Federal Budget Analysis

Federal Budget 2025 Newsletter

Michael D. Cote, PhD, RPA

Chief Economist and Managing Partner

The following is a summary of the highlights of the Federal Budget for 2025 – 2026.

We have kept the details brief to focus on the headline announcements, which are highlighted for you, in bold and italics. Most taxpayers will find very few benefits in the proposed budget. There are few changes to benefit working people that have not already been announced. During the election, the Liberals announced a minor tax cut, 1%, at the lowest bracket, and cancellation of the Carbon Tax. These items have already taken effect.

The budget focuses on big spending announcements, promoted as “investments” in the Canadian economy. Only time will tell if these “investments” result in growth to the economy. A lot of the announcements appear to be sticking with the same economic plan the government has been promoting for the past ten years. In our opinion, there is too much emphasis on green initiatives and not enough focus on day-to-day living costs.

As advisors to hard-working business owners and individuals, it was disappointing not to see some adjustments that would affect the cost of living.

Personal Tax Changes

• A Personal Support Worker Tax Credit for PSW’s working in health care facilities of 5 %, to a maximum of $1,100.00 per year, starting in tax year 2026;
• Automated Federal Benefits for Low Income Workers- this is part of the controversial automated tax filing provided by the CRA starting in 2026
• Top Up Tax Credit- designed to assist lower bracket taxpayers during the transition to the lower income bracket tax cut, from 15% to 14 %, over two years. It is designed to prevent taxpayers from backsliding into the higher tax rate.
• Qualified Investments for Registered Investment Plans (RRSP, RRIF, RESP, RHOSP, RDSP). The budget proposes to improve and clarify the use of qualified investments, particularly on shares or trusts of private corporations. It replaces the registered investment regime with two new “qualified” plans that do not require registration under the income tax act. The changes essentially benefit the trust and mutual fund industry, by making the requirements of qualified investments meet the investment industry standards and protocols.
• Home Accessibility Tax Credit- the current credit it targeted at seniors over 65 who need accessibility items in their homes. The Budget eliminates a prior ability to claim these expenses under both the credit methods, medical expenses and home accessibility tax credit, starting in 2026
• 21 Year Trust Rules - Currently the ITA requires all trusts to report deemed disposition of their assets on the 21 year anniversary. This applies to all assets of capital nature. There was a provision that did not cover assets transferred from outside the trust. This provision has now been closed.
• Canada Carbon Rebate- the final quarter CCR will cease to be paid ou on lany 2024 tax retunes filed after October 31, 2025

Business and Corporate Changes

• Immediate Expensing of Buildings used for Manufacturing or Processing- The current measures allowed a increase rate to 10% per annum (ten year expensing) using the additional 6 % allowance. This has been boosted to 100% in year 1, provided the facilities are 90% utilized in manufacturing or processing.
• LNG Equipment will also benefit from Immediate expensing.
• SRED or Scientific Research and Experimental Development Credits- changes affect the capital base allowed to claim the credit and it increases the threshold of SRED expenses allowed to 6 million per year
• Agricultural Coops – the Patronage Dividend - is now deferred to the disposition of Patronage Dividends in the form of shares, until 2030, instead of 2025
• Clean Energy Investment Tax Credit-The critical Mineral Exploration Tax Credit allows the explorer to pass these tax credits to holders of Flow Through Shares.
• Clean Technology Manufacturing Tax Credit- the 30 % credit has been expanded to a much wider list for minerals
• Carbon Capture Investment Tax Credit- the credit has been expanded to allow investment of CCURS to 2035, from the current limit of 2030
• Clean Electricity Investment Tax Credit- a refundable 15% tax credit of the capital cost of clean electricity costs
• Tax Deferral in Corporate Structures- the budget proposes to change the rules to delay the payment of a refundable dividend tax if the corporation have different year ends, with some exceptions.

International Tax Issues

• Transfer Pricing Rules -The Budget proposes to change the Transfer pricing to align them with the OECD Transfer Pricing Rules. CRA will have the right to adjust expenses to these rules if the taxpayer has not followed these rules. New penalties will be enacted, and the penalty threshold has been increased. While transfer pricing affects only those with foreign entities, it affects many small business entities.
• FAPI – Foreign Accrual Property Income – this affects large and small insurers and mutual insurers. The budget clarifies the rules for income earned by foreign affiliates and how it will be reported.

Administration Issues

• Carousel Tax Fraud – HST. This tis to shut down the use of carousel fraud or missing trader fraud. This is fraud created by use of false invoices and false collection of HST. The budget proposes to initiate a reverse charge mechanism of the claimant if the claimant is linked to a registrant who has not paid the tax.
• UHT or Underutilized Housing Tax – the budget repeals these requirements after 2025
• Luxury Tax- the budget repeals the imposition of luxury tax on cars and airplanes.

Please direct any questions you might have to your CAPC Partner, who can address how the items might directly affect you.