2025 Federal Budget Review

2025 Federal Budget Review

Prepared by McGovern Hurley LLP
November 10, 2025

Introduction and Fiscal Overview

On November 4, 2025, Finance Minister François-Philippe Champagne tabled the first federal budget under Prime Minister Mark Carney’s government, entitled “Building Canada Strong.” This budget was presented amid global economic uncertainty, domestic affordability challenges, and a strategic effort to promote sustainable growth and fiscal discipline. Budget 2025 introduces a dual reporting framework separating operational and capital spending, a move designed to improve fiscal transparency and discipline.

For 2025–26, the government projects an operating deficit of $33 billion and a capital deficit of $45 billion, totaling a combined shortfall of approximately $78 billion. The federal debt-to-GDP ratio is forecast to reach 42.4%, with a goal of balancing the operating budget by 2028–29. The new fiscal framework aims to distinguish ongoing program spending from capital investment to promote long-term fiscal accountability.

Below is an overview of some of the tax measures discussed in 2025 Budget. Please refer to Appendix I for a concise summary.

1. Personal Income Tax Measures

Personal Support Workers (PSW) Tax Credit

A new refundable tax credit equal to 5% of eligible earnings (up to $1,100 annually) will be available for personal support workers employed in hospitals, nursing homes, and similar care environments from 2026 to 2030. This measure excludes British Columbia, Newfoundland and Labrador, and the Northwest Territories, which have existing bilateral wage enhancement agreements.

Automatic Federal Tax Filing for Lower-Income Individuals

The CRA will be empowered to automatically file returns for eligible low-income individuals whose income is entirely from T-slip sources. This initiative, starting in 2025 (for filing in 2026), seeks to increase benefit uptake among non-filers. Individuals will have a 90-day review period and can opt out of the automatic filing process.

Top-Up Tax Credit

To ensure the ‘middle-class tax cut’ does not erode the value of non-refundable credits, a new Top-Up Tax Credit will maintain the 15% value for affected credits between 2025 and 2030 in certain circumstances where the non-refundable tax credit amounts exceed the first marginal tax bracket threshold ($57,375 in 2025).

Home Accessibility Tax Credit Modification

Effective 2026, the same expense cannot be claimed under both the Home Accessibility Tax Credit and the Medical Expense Tax Credit, preventing duplication of benefits.

21-Year Trust Rule Enhancement

To prevent indirect transfers designed to circumvent the 21-year deemed disposition rule, Budget 2025 expands anti-avoidance provisions to capture indirect trust-to-trust transfers occurring on or after Budget Day.

2. Registered Plans and Investment Rules

Budget 2025 simplifies and harmonizes the qualified investment regime for registered plans, aligning rules for Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Tax-free Savings Accounts (TFSAs), Registered Education Savings Plans and related benefits (RESPs), Registered Disability Savings Plans (RDSPs), First Home Savings Accounts (FHSAs), and Deferred Profit Sharing Plans (DPSPs). Two key reforms include the repeal of the registered investment regime (effective January 1, 2027) and the introduction of unified qualified investment definitions applicable across all registered plans (except DPSPs). Also, before 2027, RDSPs could not invest in shares of small business corporations, venture capital corporations, or specified cooperative corporations. With the new rules effective January 1, 2027, RDSPs will be allowed to acquire such shares.

3. Business and Corporate Tax Measures

Tiered Corporate Structure Tax Deferral Elimination

To close tax deferral opportunities in tiered corporate structures, Budget 2025 suspends dividend refunds of payer corporation where the payer’s year-end precedes that of an affiliated recipient corporation. The determination of whether the dividend payer and payee are affiliated would be based on current affiliation rules in the Income Tax Act. Refunds are restored once a dividend is paid to a non-affiliated corporation or an individual shareholder, ensuring timely taxation of investment income within corporate groups. The rule would 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. This measure would apply to taxation years that begin on or after Budget Day.

Immediate Expensing for Manufacturing & Processing Buildings

Manufacturers can now immediately expense 100% of costs related to new or expanded manufacturing and processing buildings acquired on or after Budget Day and placed in use before 2030 (provided the minimum 90% floor space requirement is met). The accelerated rate phases down beginning in 2031, with full phase-out by 2034. 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.

SR&ED Enhancements

The expenditure limit for the enhanced 35% SR&ED Investment Tax Credit (ITC) rises from $3 million to $6 million for taxation years beginning on or after December 16, 2024. This supports innovation and R&D investment across Canada.

The government also confirmed its intention to (a) increase the lower and upper prior-year taxable capital phase-out boundaries to $15 million and $75 million, respectively; (b) to extend eligibility for the enhanced tax credit to eligible Canadian public corporations (as  defined below); and (c) to restore the eligibility of SR&ED capital expenditures for both the deduction against income and investment tax credit components of the SR&ED program.

An Eligible Canadian public Corporation must, throughout the taxation year: (a) be resident in Canada (b) have a class of shares listed on a designated stock exchange (or have elected or been designated by the Minister of National Revenue to be a public corporation) and (c) not be controlled, directly or indirectly in any manner whatever, by one or more non‑resident persons.

Clean Technology and Critical Mineral Incentives

Budget 2025 expands the Clean Technology Manufacturing investment tax credit (“ITC”) to include new critical minerals (bismuth, cesium, chromium, fluorspar, germanium, indium, manganese, molybdenum, niobium, tantalum, tin, and tungsten) and extends Carbon Capture, Utilization, and Storage ITC (which is a refundable credit) at full rates through 2035 and halved for expenditures incurred from 2036 through 2040. Additionally, the Clean Electricity ITC now permits financing via the Canada Growth Fund without reducing the property’s eligible cost base.

4. Sales, Excise, and Housing Measures

The Underused Housing Tax (UHT) is repealed beginning in 2025, though prior year obligations remain in force.

The luxury tax (including the tax on sales, the tax on importations, and the tax on improvements) on aircraft and vessels is also repealed for post-Budget Day acquisitions, with rebate claims allowed until February 1, 2028. Registered vendors of these items should file final luxury tax returns for reporting periods that include November 4, 2025.

5. International and Cross-Border Tax Measures

Transfer pricing rules will align with OECD guidelines, emphasizing economic substance over legal form. The following are proposed:

• providing relief for taxpayers through an increase in the threshold for the transfer pricing penalty to apply from an assessment (from a $5 million transfer pricing adjustment to a $10 million adjustment);
• clarifying the transfer pricing documentation requirements and also more closely aligning them with the new definitions and the requirements to select and apply the most appropriate method;
• providing for simplified documentation requirements when prescribed conditions are met; and
• reducing the time to provide transfer pricing documentation from 3 months to 30 days

For taxation years that begin after Budget Day, a foreign affiliate’s income from the insurance of Canadian risks would include income from holding any property by the affiliate in connection with the insurance of Canadian risks by any person or partnership.

Previously Announced and Confirmed Measures

Budget 2025 confirms several measures from prior announcements, including:

• Lifetime Capital Gains Exemption increased to $1.25 million;
• Bare Trust reporting deferred to 2026;
• Tax exemption for sales to Employee Ownership and Worker Co-op exemptions;
• Capital gains rollover on small business investments;
• GST housing rebate enhancements;
• Excessive Interest and Financing Expenses Limitation Rules;
• Substantive CCPCs; and
• Legislative proposals released on June 30, 2025, to ensure that all Canada Carbon

Rebates for Small Businesses are provided tax-free, and to extend the filing deadline for the 2019 to 2023 calendar years.

Key Takeaways for McGovern Hurley Clients

Budget 2025 continues Canada’s shift toward targeted incentives for innovation, clean growth, and workforce support while closing longstanding tax deferral and avoidance opportunities. Clients should assess opportunities to benefit from enhanced expensing provisions, ITCs, and refundable credits while ensuring compliance with tightened trust and corporate tax rules.

Appendix I

Budget 2025: Key Tax Measures – Summary

Below is a concise overview of the relevant changes, including effective dates and fiscal impacts where material.

Please note the following is not a comprehensive analysis and may not apply to your specific situation. You should always consult us to discuss any of the noted tax measures.