Federal budget 2025 — Tying up a bunch of loose ends and some new stuff

Finance Minister Francois-Philippe Champagne tabled the 2025 Federal Budget on November 4th. This budget reinforced the government’s intent to proceed with several previously announced changes and also identified several areas for modification. The budget also projected a $78 billion deficit.

Trusts and estate planning

21-year rule 

Personal trusts are generally deemed to have disposed of their capital property and certain other property for fair market value proceeds on the 21st anniversary of their creation, and every 21st anniversary thereafter (the “21-year rule”).

One common planning strategy when planning for the 21-year rule is to do a tax-deferred rollout of capital assets via subsection 107(2) of the Income Tax Act to capital beneficiaries. Additionally, where the trust property is transferred by a trust on a tax-deferred basis to a new trust, there is an anti-avoidance rule that causes the new trust to inherit the original 21-year rule of the original trust.

There have been certain tax avoidance planning techniques that have involved indirect transfers structured to bypass the anti-avoidance rule. An example of this is where trust property is transferred on a tax-deferred basis to a beneficiary that is a corporation owned by a new trust. This was previously identified as a notifiable transaction that required reporting to the Canada Revenue Agency (CRA). Budget 2025 proposes to broaden the current anti-avoidance rule for direct trust-to-trust transfers to include indirect transfers of trust property to other trusts. This measure would apply in respect of transfers of property that occur on or after November 4, 2025.

Furthermore, life insurance is not a capital asset for the purposes of the 21-year rule. Life insurance can also be a tool to fund terminal taxes where individual beneficiaries receive assets from a trust on a tax-deferred basis.

Personal income tax measures

Personal Support Workers Tax Credit

Budget 2025 proposes to introduce a temporary personal support workers tax credit, which would provide eligible personal support workers working for eligible health care establishments with a refundable tax credit of 5% of eligible earnings, providing a credit value of up to $1,100 annually.

A number of conditions would need to be met to be considered an eligible personal support worker including providing one-on-one care and essential support to optimize and maintain another individual’s health and well-being. Eligible health care establishments would include hospitals, nursing care facilities, and other similar regulated health care establishments. Lastly, eligible earnings would include all taxable employment income and employment benefits.

It is important to highlight that amounts earned in British Columbia, Newfoundland and Labrador, and the Northwest Territories would not be eligible, as these jurisdictions have signed bilateral agreements with the federal government to include a “Personal Support Workers and Related Professions Addendum” to their Aging with Dignity funding agreements, which provide funding over five years to increase personal support workers’ wages.

Individuals would need to file a tax return to be eligible for this refundable tax credit. This measure would apply to the 2026 to 2030 taxation years.

Top-Up Tax Credit

The rate applied to most non-refundable tax credits is based on the first marginal personal income tax rate. The middle-class tax cut announced in May 2025, and included in Bill C-4, currently before Parliament, would reduce the first marginal personal income tax rate, and thus the rate applied to most non-refundable tax credits, from 15% to 14.5% for the 2025 taxation year, and to 14% for the 2026 and subsequent taxation years. There may be occasions where the value of the tax credits may exceed their tax savings from the rate reduction including where the non-refundable tax credit amount exceeds the first income tax bracket threshold ($57,375 in 2025).

Budget 2025 proposes to introduce a new non-refundable Top-Up Tax Credit that effectively maintains the current 15% rate for non-refundable tax credits claimed on amounts in excess of the first income tax bracket threshold. This tax credit would apply for the 2025 to 2030 taxation years.

Automatic federal benefits for lower-income individuals

Budget 2025 proposes to amend the act to grant the CRA the authority to file a tax return for a taxation year on behalf of an individual who meets various criteria. Most notably, the individual’s taxable income for the taxation year is below the lower of either the federal basic personal amount or provincial equivalent (plus the age amount or disability amount, as applicable).

Operationally, prior to filing a return on behalf of an eligible individual, the CRA would provide the individual with the information it has available at the time in respect of their tax return. The eligible individual would have 90 days to review the information and submit changes to the CRA. If the eligible individual does not confirm the information (with or without changes) by the end of the 90 days, the CRA could file a tax return on the individual’s behalf. The CRA would then issue a notice of assessment, and subsequently determine and issue the individual’s credit and benefit entitlements.

It should be highlighted that certain basic information, such as marital status, may require confirmation from the individual before the CRA can issue a payment of benefits. Additionally, some entitlements require a return to be filed by the individual’s spouse or common-law partner. The CRA may be able to file a return on behalf of the individual’s spouse if it is determined that they meet the criteria.

Potential outcomes of this new measure include increased benefits uptake, reduced filing costs, and improved compliance. This measure would apply to the 2025 and subsequent taxation years (i.e., filing could begin in 2026).

Qualified investments for registered plans

The qualified investment regime governs what seven types of registered plans can invest in, including: Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Tax-Free Savings Accounts (TFSAs), Registered Education Savings Plans (RESPs), Registered Disability Savings Plans (RDSPs), First Home Savings Accounts (FHSAs), and Deferred Profit Sharing Plans (DPSPs). Budget 2025 proposes the following amendments to simplify the qualified investment rules.

Small business investments

As a background, there are two sets of rules for registered plan investments in small businesses. The first set of rules applies to RRSPs, RRIFs, TFSAs, RESPs, and FHSAs, while the second set of rules applies only to RRSPs, RRIFs, RESPs, and DPSPs. Neither set of rules applies to RDSPs. The first set of rules provides for investments in specified small business corporations, venture capital corporations, and specified cooperative corporations. The second set of rules provides for investments in eligible corporations, small business investment limited partnerships, and small business investment trusts.

Budget 2025 proposes to simplify and streamline the rules relating to registered plan investments in small businesses, while maintaining the ability of registered plans to make such investments. In particular, the first set of rules would be maintained and extended to RDSPs, while the second set of rules would be repealed. As a result,

• RDSPs would be permitted to acquire shares of specified small business corporations, venture capital corporations, and specified cooperative corporations; and
• Shares of eligible corporations and interests in small business investment limited partnerships and small business investment trusts would no longer be qualified investments.

These amendments would apply as of January 1, 2027.

Registered investment regime

Registered investments are qualified investments for all registered plans. For a corporation or a trust to be a registered investment, it must be registered with the CRA.

Units of a mutual fund trust are qualified investments, but the mutual fund trust can also be a registered investment. In order for a trust or corporation that is not sufficiently widely held (e.g., a trust that does not have the 150 unit holders required to qualify as a mutual fund trust) to qualify as a registered investment, the trust or corporation must hold only investments that would be qualified investments for the types of registered plans for which it is registered. Otherwise, the trust or corporation would be liable to pay a monthly tax of up to one per cent of the acquisition-date fair market value of the non-qualified investment.

Budget 2025 proposes to replace the registered investment regime with two new categories of qualified investments which do not involve registration:

• Units of a trust that is subject to the requirements of National Instrument 81– 102 published by the Canadian Securities Administrators (which regulates certain mutual funds and non-redeemable investment funds); and
• Units of a trust that is an investment fund (as defined in existing tax rules) managed by a registered investment fund manager as described in National Instrument 31–103 published by the Canadian Securities Administrators.

It is generally expected that units or shares of funds that were registered investments would continue to qualify, either under existing rules or under one or both of the new categories of qualified investment trusts. The registered investment regime would be repealed as of January 1, 2027. The new qualified investment trust rules would apply as of Budget Day.

Other changes

Budget 2025 also proposes to make a number of other technical legislative amendments to simplify the qualified investment rules. Notably, the qualified investment rules for six types of registered plans (i.e., all plans except DPSPs) would be consolidated into one definition in the Income Tax Act. In addition, the list of qualified investments prescribed in the Income Tax Regulations would be updated and reorganized by asset class (e.g., debt instruments or equity instruments).

Canadian Entrepreneurs Incentive

There was also a footnote in the budget document that disclosed that the Canadian Entrepreneurs Incentive was cancelled.

Business income tax measures

Tax deferral through tiered corporate structures

Canadian controlled private corporations (CCPCs) are subject to a higher rate of tax on investment income than active business income. This is done to prevent the use of CCPCs to defer personal income tax on investment income. Investment income earned by a CCPC is subject to refundable taxes that increases the corporation’s tax rate to approximate the highest marginal combined federal-provincial personal income tax rate. A corporation is entitled to a refund of a portion of this additional tax when it pays a taxable dividend. This recovery of refundable taxes occurs at a rate of $1 for every $2.61 of taxable dividends paid.

However, where there is a corporate shareholder, it is generally not subject to income tax on a taxable dividend received from another corporation where the taxable dividend is from a connected corporation (generally where the corporate shareholder owns more than 10% of the votes and value). However, such a dividend would be subject to Part IV tax, which is a refundable tax levied on the recipient corporation corresponding to the amount of the payer corporation’s dividend refund.

Part IV tax is payable by the recipient corporation on the balance-due day for its taxation year in which the dividend is received. This day can be after the balance due day for the payor corporation’s taxation year in which the dividend was paid. This can create a timing difference between when Part IV tax is refunded to the payor corporation and paid by the recipient corporation.

Budget 2025 proposes to limit the deferral of tax on investment income using tiered corporate structures with mismatched year ends. The proposed limitation would suspend the dividend refund that could be claimed by a payor corporation on the payment of a taxable dividend to an affiliated recipient corporation if the recipient corporation’s balance-due day for the taxation year in which the dividend was received ends after the payer corporation’s balance-due day for the taxation year in which the dividend was paid.

There is a carveout provided for bona fide commercial transactions, the rule would also not apply to a dividend payer that is subject to an acquisition of control where it pays a dividend within 30 days before the acquisition of control. The payor corporation would generally be entitled to claim the suspended dividend refund in a subsequent taxation year when the recipient corporation pays a taxable dividend to a non-affiliated corporation or an individual shareholder.

This measure would apply to taxation years that begin on or after November 4, 2025.

Often corporate investing and corporate owned life insurance occurs in a holding company higher up in a corporate chart. Overall, these rules will need to be considered for all intercorporate dividends. However, this should not impact intercorporate dividends which aren’t subject to a Part IV tax as these dividends can still be tax-free subject to 55(2).

Immediate expensing for manufacturing and processing buildings

Currently, eligible buildings in Canada used to manufacture or process goods for sale or lease (manufacturing or processing buildings) are prescribed a capital cost allowance (CCA) rate of 10%. This includes the regular CCA rate of 4% under Class 1, plus an additional allowance of 6% for manufacturing or processing buildings. To be eligible for the 6% additional allowance, at least 90% of the building’s floor space must be used to manufacture or process goods for sale or lease.

Budget 2025 proposes to provide temporary immediate expensing for the cost of eligible manufacturing or processing buildings, including the cost of eligible additions or alterations made to such buildings. The enhanced allowance would provide a 100% deduction in the first taxation year that eligible property is used for manufacturing or processing, provided the minimum 90% floor space requirement is met.

Property that has been used, or acquired for use, for any purpose before it is acquired by the taxpayer would be eligible for immediate expensing only if both of the following conditions are met:

• neither the taxpayer nor a non-arm’s-length person previously owned the property; and
• the property has not been transferred to the taxpayer on a tax-deferred “rollover” basis.

In cases where a taxpayer benefits from immediate expensing of a manufacturing or processing building, and the use of the building is subsequently changed, recapture rules may apply. This measure would be effective for eligible property that is acquired on or after budget day and is first used for manufacturing or processing before 2030. An enhanced first-year CCA rate of 75% would be provided for eligible property that is first used for manufacturing or processing in 2030 or 2031, and a rate of 55% would be provided for eligible property that is first used for manufacturing or processing in 2032 or 2033. The enhanced rate would not be available for property that is first used for manufacturing or processing after 2033.

Investment income derived from assets supporting Canadian insurance risks

Budget 2025 proposes to clarify that investment income derived from assets held by a foreign affiliate of an insurer to back Canadian insurance risks is included in foreign accrued property income (FAPI) regardless of which entity holds those assets. Investment income derived from assets backing Canadian risks encompasses both income from assets held to back such risks and assets included in regulatory surplus that back such risks. This measure would apply to taxation years that begin after November 4, 2025.

Previously announced measures

Budget 2025 confirms that the government has considered each of the outstanding tax measures announced by the previous government and confirms that it intends to proceed with the following measures, as modified to take into account consultations and deliberations since their release (note that this list has been curated from the original list from the Budget).

• Legislative and regulatory proposals released on August 15, 2025, including with respect to the following measures:
  • Capital gains rollover on small business investments under section 44.1 of the act;
  • $10 million tax exemption for sales to employee ownership trusts and sales to worker cooperatives;
  • Non-compliance with information requests;
  • Excessive interest and financing expenses limitation rules;
  • Substantive CCPCs;
  • Technical tax amendments to the Income Tax Act and the Income Tax Regulations (subject to a deferred application date for reporting by bare trusts, so that it would apply to taxation years ending on or after December 31, 2026);
    • This represents an additional one year deferral from the previously announced application to taxation years ending on or after December 31, 2026
• Legislative proposals released on January 23, 2025, to extend the 2024 charitable donations deadline.
• Legislative and regulatory proposals released on August 12, 2024, including with respect to the following measures:
  • Alternative minimum tax (other than changes related to resource expense deductions);
    • Investment counsel fees: deductions for investment counsel and management fees would be reduced to 50% for AMT purposes (from the previous 100% deductibility).
    • Resource expenses: taxpayers would only be permitted to deduct resource expenses to the extent of resource income relating to the expenses incurred, repealing what was proposed in the August 12, 2024, draft legislation.
  • Avoidance of tax debts;
  • Technical tax amendments to the Income Tax Act and the Income Tax Regulations;
    • This should include technical amendments relating to the extension of both the 164(6) loss carry-back and 112(3.2) stop-loss rules to be three taxation years.
    • Relief to graduated rate estates for testamentary pipeline transactions with non-resident beneficiaries and the introduction of 212.1(6)(b).
• The proposed increase in the lifetime capital gains exemption to apply to up to $1.25 million of eligible capital gains announced in Budget 2024.

Sales and excise tax matters

Underused Housing Tax

Budget 2025 proposes to eliminate the Underused Housing Tax (UHT) as of the 2025 calendar year. As a result, no UHT would be payable and no UHT returns would be required to be filed in respect of the 2025 and subsequent calendar years.

The short-lived UHT took effect on January 1, 2022 and applied to certain owners of vacant or underused residential property in Canada (generally non-residents). The UHT is imposed on an annual basis at a rate of 1% on the value of the property.

However, all UHT requirements continue to apply in respect of the 2022 to 2024 calendar years.

Eliminating the UHT will reduce compliance costs for taxpayers and administrative costs at the government level.

Luxury tax on aircrafts and vessels

Currently, the federal government imposes a tax on vehicles and aircraft with a value above $100,000 and vessels (e.g., boats) with a value above $250,000. The luxury tax is equal to the lesser of 10% of the total value of the item and 20% of the value above the relevant threshold.

Budget 2025 proposes to amend the Select Luxury Items Tax Act (SLITA) to end the luxury tax on aircraft and vessels. All instances of the tax would cease to be payable after budget day, including the tax on sales, the tax on importations, and the tax on improvements. It is important to note that the elimination of SLITA does not apply to automobiles.

The measure will provide relief to the aviation and boating industries while also providing relief to individuals who would otherwise pay luxury tax on the purchase or lease of aircraft and vessels.

What wasn’t in the budget

Budget 2025 did not include any further measures around a wealth tax, changes to corporate tax rates, changes to capital gains inclusion rates, a reduction to the RRIF minimum withdrawals and any increases to personal tax rates.

Conclusion

This budget tied up various loose ends and covered off some newer areas from a tax measures perspective.

These articles are current as of the time of writing, but are not updated for subsequent changes in legislation unless specifically noted.