Pens Down in the Elbows Up Era: Budget 2025 Nibbles at the Edges

On November 4, 2025, Canada’s Minister of Finance tabled the federal budget, Building Canada Strong (“Budget 2025”). From a tax perspective, Budget 2025 contains only a smattering of changes across the tax spectrum, including targeted new credits, a modernization of the transfer pricing regime, and for the first time in many years, legislative changes which will reduce the overall tax compliance burden on the average Canadian. Indeed, from a revenue collection standpoint, Budget 2025 is downright modest.

Below is a summary of certain key measures proposed in Budget 2025.

Cancellation of the Canadian Entrepreneurs’ Incentive

Budget 2025 cancels the Canadian Entrepreneurs’ Incentive that was announced in the 2024 federal budget (“Budget 2024”). This measure would have permitted certain individuals to reduce their capital gains inclusion rate on dispositions of certain types of shares. Given that it was intended to partially offset the never-enacted increase in the capital gains inclusion rate from Budget 2024, its cancellation is not particularly surprising.

21-Year Rule for Trusts

Generally, a trust is deemed to dispose of most property (including capital property) for proceeds equal to their fair market value every 21 years after the date of its creation. Budget 2025 proposes to broaden existing anti-avoidance rules in the Income Tax Act (Canada) (the “Tax Act”) that prevent a trust from deferring the deemed disposition of its assets on its 21st anniversary to include circumstances where property is transferred indirectly from one trust to another. This measure will apply to transfers that occur after November 3, 2025.

Elimination of the Underused Housing Tax (“UHT”)

Budget 2025 eliminates the UHT as of the 2025 calendar year. As such, no UHT would be payable and no UHT returns would be required to be filed in respect of 2025 and subsequent calendar years. Prior year obligations will remain, and the legislation will effectively “sunset” in ten years. As a measure which was both a material administrative burden on the government, and a significant and complex compliance obligation on Canadian homeowners, the demise of the UHT is welcome news.

Expansion of the Critical Mineral Exploration Tax Credit (“CMETC”)

The CMETC is being expanded to include bismuth, cesium, chromium, fluorspar, germanium, indium, manganese, molybdenum, niobium, tantalum, tin, and tungsten as critical minerals. This measure would apply to expenditures renounced under eligible flow-through share agreements entered into between November 5, 2025 and March 31, 2027.

Clarifying eligible activities under the Canadian Exploration Expense (“CEE”)

Proposed amendments to the Tax Act seek to clarify that expenses incurred to assess the economic viability or engineering feasibility of a mineral resource do not qualify as CEEs as they are not undertaken for the purpose of determining the quality of a mineral resource in Canada. The proposal contrasts with the recent decision in Seabridge Gold Inc. v. British Columbia (2025 BCSC 558) by the B.C. Supreme Court, where the court interpreted the B.C. Mining Exploration Tax Credit’s (“METC”) similar purpose test to include work informing economic viability. The change proposed in Budget 2025 governs CEE for federal purposes only; provincial programs with parallel wording (like B.C.’s METC) would require provincial amendments to align.

Qualified Investments for Registered Plans

The federal government is moving to simplify, streamline and harmonize the qualified investments rules across RRSPs, RRIFs, TFSAs, RESPs, RDSPs, FHSAs and DPSPs. The objective is to preserve broad market access for savers while removing duplication and uncertainty that have crept into the framework over time.

A key change concerns small business investments. The current rules effectively offer two overlapping pathways: one built around specified small business corporations, venture capital corporations, and specified cooperative corporations; the other built around eligible corporations, small business investment limited partnerships (“SBILPs”) and small business investment trusts (“SBITs”).

Budget 2025 proposes to keep the first, more widely used pathway and repeal the second. As part of this simplification, RDSPs would be aligned with RRSPs, RRIFs, TFSAs, RESPs and FHSAs, meaning RDSPs would also be able to hold shares of specified small business corporations, venture capital corporations, and specified cooperative corporations. Conversely, shares of eligible corporations and interests in SBILPs and SBITs would cease to be qualified investments as of January 1, 2027. Any holdings in SBLIPs and SBITs acquired before that date would be grandfathered. It is expected that many issuers who were already considered “eligible corporations” can still qualify, as long as they continue to meet the requirements for being small business corporations.

Under current law, certain trusts and corporations can register with the Canada Revenue Agency (“CRA”) as registered investments to be qualified investments for registered plans. Budget 2025 would repeal the registered investment regime and replace it with two new categories of qualified investments that do not require CRA registration: (i) units of a trust that is subject to and substantially compliant with the requirements of National Instrument 81-102, and (ii) units of a trust that is an “investment fund” under existing tax rules and whose investments are managed by a registered investment fund manager under National Instrument 31-103. The registered investment regime would be repealed as of January 1, 2027 and the new qualified investment trust rules would apply as of November 4, 2025.

Information Sharing – Worker Misclassification

Budget 2025 proposes to amend the information sharing provisions of the Tax Act and the Excise Tax Act (Canada) (“ETA”) to allow the CRA to share taxpayer information (under the Tax Act) and confidential information (under the ETA) with Employment and Social Development Canada for the purposes of the administration and enforcement of the Canada Labour Code as it relates to the classification of workers. This measure is intended to address misclassification of employees as independent contractors in the trucking industry and is expected to come into force on the date the enacting legislation receives Royal Assent.

Immediate Expenditure of Manufacturing & Processing Property

Budget 2025 introduces a measure that will allow taxpayers to claim a 100% “capital cost allowance” deduction on the acquisition of, or the cost of eligible additions or alterations to, certain properties which would currently qualify for the “extra” 2% deduction where at least 90% of the floor space is dedicated to manufacturing or processing goods for sale or lease. The property must be new to the taxpayer – it cannot have been owned before November 4, 2025, and must become first available for use in manufacturing before 2030 for the 100% write-off to be available. Properties that become available for use in later years will be entitled to only a partial (though still significantly enhanced) deduction, until 2034 when a property that has not yet been used in manufacturing will no longer qualify for any enhanced rate. This measure is effective for eligible property acquired on or after November 4, 2025, and if used for manufacturing and processing before 2030.

Anti-Deferral Measures Aimed at Tiered Structures

Budget 2025 introduces a fairly complex rule which aims to eliminate the ability of Canadian-controlled private corporations (“CCPCs”) to defer refundable dividend tax under Part IV of the Tax Act (i.e., tax on dividends where the payer corporation is not “connected” to the recipient, or the payer corporation receives a refund as a result of paying the taxable dividend), perhaps indefinitely, through the use of tiered corporations having differing taxation year ends and, consequently, balance due dates for tax payments. The example given in Budget 2025 involves a payer corporation paying a dividend in its 2025 taxation year to a recipient corporation that has its next taxation year end in 2026. The proposed amendments would apply where taxable dividends are paid between affiliated corporations (using the current affiliate rules) and would “suspend” the payer corporation’s entitlement to a refund until the recipient corporation pays a taxable dividend to an individual shareholder or a non-affiliated corporation (additional limited exceptions apply). It seems like a solution in search of a problem, as it is not clear how widespread the use of such cumbersome (and costly) structures really is. This measure applies to taxation years that begin on or after November 4, 2025.

Transfer Pricing Rules

The transfer pricing regime applies to cross-border transactions (or series of transactions) between a Canadian taxpayer and non-resident persons with whom the taxpayer does not deal at arm’s length. Budget 2025 proposes a modernization of these rules to align their application with the OECD Transfer Pricing Guidelines (the “OECD Guidelines”), including an interpretation rule directing that Canada’s transfer pricing provisions be applied consistently with the OECD analytic framework.

Budget 2025 proposes to replace the existing transfer pricing adjustment and recharacterization and replace them with a single adjustment application rule that would apply where the “actual conditions” of the relevant transaction (or series) differs from “arm’s length conditions”. The proposed rule would apply where there is a transaction (or series) between a taxpayer and a non-resident person with whom the taxpayer does not deal at arm’s length, and the transaction or “series” includes actual conditions that differ from arm’s length conditions.

The application of the proposed rule is supported by new defined terms, deeming rules and interpretive provisions. In particular, in determining the actual conditions, the analysis is not confined to contractual terms, but it must consider the transaction’s economically relevant characteristics, which include contractual terms, the functions performed by the parties, the characteristics of the relevant properties or services, the economic and market context and the business strategies of the parties. The focus is on the parties’ actual conduct and factual substance, not merely the legal form.

The determination of arm’s length conditions must be made by asking what the actual participants would have agreed to had they been dealing at arm’s length in comparable circumstances, taking into account the options realistically available to them at the time. This is not a hypothetical third-party exercise untethered to the real parties; the comparison is anchored in the actual participants and the accurately delineated transaction.

The determination of arm’s length conditions must be made by selecting and applying the most appropriate method in accordance with the OECD Guidelines. The economically relevant characteristics inform both steps of the comparability analysis: (i) establishing the object to be compared through accurate delineation; and (ii) identifying and testing an appropriate comparator/outcome.

Where the actual conditions diverge from arm’s length conditions, any amounts relevant under the Tax Act (i.e., income, loss, capital amounts, etc.) may be adjusted to the quantum or nature that would have arisen had arm’s length conditions applied. Consistent with the OECD Guidelines, if the accurate delineation shows that, in exceptional circumstances, arm’s length parties would have entered into a different transaction (or no transaction), the accurately delineated transaction may be replaced accordingly. The replacement/non-recognition concept is framed as exceptional, following the OECD approach.

Budget 2025 also proposes new rules to modify certain administrative measures, namely:

• Penalty relief: Budget 2025 increases the threshold for the transfer pricing penalty to apply from a $5 million assessment to a $10 million assessment.
• Documentation requirements: Simplify the documentation requirements and clarify and align the documentation requirements with the new definitions and requirements to select and apply the most appropriate method.
• Time period: Reduce the time period to provide documentation from 3 months to 30 days.

The proposed measure would apply to taxation years beginning after November 4, 2025.

Previously Announced Measures

In addition to the new measures discussed above, Budget 2025 provides that the federal government has considered outstanding tax measures announced by the previous federal government and confirms that it intends to proceed with many of these measures, including but not limited to the following:

• Increasing the Lifetime Capital Gains Exemption to $1.25 million, with indexing to inflation for tax years beginning 2026 and onward;
• Capital Gains Rollover on Small Business Investments;
• Tax exemption for sales to Employee Ownership Trusts;
• The extension of the Mineral Exploration Tax Credit until March 31, 2027;
• Exemption from the Alternative Minimum Tax for Indigenous trusts;
• Rules addressing substantive CCPCs;
• Legislative proposals released on January 23, 2025, to extend the 2024 charitable donations deadline;
• Changes to the Alternative Minimum Tax;
• Withholding for Non-Resident Service Providers;
• Accelerated CCA for purpose-built rental housing and productivity-enhancing assets;
• Amendments for charities, RESPs, mutual fund corporations and synthetic equity arrangements; and
• Technical tax and GST/HST amendments to improve certainty and reduce compliance costs.

These adopted measures ensure continuity from the 2021–2024 budgets and reinforce the federal government’s broader fiscal and social policy commitments.

If you have any questions, please contact Mariam Al-Shikarchy at [email protected], Jesse Brodlieb at [email protected], John Kutkevicius at [email protected], Richard Lewin at [email protected], Adam Solomon at [email protected], Marija Tasevska at [email protected] or Leanne Stevens at [email protected].

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.