Federal Budget 2025 – Key Tax Measures

On November 4, 2025, the Federal Budget 2025 was tabled by the Minister of Finance, François-Philippe Champagne. Below, we have highlighted some of the key proposed tax measures for your consideration.

Personal Tax Measures

Personal Support Workers Tax Credit

A new tax credit for personal support workers (PSWs) will be introduced on a temporary basis. The new credit would allow eligible PSWs working for eligible health care establishments to claim a refundable tax credit on 5% of eligible earnings, up to a maximum of $1,100.

For the purposes of qualifying for the credit as an eligible PSW, the personal support worker must regularly provide direct personal care and essential support to improve a person’s health, well-being, safety, autonomy, and comfort in accordance with that person’s needs.

Eligible health care establishments include hospitals, nursing care facilities, residential care facilities, community care facilities for elderly individuals, home health care facilities, and other facilities that are similarly regulated.

For the purposes of the PSW tax credit, eligible earnings include all taxable employment income and employment benefits earned in the role of a PSW while working for an eligible health care establishment. Tax-exempt PSW income and benefits earned while working for an eligible health care establishment on a reserve would also qualify as eligible earnings.

It is worth noting that amounts earned in British Columbia, Newfoundland and Labrador, and the Northwest Territories would not be eligible for the PSW tax credit, as those provinces have already signed bilateral agreements with the federal government to receive funding that will increase PSWs’ wages over five years.

There are a few practical matters worth mentioning with respect to the PSW tax credit:

• If a PSW qualifies for the PSW tax credit, they must file a tax return to obtain it.
• If the PSW dies during the year, a tax return filed by their legal representative will be deemed to have been filed by the PSW for the purposes of the PSW tax credit.
• If an individual becomes bankrupt in a taxation year, their eligible earnings both pre- and post-bankruptcy would be considered when calculating the PSW tax credit.
• Employers must certify the eligible earnings earned by a PSW for those earnings to qualify for the PSW tax credit.

This proposed temporary tax credit would apply to the 2026 to 2030 taxation years.

Automatic Federal Benefits for Lower-Income Individuals

Budget 2025 proposes the discretionary authority to the Canada Revenue Agency the ability to file a tax return on behalf of an individual (other than a trust) where the following conditions are met:

• The taxable income of the individual is below either the basic personal exemption amount (or the provincial equivalent) plus the age amount and/or the disability amount wherever applicable;
• All the income for the individual is from sources that are otherwise reported on an information return;
• The individual has not filed an income tax return in any one of the preceding three tax years;
• The individual has not filed a return for the taxation year prior to, or withing 90 days following, the tax filing deadline for the year; and
• Any other criteria as determined by the Minister of National Revenue.

Where the CRA seeks to file a return on behalf of an individual, a 90-day review period (following notification) is required that allows the individual to clarify and request changes. Where no response is received by the end of the period, the CRA may file the return on their behalf.

The proposal would apply to the 2025 and subsequent taxation years though an opt out of automatic filings would be permitted.

Top-Up Tax Credit

The 2025 Federal Budget proposes to introduce a new non-refundable Top-Up Tax Credit aimed at stabilizing the impact on non-refundable tax credits due to the middle-class tax cut announced in May 2025. Since the middle-class cut reduces the first marginal personal income tax rate from 15% to 14.5% in 2025 and to 14% in 2026, the rate reduction would have also applied to most non-refundable tax credits.

While most non-refundable tax credits (like tuition or medical expenses) now also get this lower rate, in rare cases, this could increase an individual’s tax liability, for example, where an individual non-refundable tax credit amount exceeds the first income tax bracket threshold ($57,375 in 2025), the decrease in the value of these credits may exceed their tax savings from the rate reduction. This would only be the case where an individual claims a large one-time expense (i.e., high tuition, medical expenses, or a combination of large tax credits).
 
To protect affected taxpayers, the new budget introduces a Top-Up Tax Credit for 2025–2030. It boosts the value of excess non-refundable credits back to the original 15% rate, ensuring no one loses due to the lower tax rate.

Qualified Investments for Registered Plans

Canada’s registered plans like RRSPs, RRIFs, TFSAs, RESPs, FHSAs, and DPSPs, can only hold certain “qualified investments” (i.e., mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates). After consulting stakeholders in 2024, budget 2025 proposes changes to make these rules clearer, simpler, and more consistent across all plan types.

Small Business Investments

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

Budget 2025 proposes to simplify the rules relating to registered plan investment in small businesses while maintaining the ability of registered plans to make such investments. The proposed changes look at keeping the broader first set of rules and extending them to RDSPs while the second set of rules would be eliminated. Due to these changes:

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

Changes are planned to take effect Jan 1, 2027, with transitional relief for existing investments.

Registered Investments Regime

To qualify as a registered investment, a corporation or trust must register with the Canada Revenue Agency. Mutual fund trust units are already qualified for investments but trusts or corporations that aren’t widely held (fewer than 150 unitholders) must invest only in assets allowed for the registered plans they serve. If they hold non-qualified investments, they face a monthly tax of 1% of the asset’s fair market value.

Stakeholders have determined that the current registration process for certain trusts and corporations under the CRA does not add sufficient value to justify its associated compliance and administration burdens.

Budget 2025 proposes to repeal and 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
• Units of a trust that is an investment fund managed by a registered manager as defined in National Instrument 31-103.

Funds that were registered investments are expected to remain eligible under existing rules or the new qualified investment trust categories.

The registered investment regime ends January 1, 2027, and the new rules take effect on Budget Day.

Home Accessibility Tax Credit (HATC) and Medical Expense Tax Credit (METC)

The federal HATC is a non-refundable credit for eligible expenses related to qualifying renovations of an eligible dwelling, which can reduce an individual’s taxes payable in a given taxation year. Prior to 2022, the HATC could be claimed on eligible expenses up to $10,000 per year, providing up to $1,500 in tax credits (assuming a 15% non-refundable tax credit rate). For 2022 and subsequent years, the annual expense limit was increased to $20,000, resulting in a maximum credit of $2,900 for 2025 (assuming a 14.5% credit rate) and $2,800 for 2026 and beyond (assuming a 14% credit rate). The differences in the tax credit rate reflect the government’s decision to reduce the first marginal personal income tax rate from 15% to 14%, effective July 1, 2025. Because the change takes effect mid-year, the blended rate for 2025 will be 14.5%. Eligible expenses must improve the safety, accessibility, or functionality of an eligible dwelling for a qualifying individual who is either aged 65 or older or eligible for the Disability Tax Credit.

The federal METC is a non-refundable credit that can reduce an individual’s taxes payable in a given year. To qualify, medical expenses must be incurred for the individual, their spouse or common-law partner, a child under 18, or a person dependent on the individual for support. The METC is calculated at the lowest personal income tax rate (i.e., 15% for years prior to 2025, 14.5% for 2025, and 14% for 2026 and beyond) and applies to the amount by which total eligible medical expenses (assuming they were not claimed in another year) exceed the lesser of $2,834 (for 2025) and 3% of the claimant’s net income. The CRA includes in its list of eligible expenses certain alterations to an existing dwelling, provided they enable the individual to access their home or be mobile or functional within it, do not typically increase the dwelling’s value, and would not normally be incurred by persons with normal physical development or who do not have severe and prolonged mobility impairment.

Currently, if both sets of eligibility criteria (i.e., HATC and METC) are met, taxpayers may claim both credits for the same expense. Budget 2025 proposes to amend the Income Tax Act so that an expense claimed under the METC cannot also be claimed under the HATC. This measure would apply starting in 2026.

21-Year Rule for Trusts

The “21-Year Rule” deems certain types of trusts to dispose of their capital property and other specified property at fair market value and recognize accrued gains every 21 years (i.e., on the 21st anniversary of their creation and every 21st anniversary thereafter). Without this rule, trusts could defer the realization of capital gains indefinitely. Therefore, the rule prevents personal trusts from being used to postpone tax on accrued gains beyond 21 years.

If property is transferred by a trust on a tax-deferred basis to a new trust, anti-avoidance rules deem the new trust to inherit the original trust’s 21-year anniversary. This ensures that the transferred property remains subject to the same 21-year period that applied to the original trust.

Certain tax avoidance strategies may be used to transfer trust property indirectly to a new trust, circumventing both the 21-year rule and the existing anti-avoidance rule. For example, this planning could involve transferring trust property on a tax-deferred basis to a beneficiary that is a corporation owned by a new trust. To illustrate, suppose the original trust (“Old Trust”) is approaching its 21st anniversary. The property from the Old Trust could be transferred to a corporation wholly owned by a newly established Canadian-resident trust (“New Trust”), whose beneficiaries are the same as those of the Old Trust. The corporation is, or will become, a beneficiary of the Old Trust under its trust indenture. The Old Trust then distributes its property with an unrealized gain to the corporation on a tax-deferred basis and subsequently ceases to exist.

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 to property transfers occurring on or after Budget Day (i.e., November 4, 2025).

Canada Carbon Rebate (CCR) Payments

The CCR was a tax-free payment from the CRA designed to help eligible individuals and families offset the cost of federal carbon pollution pricing. It served as the primary mechanism for returning proceeds from the federal fuel charge directly to Canadians residing in provinces where the charge applied, provided they met eligibility requirements (including filing a tax return).

With the removal of the federal fuel charge effective April 1, 2025, the government issued a final quarterly CCR payment starting in April 2025 to eligible households.

Budget 2025 proposes to amend the Income Tax Act to provide that no CCR payments will be made for tax returns or adjustment requests filed after October 30, 2026.

Business Tax Measures

Capital Cost Allowance (CCA) for Manufacturing and Processing Buildings

Current rules permit a CCA deduction of 4 per cent on eligible buildings used to manufacture or process goods for sale or lease (manufacturing or processing buildings) with an additional 6 per cent allowance for a total of 10 per cent claim.

Budget 2025 provides a temporary immediate expensing for the cost of eligible manufacturing and processing buildings, including the cost of eligible additions or alternations to such buildings at a rate of 100 per cent deduction in the first taxation year that eligible property is used for manufacturing or processing provided the minimum 90 percent floor space requirement is met. There are certain carve-outs restricting eligibility to this enhanced CCA claim for certain non-arm's-length transfers of property and transfers that have benefited from a tax-deferred rollover.

The measure would be effective for eligible property that is acquired on or after Budge Day and is first used for manufacturing or processing before 2030. A reduced CCA rate of 75 per cent for eligible property first used for manufacturing or processing in 2030 or 2031 and 55 per cent for eligible property first used for manufacturing or processing after 2032 or 2033 with no enhaced CCA rate available beyond 2033.

Tax Deferral Through Tiered Corporate Structures

The Income Tax Act contains measures designed to stop CCPCs from using investment income to defer personal taxes. Specifically:

• Refundable tax on investment income: CCPCs face an extra refundable tax on investment income, the “additional refundable tax”, pushing their overall tax rate near the top federal-provincial personal rate. They receive a refund when that income is paid out as taxable dividends, since individual shareholders pay personal tax on it.
• Tax on inter-corporate dividends: Corporate shareholders normally avoid tax on dividends via an inter-corporate deduction. However, the income tax act imposes a refundable tax (the Part IV tax) if the recipient corporation (recipient) gets a taxable dividend from a “connected” corporation. A connected corporation is generally one owning >10% of votes and value, equal to the payer corporations’ (payer) refund amount.
• Timing and deferral: Part IV tax is due on the recipient corporations’ year‐end, which may come after the payers’ corporation year-end. Some use staggered fiscal years to defer tax, paying a dividend in the payer’s 2025 tax year-end but lands in the recipient’s tax year-end that is 2026, thereby deferring the payable tax to 2026. In a series of connected chain of affiliated corporations with mix-matched fiscal year ends, this deferral can be extended for many years.
• Budget 2025 proposal: The government seeks to limit this deferral by suspending the payer’s dividend refund if the recipient’s year‑end/payment due date is later than the payer’s—based on the current affiliation rules. The proposal is effective on or after Budget day.
• Some exemptions include where each recipient in an affiliated chain pays a dividend before the payer’s due date, avoiding deferral or where a 30‑day safe harbor rule for payers undergoing an acquisition of control where dividends paid within that window aren’t blocked.
• Reclaiming the refund: The payer may reclaim the suspended refund when the recipient eventually pays a taxable dividend to a non‑affiliated corporation or individual.

Other Notable Tax Measures

Investment Income Derived from Assets Supporting Canadian Insurance Risks

There are already existing rules under the Canadian tax system designed to prevent Canadian taxpayers from shifting various types of income overseas to avoid Canadian tax. These rules often apply to income earned by controlled foreign affiliates of Canadian-resident taxpayers. In some instances, the income of the controlled foreign affiliate can fall under the definition of foreign accrual property income (FAPI) and be subject to taxation in Canada.

While rules relating to FAPI have existed for some time, Budget 2025 is clarifying the rules surrounding scenarios where Canadian insurance companies use foreign affiliates to hold investment assets that back Canadian insurance risks. Canadian insurance risks include insurance risks relating to people residing in Canada, property located in Canada, or businesses that are operated in Canada.

Previously, some taxpayers had challenged the idea that income earned by a foreign affiliate of a Canadian insurer on assets backing Canadian insurance risks should fall under the definition of FAPI. Budget 2025 clarifies that investment income earned by a foreign affiliate under the above-mentioned circumstances is considered FAPI. This will apply to both income from assets directly backing Canadian insurance risks as well as assets included in regulatory surplus that back Canadian insurance risks.

This clarified rule is effective as of Budget Day.

Underused Housing Tax (UHT)

The UHT, which took effect on January 1, 2022, applies to certain owners of vacant or underused residential property in Canada, generally targeting non-resident and non-Canadian owners. The tax is imposed annually at a rate of 1% of the property’s value.

Budget 2025 proposes to eliminate the UHT starting with the 2025 calendar year. Therefore, no UHT will be payable, and no UHT returns will be required for 2025 and subsequent years.

However, all UHT requirements remain in effect for the 2022 to 2024 calendar years. Penalties and interest for failing to file a UHT return when required, or for failing to pay UHT when due, will continue to apply for those years.

Luxury Tax on Aircraft and Vessels

There is an existing luxury tax on subject vehicles and subject aircraft valued more than $100,000 and on subject water vessels valued more than $250,000. The luxury tax was equal to the lesser of 10% of the value of the property and 20% of the value above the property category’s threshold (e.g., for subject vehicles, the value above $100,000).

Budget 2025 proposes to eliminate the luxury tax on subject aircraft and subject vessels, effective the day following Budget Day, though registered vendors of subject aircraft and subject vessels would still be required to file a final return for the period up to and including Budget Day.

No change has been proposed with respect to the luxury tax on subject vehicles. 

Carousel Fraud

Carousel fraud schemes exploit GST/HST rules through chains of real or fake transactions, where a “missing trader” collects tax but fails to remit it. These schemes undermine the tax system and have grown increasingly sophisticated.

Budget 2025 proposes to combat carousel fraud with plans to amend the Excise Tax Act by introducing a reverse charge mechanism (RCM) for certain telecommunications services. Under the RCM, suppliers will not collect GST/HST and recipients will self-assess and report the tax in their GST/HST return and may claim input tax credits (ITCs) if eligible. The RCM applies to specified telecommunication services (e.g., VoIP minutes) acquired mainly for resale by GST/HST-registered recipients.

Some Key Rules related to these changes include:

• ITC eligibility requires registration when tax becomes payable.
• Rebates for tax paid in error apply only if paid to the Receiver General; otherwise, refunds must come from suppliers.
• Invoices must indicate that RCM applies.
• The government may expand RCM to other supplies via regulation.

The government is seeking feedback on these proposals by January 12, 2026. Feedback may be sent to Consultation-Legislation@fin.gc.ca and will be considered.

Previously Announced Tax Measures

Budget 2025 confirms that it intends to proceed with various previously announced measures as modified by considering feedback from the public. We have highlighted below some previously released measures that are expected to be enacted with Budget 2025.

• Permit the deferral of capital gains realized from the sale of small business corporation shares if reinvested in eligible small business corporation (SBC) shares within stipulated time frames
• Increase to the Lifetime Capital Gains Exemption (LCGE) up to $1,250,000 of eligible capital gains
• Introduction of the Cypto-Asset Reporting Framework and the Common-Reporting Standard subject to the deferred application date of January 1, 2027;
• Technical tax amendments to the trust reporting obligations, 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
• Substantive CCPCs: A substantive CCPC is a private corporation that is not technically a CCPC but is treated like one if it’s controlled (directly or indirectly) by Canadian resident individuals or would be controlled by a Canadian individual if they owned all shares held by Canadian residents. Essentially, if the only reason a corporation is not a CCPC is because a non-resident or public company has a right to acquire its shares, it will still be considered a substantive CCPC. The rules include an anti-avoidance provision, meaning a corporation can be deemed a substantive CCPC if transactions were done mainly to avoid this status. Examples include issuing skinny voting shares to non-residents or selling partnership interests to non-residents before realizing large capital gains. In both cases, the government would likely apply the anti-avoidance rule to prevent tax benefits from avoiding substantive CCPC status.
• Tax exemption for sales to Employee Ownership Trusts (EOT): Originally introduced in Budget 2023, the proposal is to exempt the first $10 million in capital gains realized on the sale of a business to an EOT from taxation, subject to certain conditions. If certain conditions are satisfied, the individual would be able to claim an exemption for up to $10 million in capital gains from the sale. If multiple individuals disposed of shares to an EOT as part of a qualifying business transfer and the conditions are met, they may each claim the exemption, but the total exemption in respect of the qualifying business transfer cannot exceed $10 million. Additionally, there were proposals for adding a $10 million capital gains exemption for qualifying sales of business to worker co-ops.
• Legislative proposals released on January 23, 2025, to extend the 2024 charitable donations deadline: The Department of Finance announced plans on December 30, 2024, to extend the deadline for charitable donations eligible for 2024 tax support, with draft legislation released on January 23, 2025. The CRA confirms it will administer this extension, allowing donations made up to February 28, 2025, to be claimed on 2024 returns, with unclaimed amounts carried forward or claimed in 2025. Charities should continue issuing receipts under existing rules, and the extension does not change reporting requirements. Corporations and Graduated Rate Estates also qualify.
• Legislative and regulatory proposals released on August 12, 2024, including with respect to the following measures:
  • Alternative Minimum Tax (AMT) (other than changes related to resource expense deductions): Legislative and regulatory proposals released on August 12, 2024, included changes to the AMT to align with inclusion rates set out in Bill C-69. Capital gains exempted on the sale of a business to an Employee Ownership Trust (EOT) or worker cooperative will be fully excluded for AMT purposes, while gains under the lifetime capital gains exemption and income from donated stock options remained subject to a 30% inclusion rate.
  • Mutual Fund Corporations: Starting with tax years after 2024, a corporation will no longer qualify as a mutual fund corporation if it is controlled by or set up for the benefit of a corporate group. This includes any group made up of corporations, individuals, trusts, or partnerships that are related and do not deal at arm’s length. An exception is provided to ensure widely held pooled investment funds are not negatively impacted.
  • Registered Education Savings Plans (RESPs): Rules for RESPs have been updated to clarify conditions under which the Minister acts as a designated subscriber, remove the requirement for a Social Insurance Number in those cases, and exempt the Minister from certain taxes and penalties related to income payments and prohibited investments. These changes will take effect once the legislation receives Royal Assent.

Budget 2025 also confirms the government’s commitment to make any necessary technical changes to strengthen the clarity and reliability of the tax system.