Written by Steven Climenhaga

Canada’s Minister of Finance and National Revenue tabled the Liberal Government’s latest budget, Building Canada Strong (“Budget 2025”) on November 4, 2025 (“Budget Day”) with targeted tax changes purportedly aimed at relief for households and growth for businesses.

With Budget 2025, the Underused Housing Tax and Luxury Tax (on Aircraft and Boats) will join the Consumer Carbon Tax and Digital Services Tax on the list of cancelled Trudeau-era Liberal taxes.

While relief for most households from tax measures proposed in Budget 2025 will arrive primarily through trickle-down economics, businesses and investors in select industries will see significant immediate benefits from new and expanded tax credits.

Despite a minority Liberal Government and reportedly weak support for Budget 2025 from outside the Liberal Party, a number of the changes proposed in Budget 2025 are to be effective as of Budget Day. This has the potential to create a significant headache for taxpayers that rely on the Budget 2025 proposals if this Liberal Government fails to implement the proposals.

​Highlights for Individuals

A. ​​ ​ Elimination of Luxury Tax on Aircraft and Boats

The Select Luxury Items Tax Act imposes a tax on the purchase, import, or improvement of vehicles and aircraft with a value of more than $100,000 and vessels (i.e. boats) with a value of more than $250,000 (the “Luxury Tax”). Generally, the tax is the lesser of 10% of the purchase price and 20% of the amount by which the purchase price exceeds the threshold amount.

According to Budget 2025, the Luxury Tax on Aircraft and Vessels is inefficient and would have generated revenue of just $135 million over the next five years. In part because of the inefficiency of administering the tax, Budget 2025 proposes to eliminate the Luxury Tax on all sales, importations, and improvements of aircraft and vessels that occur after Budget Day.  Vendors must claim any rebates for which they are eligible before their registrations are automatically cancelled on February 1, 2028.

The Luxury Tax on the sale, import, and improvement of luxury vehicles with values over $100,000 will remain in place.

B. ​ ​Expanded Audit Powers and Penalties

Budget 2025 confirms the government’s intention to implement changes first proposed in Budget 2024 and updated in August 2025 that would grant the CRA additional audit and investigation powers, including:

• Issuing a notice of non-compliance if a taxpayer has not complied with a request for information;

• Imposing penalties of up to $25,000 while a notice of non-compliance is outstanding;

• Requiring taxpayers to answer questions under oath; and

• Extending the CRA’s deadline for issuing a reassessment while a notice of non-compliance is outstanding or the subject of judicial review.

C. ​ ​Increased Limits for Tax Court’s Informal Procedure

Budget 2025 proposes an increase to the limits for income tax and GST disputes to be dealt with under the Tax Court’s Informal Procedure. Current limits range from $25,000 per year of disputed tax and penalties to $50,000 for disputed losses and GST amounts.

Budget 2025 does not specify what the new limits will be, but limits in the range of $50,000 to $100,000 would be in line with recent increases to the jurisdiction of provincial courts that follow similar procedures.

The Informal Procedure increases access to justice for taxpayers by simplifying the pre-hearing discovery, relaxing the applicable rules of evidence, and facilitating appeals by self-represented taxpayers.

D. ​ ​Middle-Class Tax Cut and the Top-Up Tax Credit

Budget 2025 confirms the previously announced plan to reduce the personal tax rate for the lowest income bracket (income below $57,375 in 2025) from 15% to 14% effective July 1, 2025, reducing income taxes for nearly all taxpayers.

Because tax credits are calculated by multiplying the eligible amount by the lowest tax rate, taxpayers claiming credits on amounts in excess of the first income tax bracket threshold ($57,375 in 2025), would actually pay more tax because of the Middle-Class Tax Cust.  Budget 2025 proposes a temporary Top-Up Tax Credit keeps the effective 15% rate for non-refundable credits claimed above the first bracket threshold ($57,375 in 2025) for 2025–2030, preventing higher net tax from the rate cut mechanics.

E. ​ ​Automatic Federal Benefits for Lower-Income Non-Filers

Budget 2025 proposes to expand on the CRA’s automatic tax filing program. Under the Proposal, the CRA would be authorized to file a basic return for eligible low-income individuals using information slips if they haven’t filed within 90 days of the filing due date; pre-filled returns could start for 2025 income (filed in 2026).

Taxpayers with any income that is not reported on an information slip that is filed with the CRA (e.g. a T4) would not be eligible for the automatic tax filing.

If an individual is later determined not to have been eligible, the return filed by the CRA would be deemed not to have been filed. Presumably, that would mean certain benefits may need to be repaid, but penalties for filing a false return would not apply.

F. ​ ​Personal Support Workers Tax Credit

Budget 2025 proposes a credit to reduce tax payable by eligible Personal Support Workers. The new refundable credit would be equal to 5% of eligible Personal Support Worker earnings, up to $1,100 annually, for the 2026 to 2030 tax years. This would apply to eligible personal support workers employed in eligible health care establishments who obtain a certification of their eligibility for the credit from their employer.

G. ​ ​Home Accessibility vs. Medical Expense Credits

Currently, certain expenses may qualify for both the Home Accessibility Tax Credit and the Medical Expense Tax Credit, which means taxpayers could receive a credit of up to 30% on medical expenses for home renovations that improve access or mobility for persons with disability. Budget 2025 proposes to eliminate the ability to claim both credits for the same expenses for the 2026 and subsequent tax years.

H. ​ ​Trusts: 21-Year Rule Tightened

Most personal trusts are deemed to dispose of their capital property for fair market value every 21 years (the “21-year rule”), but assets can be distributed from a trust prior to the 21st anniversary of a trust without triggering a capital gain. To avoid the significant tax consequences of the 21-year rule, taxpayers have employed various strategies to circumvent these deemed dispositions. A number of anti-avoidance rules exist to prevent the use of those strategies. Budget 2025 proposes to expand existing anti-avoidance rules so that indirect transfers between personal trusts would not avoid the 21-year rule. This change would apply in respect of transfers of property that occur on or after Budget Day.

I. ​ ​Canada Carbon Rebate Wind-Down

To facilitate the previously announced end of the federal consumer carbon tax, Budget 2025 proposes a deadline of October 30, 2026 to file tax returns and adjustment requests to trigger a Canada Carbon Rebate payment.

J. ​ ​Underused Housing Tax Eliminated

Implemented as of January 1, 2022, the Underused Housing Tax (“UHT”) imposed a tax, generally on non-resident and non-Canadian owners of vacant or underused residential property in Canada, at a rate of 1% of the value of the property. The UHT was designed to increase the supply of residential property available to Canadian residents but was costly to administer and has not been a significant source of revenue for Canada.

Budget 2025 proposes to eliminate the UHT retroactively to January 1, 2025. No UHT return will be required in respect of the 2025 and subsequent calendar years. Outstanding obligations in respect of the 2022 to 2024 years remain. 

K. ​ ​Qualified Investments for Registered Plans

The Income Tax Act restricts the types of investments that are permitted to be held in the various types of registered plans (e.g. RRSPs, RRIFs, TFSAs, RESPs, FHSAs, DPSPs, and RDSPs). Different sets of rules apply to different types of registered plans, making the existing system more complicated than may be necessary.

Budget 2025 proposes to streamline and harmonize qualified investment rules, so that investments will be qualified investments for all registered plans or no registered plans. Certain investments, including those that were qualified investments because they were eligible corporations or small business investment limited partnerships, may no longer be eligible investments for registered plans.

Previously, an investment could also be a qualified investment if it was a Registered Investment. Budget 2025 proposes the replacement of the Registered Investment Regime with two new categories of qualified investments: (1) units of a trust subject to the requirements of National Instrument 81-102; and (2) units of a trust that is an investment fund managed by a registered investment fund manager as described in National Instrument 31-103.

The new qualified investment trust rules would apply as of Budget Day. However, the remaining changes to the qualified investment rules and the repeal of the Registered Investment regime would be effective as of January 1, 2027.

Qualified investment opinions for registered plans may need to be updated prior to these changes coming into effect.

​Highlights for Businesses

A. ​ ​Immediate Deduction of Capital Expenses for Manufacturing/Processing Buildings

Budget 2025 proposes a 100% first-year deduction for qualifying buildings, subject to 90% floor-space test, for assets acquired on or after Budget Day and first used before 2030. Accelerated expensing would be phased out in stages between 2030 and 2033. Assets first used in 2030-31 would be eligible for an immediate 75% expense, and assets first used in 2032-33 would be eligible for an immediate 55% expense.

Before taking advantage of this accelerated expensing, taxpayers should consider the consequences of a future capital cost recapture when the building is sold.

B. ​ ​SR&ED Enhancements

Budget 2025 proposes to increase the annual expenditure limit on which the SR&ED enhanced 35% credit can be earned from $4.5 million to $6 million for years beginning on or after December 16, 2024.

In addition, Budget 2025 announces changes that will be made to the administration of the SR&ED program to improve predictability and streamline the process from making SR&ED claims.

C. ​ ​Clean Technology Manufacturing Investment Tax Credit

Budget 2025 proposes to expand the list of critical minerals that would be eligible for the refundable 30% Clean Technology Manufacturing ITC. Investments in new machinery and equipment used to extract, process, or recycle antimony, indium, gallium, germanium, and scandium will now be eligible for the credit. This change would apply in respect of property of property acquired on or after Budget Day.

D. ​ ​Critical Mineral Exploration Tax Credit

Budget 2025 proposes amendments to the Critical Mineral Exploration Tax Credit (“CMETC”) so that exploration expenses incurred in Canada for an expanded list of critical minerals that would be eligible for the 30% non-refundable credit on eligible exploration expenses renounced to flow-through share holders. The additional critical minerals to be included are bismuth, cesium, chromium, fluorspar, germanium, indium, manganese, molybdenum, niobium, tantalum, tin, and tungsten.

For shareholders to be eligible for this credit, the relevant flow-through share agreements must be entered into between Budget Day and March 31, 2027.

E. ​ ​Canadian Exploration Expense

Canadian Exploration Expenses (“CEEs”) may be renounced by mining companies to flow-through share holders. Investors in the flow-through shares can then claim a deduction, and in some cases a credit, on account of the CEEs that have been renounced to them.

In response to recent a recent court decision interpreting the meaning of “quality” for the purposes of similar provincial legislation, Budget 2025 proposes amendments to the Income Tax Act to exclude expenses incurred for determining a resource’s engineering feasibility and economic viability as a mining project from eligibility for the Canadian Exploration Expense.

F. ​ ​CCUS ITC Extended

Existing Carbon Capture, Utilization, and Storage (“CCUS”) investment tax credits are extended to allow the full credit rates (37.5 to 60% depending on the type of equipment) for expenses incurred to the end of 2035. From 2036 to 2040 eligible expenditures would be entitled to credits at half the previous rate.

A previously announced review of the CCUS investment tax credit rates will be delayed from 2030 to 2035, at which point the government will ensure that the reduction in rates in 2036 aligns with the government’s environmental objectives.

G. ​ ​Clean Electricity Investment Tax Credit and Canada Growth Fund

The Clean Electricity Investment Tax Credit provides a refundable credit of up to 15% of the capital cost of eligible investments in low emission electricity generation, storage, and transmission. The amount of eligible capital costs is reduced to the extent that a taxpayer has received other government assistance in respect of the costs.

Budget 2025 proposes an exception so that financing from the Canada Growth Fund would not reduce the eligible amounts for the Clean Electricity Investment Tax Credit. This change would apply to eligible property that is acquired and becomes available for use on or after Budget Day.

H. ​ ​Preventing Tax Deferrals through Tiered Corporate Structures

Budget 2025 proposes an amendment to the Income Tax Act to suspend the refund of refundable dividend tax where tiered corporate structures with staggered year-ends would otherwise permit a deferral of the payment of the refundable dividend tax.

I. ​ ​Other Changes

Other changes proposed by Budget 2025 include:

• Amendments to the Transfer Pricing Rules for cross-border transactions between non-arm’s length parties;
• Amendments to clarify the tax treatment of investment income from assets held by foreign affiliates of Canadian insurance companies to support Canadian Insurance Risks;
• An extension to the tax deferral to the end of 2030 for patronage dividends paid in shares by agricultural cooperatives; and
• A new reverse charge rule for GST in respect of the supply of specified telecommunication services to help combat carousel fraud.