP will be reduced from 25% of the purchase price to 15% of the purchase price and from 50% of the purchase price to 30% of the purchase price, respectively. This change will require purchasers to be comfortable that a particular non-resident vendor is in fact a corporation for Canadian income tax purposes, and, where the vendor is a partnership with both corporate and non-corporate non-resident members, the applicable interest of each such member in the subject property. The payment needed to obtain the certificate will still typically exceed the actual tax payable by the corporation, but by a much smaller margin than under the existing rules.
• Where a disposition of TCP occurs on a fully tax-deferred basis under section 85, the joint election is filed within 30 days of the disposition and the purchaser provides timely notice to the CRA (similar to the purchaser notice currently permitted for treaty-exempt dispositions), the parties will be exempt from the withholding and tax remittance requirements of section 116. Purchasers will be required to reasonably satisfy themselves that the vendor is effecting the transfer on a fully tax-deferred basis.

Both of these measures would apply to dispositions that occur on or after January 1, 2027.

The tax-deferred proposal contains a rule that would cause the section 116 compliance obligation to spring back into existence upon an amendment to the section 85 election that resulted in income being recognized by the vendor on the original disposition. Presumably this will not be a concern in most cases because such an amendment would require the purchaser’s consent.

These changes are generally a step in the right direction, in that they ease some of the administrative inefficiency of the section 116 regime without compromising the Canadian tax base. It remains to be seen whether Quebec will adopt similar changes, although it would be surprising if that were not the case. There are many other potential changes that could be made, either legislatively or as a matter of CRA administration of the section 116 regime to further alleviate burdens on parties engaging in commercial transactions without materially weakening the legitimate protective function served by section 116. A January 2025 submission by the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada (the Joint Committee) outlined several potential changes. Hopefully some of these ideas can be considered in the ongoing effort towards simplification.

Budget 2026 also proposes to strengthen an anti-avoidance rule that could apply where a tax-deferred transfer is followed by a subsequent disposition of the consideration received on the transfer in circumstances where the subsequent disposition is not taxable, including because of a treaty exemption (that would not have applied had the original property been disposed of directly).

Common Reporting Standard Consultation

In late 2025, the CRA amended its public guidance on the application of the Common Reporting Standard (CRS) in Canada to expand its interpretation of the residence of a partnership to include a partnership governed by Canadian law, without reference to the location of its central management and control. This was done to more closely align Canada’s rules with international standards in this area, but the change in interpretation, without a change in law, with little notice and close to the reporting deadline for the year, drew significant criticism. That change in interpretation was withdrawn, but changes to Canada’s CRS regime are now back on the table.

Global peer review of Canada’s implementation of the CRS identified two specific departures from the “global standard” in Canada’s rules. In particular:

• The definition of “residence” of a partnership under the Canadian rules excludes a partnership governed by the laws of a province if the central management and control of the partnership is not in Canada
• Certain financial investment and trading entities do not have reporting obligations in Canada unless they are marketed to the public as investment vehicles

The concern is that these unique Canadian differences could create opportunities for individuals to avoid reporting of their financial accounts in a way that is not considered appropriate in the context of the global CRS system.

Budget 2026 announces a consultation on potential measures to address these perceived gaps. No specific proposals have been advanced, but interested parties can submit comments to the Department of Finance on or before December 31, 2026, focusing on the questions of (1) how should Canada’s CRS rules be amended, and (2) how can changes be implemented without imposing unnecessary burden?

There is no indication of when any changes may be effective, but with the consultation period ending December 31, 2026, it would be surprising if any changes were made effective for the 2026 reporting year. No changes are currently proposed in respect of the nearly-identical Foreign Account Tax Compliance Act regime (implemented in Part XVIII of the Tax Act) that applies in respect of exchanges of information with the United States.

Business Income Tax Measures

Productivity Mega Deduction

Budget 2026 confirms the government’s intention to proceed with implementing its previously announced “Productivity Mega Deduction.” The Productivity Mega Deduction is intended to provide immediate expensing for a broad range of depreciable property. For more details, see our bulletin, Canada Announces Productivity Mega Deduction.

Taxable Preferred Shares 

The Tax Act contains a regime that is intended to prevent erosion of the corporate tax base through after-tax financing that involves the issuance of shares with debt-like characteristics (“taxable preferred shares”) in lieu of debt instruments. Specifically, where a payer corporation is unable to immediately benefit from the tax deduction generated by interest expense (payable on a debt instrument) and the recipient can receive a dividend on an effectively tax-free basis (as compared to earning taxable interest income), the parties may be otherwise incentivized to use such preferred share financing, priced at a lower rate than equivalent debt financing would be.

Dividends paid (and deemed to be paid) on such shares are subject to a special punitive “Part VI.1 tax” on the payer corporation. While Part VI.1 tax can be offset against ordinary income tax (where the corporation and its related corporate group are sufficiently taxable), even where the offset is fully available, some tax leakage still results due to imperfect provincial integration. Part VI.1 tax is also only payable for dividends paid in excess of an annual C$500,000 dividend allowance threshold (reduced to the extent dividends paid in the prior calendar year exceed C$1-million).

Budget 2026 proposes to introduce the following measures:

• Exempt dividends paid by “Canadian-controlled private corporations” (CCPCs) from the taxable preferred share regime entirely
• Increase the dividend allowance from C$500,000 to C$1.5-million, and the threshold for reduction of the dividend allowance from C$1-million to C$3-million

The CCPC exemption is proposed to apply to dividends paid on or after Budget Day, and the changes to the dividend allowance are proposed to apply to taxation years that end after 2026.

Budget 2026 also announced a review of the broader preferred share regime in the Tax Act and is seeking stakeholder submissions by January 8, 2027.

These proposals will no doubt be helpful for many smaller corporations (and appear to directly address certain concerns raised by STEP Canada in a submission dated August 13, 2026) and the announcement of a broader review of the preferred share regime is welcome; however, the measures proposed in Budget 2026 do not address many of the issues and concerns with the Part VI.1 tax regime, which have been raised with the Department of Finance.

While the stated policy objective of the taxable preferred share regime is understandable, the rules as drafted are too broad, capturing many common commercial transactions and arrangements that in no way are designed to, or actually result in, the base erosion abuse described above. The definition of “taxable preferred share” is very broad. By way of example, the CRA’s view is that an agreement for a corporation or its majority shareholder to acquire a common share from a minority shareholder at a price equal to the common share’s pro rata portion of the fair market value of all the corporation’s common shares, determined without regard for minority or liquidity discount, arguably could cause the share to be a taxable preferred share. It is challenging to justify this result (or the uncertainty surrounding it), and it serves as an irritant in many ordinary course transactions. It is similarly difficult to understand why it is appropriate for Part VI.1 tax to apply to a dividend paid to a non-resident of Canada. In fact, if a goal is to attract further international investment into Canada, having the taxable preferred share rules applied in this manner is contrary to this objective.

The foregoing are but two examples of the ways in which the breadth of the taxable preferred share regime far exceeds its intended purpose. In addition to the STEP Canada submission noted above (which called for the repeal of Part VI.1 as its primary recommendation, failing which the implementation of a number of changes including those reflected in the Budget 2026 proposals), the Joint Committee made a comprehensive submission dated October 21, 2026, also recommending that Part VI.1 be repealed.

It is hoped that the Department of Finance will consider such submissions, together with the feedback from the consultation described above, with a view to addressing some of the other inequities in the taxable preferred share regime in the near term and further removing irritants to investment.

Corporate Loss Transfers

As part of its simplifying measures, Budget 2026 proposes a consultation on a limited measure to simplify the transfer of losses in wholly-owned corporate groups. As background, Canada’s income tax system does not allow for consolidated group returns, such that there is currently no simple way to transfer losses between corporations in the same corporate group. The CRA has for many years supported loss consolidation transactions whereby losses can be transferred between related or affiliated corporations, but those transactions can be cumbersome and costly to implement.

The rule proposed in Budget 2026 is quite narrow. First, it only provides for the transfer of current-year losses, meaning that it does not provide for the transfer of loss carry-forwards, as is often done in loss consolidation transactions. Second, unlike the CRA’s position regarding loss consolidation transactions, the rule proposed in Budget 2026 does not permit losses to be transferred between corporations that are related or affiliated but not part of the same wholly-owned group.

Last, the rule is proposed to apply only if the transferor and transferee each have a permanent establishment in only one province (or territory) and those permanent establishments are in the same province (or territory). If the rule were enacted as proposed, this permanent establishment restriction would severely limit the utility of the election and would be more restrictive than the CRA’s administrative position and rulings practice on loss consolidation transactions where incidental provincial income shifts are typically permitted; however, Budget 2026 specifically requests comments on how this restriction could be broadened while protecting provincial tax bases. It is hoped that this restriction will be significantly relaxed in the version of the rule ultimately enacted, as doing so would greatly enhance the effect of these proposals.

Budget 2026 notes that there are tax integrity concerns involved with allowing loss transfers and requests comments on how to address such concerns. Specifically, Budget 2026 notes that if a parent corporation invested $100 in shares of a subsidiary, and the $100 was lost by the subsidiary, the parent and subsidiary could elect to transfer the subsidiary’s resulting $100 loss to the parent, while leaving the parent with $100 of tax basis in the shares of the subsidiary. Budget 2026 suggests, for example, that a condition of the election should be that the parent’s $100 tax basis in the shares of the subsidiary would be eliminated. Such a restriction has not been required by the CRA in its typical rulings on loss consolidation transactions.

Budget 2026 does not mention whether the proposed loss transfer rule will include limits on transfers of losses between financial institutions and non-financial institutions along the lines of the excessive interest and financing expense limitation (EIFEL) rules.

Interested parties can submit comments on the proposed loss transfer rule to the Department of Finance by January 8, 2027.

Excessive Interest and Financing Expense Limitation 

Canada’s EIFEL rules generally operate to limit the amount of interest and financing expenses that are deductible in Canada.

There are currently proposed exceptions to the EIFEL restrictions for interest incurred before 2036 on borrowed funds used to directly acquire or build purpose-built rental housing in Canada and for taxpayers incurring interest expense on borrowed funds used directly to carry on a “regulated energy utility business” in Canada.

Budget 2026 announces the following enhancement to these measures:

• The above-noted exceptions will be expanded to cover interest expense on borrowed funds that are used for eligible purposes by another corporation, trust or partnership within the same group of affiliated entities or where the eligible activities are carried on by a partnership where the taxpayer (together with affiliated entities) has at least a 40% interest
• The definition of “regulated energy utility business” will be expanded (or clarified) to include cases where the prices of all or substantially all of the products or services are (1) established, approved or guaranteed by the government (including sales to Crown corporations), or (2) established through a government-operated market that facilitates delivery for consumption or use in Canada.

These changes would apply to taxation years that begin on or after October 1, 2023.

Scientific Research and Experimental Development (SR&ED) Program

Generally, under the SR&ED program, qualifying expenditures are deductible in the year they are incurred and are eligible for an investment tax credit. Budget 2026 proposes to expand the activities and expenditures that are eligible under the SR&ED program, including tests, technological validations and studies conducted to meet regulatory requirements. Budget 2026 also proposes to expand SR&ED eligible expenditures to include expenses related to registration and maintenance of intellectual property protection. However, certain recapture rules would apply to related SR&ED deductions and investment tax credits if a taxpayer disposes of intellectual property for which SR&ED support was provided. This measure applies to taxation years beginning on or after Budget Day.

Clean Electricity and Clean Technology Investment Tax Credits

Budget 2026 proposes to extend the Clean Electricity Investment Tax Credit (ITC) and Clean Technology ITC to eligible property that becomes available for use before 2041. Furthermore, the Clean Electricity ITC is proposed to be expanded to include certain intra-provincial electricity transmission property. This measure would apply with respect to property that is acquired on or after Budget Day.

Helium Exploration, Development and Resource Expenses

Global demand for helium is growing, and Canada has a large helium resource base, particularly in Alberta and Saskatchewan. Budget 2026 proposes to allow helium exploration and development expenses to qualify as Canadian exploration expense (CEE) and Canadian development expense (CDE), similar to the oil and gas and mining regimes. Expenses incurred to acquire helium resource properties would also qualify as Canadian oil and gas property expenses (COGPE). This measure would apply to expenses incurred on or after Budget Day.

Mineral Exploration Tax Credit and Critical Mineral Exploration Tax Credit

Flow-through shares permit corporations to renounce or “flow through” Canadian exploration expenses to investors, who can deduct 100% of those expenses in computing their taxable income. Two tax credits provide additional benefits to individuals who invest in eligible flow-through shares:

• The Mineral Exploration Tax Credit (METC) is equal to 15% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors
• The Critical Mineral Exploration Tax Credit (CMETC) is equal to 30% of specified critical mineral exploration expenses incurred in Canada and renounced to flow-through share investors

Both the METC and CMETC were set to expire on March 31, 2027. Budget 2026 proposes to extend eligibility for both credits by five years, to flow-through agreements entered into on or before March 31, 2032.

Budget 2026 also proposes to expand the definition of critical minerals relevant for the CMETC to include antimony. 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, 2032.

Corporate Tax Elections

Certain provisions of the Tax Act and Income Tax Regulations require corporations filing elections or agreements with the CRA to provide certified copies of directors’ resolutions or, in some cases, authorizations from the person administering the corporation’s affairs. These requirements add unnecessary complexity for taxpayers.

Among other examples, these requirements apply to capital dividend elections, elections to cease to be a public company, transfers of tax liability on certain taxable dividends, transfers of qualified SR&ED expenditures and allocations of SR&ED employees’ wages and salaries.

As a small (but nevertheless welcome) simplifying measure, Budget 2026 proposes to eliminate the requirements for corporations to file a certified copy of a resolution or authorization when making certain elections or agreements. This will slightly simplify the process around the payment of capital dividends and elections to cease to be public corporations, both common aspects of corporate tax planning.

This measure would apply after the date of royal assent of the enacting legislation.

Personal Income Tax Measures

Canada Growth Incentive

The Canada Growth Incentive (CGI) is intended to help high-potential businesses attract investment and grow in Canada. As proposed in Budget 2026, the CGI consists of two measures: (1) a new tax exemption on up to C$15-million in capital gains earned from successful eligible investments in Canadian businesses and (2) enhancing the availability of the existing small business rollover to allow deferral of taxes on capital gains when proceeds are reinvested in another Canadian small business.

The stated purpose of the CGI is to “level the playing field” with the United States and encourage more capital to flow to Canadian business and enable a tax-efficient reinvestment of proceeds into Canada.

The measure would apply to qualifying shares issued on or after Budget Day and before 2037.

Capital Gains Exemption

At a high level, the CGI capital gains exemption (CGI CGE) applies where a “qualifying individual” disposes of “qualifying shares” of a “qualifying corporation.” As with the existing lifetime capital gains exemption (LCGE), there are several conditions of application involving both quantitative and qualitative tests.

Given the potential for significant tax savings on a future sale of the business, the measure could serve as a significant stimulus for investment. Businesses and investors looking to take advantage of the CGI CGE in raising (or investing) future capital will need to be mindful of the eligibility criteria in order to ensure the CGI CGE is available. These criteria are likely to become important structuring considerations in establishing early-stage companies and should be considered from the outset.

Eligibility Criteria 

A “qualifying individual” is an individual, other than a trust, who is at least 18 when the shares are acquired and a resident of Canada throughout the year in which the exemption is claimed. Generally, the rules permit the CGI CGE to be accessed by qualifying individuals holding qualifying shares through partnerships. It is unclear whether individuals holding qualifying shares through trusts would be able to claim the CGI CGE, as is the case with the existing LCGE.

The claim of the CGI CGE can relate to a capital gain realized on the disposition of a qualifying share in that year or a preceding taxation year.

The criteria for a share being a “qualifying share” are extensive and target the incentive at early-stage companies with significant Canadian connections. A share of a corporation will only be a “qualifying share” where each of the following conditions is satisfied:

• At issuance, the corporation is a Canadian-controlled private corporation and all or substantially all of the fair market value of the corporation’s assets are attributable to assets used, or reasonably intended for use within 36 months, principally in a qualifying business carried on primarily in Canada
• Immediately before and after the issuance of a share, the combined carrying value of the assets of the corporation and all related corporations does not exceed C$100-million
• The share must be issued solely for cash or in exchange for employment services
• Throughout the period of ownership, at least 50% of the fair market value of the corporation’s assets must be attributable to assets used, or reasonably intended to be used, principally in a “qualifying business.” Further, that business must be carried on primarily in Canada for 24 consecutive months immediately following the issuance of shares
• Shares must be held for at least 36 consecutive months immediately before disposition
• At the time of disposition, the corporation must be a Canadian-resident corporation that is a private corporation or listed on a designated stock exchange in Canada, and all or substantially all of the fair market value of the corporation’s assets must be attributable to assets used principally in a qualifying business

Generally, a “qualifying business” is proposed to be an active business other than certain excluded businesses. These excluded businesses include consulting, specified professional practices, businesses principally dependent on employees’ reputation or skill, businesses operating under licensing or franchising agreements and businesses operating in agriculture, fishing, forestry, mining, finance, insurance, utilities, real estate, food and accommodation, arts, recreation and entertainment. These exclusions would appear to limit the CGI CGE to only a narrow subset of businesses. While the objective of the CGI is important, the government should be urged to carefully consider if the rules are too restrictive to accomplish this objective (particularly with regard to the scope of businesses that are eligible).

Consistent with the treatment of gains eligible for the LCGE, capital gains exempted by the CGI CGE will have a 30% inclusion rate for alternative minimum tax purposes.

A CGI CGE claimed on qualifying shares will limit the ability of the qualifying individual to claim the LCGE on those same shares (and the claiming of the LCGE will also limit the ability to claim the CGI CGE on the same shares).

Budget 2026 is clear that certain integrity rules will be proposed to ensure the CGI CGE is only accessed in the intended circumstances. Draft legislation implementing the CGI CGE is not yet available but will need to be carefully reviewed to ensure compliance.

Rollover for Investments in Small Businesses

Budget 2026 also proposes to expand the existing tax deferral for individuals reinvesting proceeds from qualifying dispositions of eligible small business corporation (ESBC) shares, effective for dispositions occurring on or after January 1, 2027.

The reinvestment period in respect of such dispositions of ESBC shares is currently the year of disposition or the following calendar year. Budget 2026 extends the reinvestment period to year of disposition and the three following calendar years, with a reserve permitting deferral of a gain, pending reinvestment, to the end of the reinvestment period.

Further, an individual who, before the end of the three-year reinvestment period, enters into an agreement with an ESBC under which they provide upfront capital pursuant to future-equity agreements (including SAFEs) could extend deferral by two years. Gains would be taxed if shares of the ESBC are not issued by the end of the fifth year following disposition. This provision is an interesting recognition of the prevalence of agreements such as SAFEs in the start-up ecosystem (a common form of instrument in growth-stage companies that had previously received minimal consideration by the government).

Tax on the gain in respect of un-reinvested proceeds that are not ultimately invested in replacement shares would be subject to additional interest at prescribed rates from the original balance-due day.

Finally, the ongoing active-business asset threshold in the ESBC test, which currently requires all or substantially all of the assets of the ESBC to be used principally in an active business will be lowered from “all or substantially all” to a “primarily” threshold during the holding period. However, the “all or substantially all” test would need to be met at the time of issuance and disposition, potentially creating the need for “purification transactions” before an investment or in advance of a disposition.

As with the CGI CGE, Canadian business activity would be required at issuance and continuously thereafter for the lesser of two years and the ownership period.

Pension and Registered Plan Measures

Budget 2026 includes several provisions related to pension plans and other registered plans. See our bulletin, 2026 Federal Budget: Selected Pension and Registered Plan Measures, for more information.

Administration and Enforcement

Extension of the Deadline to File Notices of Objection

A significant change proposed in Budget 2026 is the extension of the deadline for filing a notice of objection to an assessment or reassessment under the Tax Act.

Under the current rules, most types of taxpayers must file a notice of objection within 90 days after the sending of a notice of assessment or reassessment. Budget 2026 proposes to extend this period from 90 days to one year for these taxpayers. For individuals and graduated rate estates, the deadline would be the later of (1) two years after the taxpayer’s filing due date for the year and (2) one year after the date of sending the notice of assessment or reassessment. This proposal follows the CRA’s recent replacement, on October 26, 2026, of Form T400A with a new comprehensive Form RC592 for filing notices of objection under the Tax Act and other tax statutes. While the extended deadlines will be welcome for many taxpayers, two important considerations warrant attention.

Under the current rules, taxpayers may apply to the CRA for an extension of time to object within one year after the original deadline for filing a notice of objection. In practice, these extensions are almost always granted. Under the new rules, the statutory regime for applying for an extension of time to object under the Tax Act would be repealed for most objections (although it is not yet clear whether corresponding changes would be made under other tax statutes). Eliminating the regime for obtaining an extension of time makes it particularly important for taxpayers to monitor objection deadlines carefully and ensure that their rights of objection are preserved. The proposed changes are to apply to assessments or determinations sent on or after the day that is three months after Royal Assent.

Budget 2026 also does not address any corresponding changes to the CRA’s collection powers. Under the current regime, the CRA is generally restricted from taking collection action in respect of assessed amounts until at least 90 days after the notice of assessment or reassessment is sent or, where an objection has been filed, until 90 days after the CRA Appeals Division has confirmed or varied the assessment. Certain exceptions apply, including in the case of “large corporations” as defined in the Tax Act. It remains to be seen whether the proposed extension of the objection period will be accompanied by changes to the CRA’s collection powers or practices. Without a corresponding extension of the period during which collection action is restricted, taxpayers may effectively need to file their objections within 90 days to avoid the possibility of collection action being taken against the outstanding balance, notwithstanding the longer statutory deadline for objecting.

Disclosure of Tax Debt

Budget 2026 also proposes measures that would permit the CRA to disclose information about a taxpayer’s outstanding tax debt to credit bureaus. Disclosure would be permitted only where (1) the outstanding tax debt exceeds C$50,000, (2) all objection and appeal rights in respect of the underlying assessments have expired or been exhausted, (3) the CRA has provided the taxpayer with at least 30 days’ advance notice of its intention to disclose the information, and (4) the CRA has taken reasonable steps to collect the debt and the taxpayer has been given an opportunity to make reasonable repayment arrangements.

The exercise of this proposed power could have a significant impact on a taxpayer’s credit rating. In the case of businesses, disclosure may also affect access to credit facilities, financing arrangements and other commercial arrangements. However, because disclosure would be permitted only after all objection and appeal rights in respect of the underlying tax debt have expired or been exhausted, credit reporting may be delayed for a significant period of time in many cases (especially when coupled with the proposed extension of the objection period).

Increased Funding

Budget 2026 also proposes additional funding for CRA audit and compliance activities aimed at addressing non-compliance with the Tax Act. Beginning in 2027–2028, the CRA would receive C$116.5 million over four years to:

• Expand compliance activities targeting individuals and businesses that fail to file income tax returns
• Enhance the CRA’s Trust Filers Verification Program
• Strengthen pre-assessment validation activities for corporate income tax returns to prevent unwarranted refunds

These investments reflect a continued focus on expanding the CRA’s compliance and verification activities to remedy perceived gaps or inadequacies in the tax administration system, including before initial assessments and refunds are issued.

Increases to Penalties

Budget 2026 continues the trend of increasing penalties applicable to taxpayers. Following the review of administrative penalties announced in Budget 2025, Budget 2026 proposes a number of changes intended to further deter non-compliance with the Tax Act.

Most fixed-dollar administrative penalties would be increased to account for inflation since their introduction. These amounts would then be indexed to inflation every five years, beginning January 1, 2033.

Certain penalties would also be adjusted according to the size of the taxpayer, with the objective of making them a more effective deterrent for larger corporations and partnerships. Under the proposed framework, individuals and smaller corporations and partnerships would be subject to a base-level fixed penalty. The penalty would increase to three times the base amount for medium-sized corporations and partnerships and eight times the base amount for large-sized corporations and partnerships. Related corporations would generally be grouped together when determining whether a corporation qualifies as medium or large for these purposes.

Budget 2026 also proposes new penalties for repeated failures to file tax forms or comply with other obligations. These penalties would apply where a taxpayer had been liable for a penalty for an identical failure in any of the three preceding taxation years and failed to remedy the non-compliance after receiving a notice, requirement or demand from the CRA.

These measures are generally proposed to apply to taxation years or fiscal periods ending after 2027.

GST/HST Measures

Pre-Approval of GST/HST Input Tax Credit Allocation Methods for Qualifying Financial Institutions

Budget 2026 proposes to reduce the compliance burden for certain financial institutions that are required to obtain advance approval from the Minister of National Revenue for their GST/HST input tax credit allocation methods. Rather than seeking approval annually, a financial institution would be permitted to apply for approval of its methods for up to three consecutive fiscal years. The Minister could, however, approve the proposed methods for only the first year, in which case further applications would be required for the remaining years. The change would apply to fiscal years beginning after June 30, 2027.

The proposal should reduce the recurring compliance burden associated with annual applications, particularly for financial institutions with established methodologies that are used consistently over time. The proposal does not address the separate question of whether the Minister of National Revenue may subsequently assess a financial institution using an allocation methodology different from a methodology that was previously approved. This issue remains unsettled.

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