2025 Federal Budget: What It Means for Canadian Businesses
This year’s federal budget marks a noticeable shift in tone and policy direction - one that business owners will likely welcome. For the first time in nearly a decade, there are no new tax increases targeting private enterprises. That alone sets this budget apart from those we’ve seen since 2016, which brought measures such as small business deduction restrictions, tightened income-splitting rules, and the now-abandoned proposal to raise the capital gains inclusion rate from one-half to two-thirds.
It’s a refreshing change - a budget that places its focus on investment, incentives, and growth rather than further tax burdens. While it’s far from balanced, its intent is clear: to encourage economic activity and rebuild confidence at a time when uncertainty looms large. With global instability, softening domestic growth, rising unemployment, and ongoing affordability pressures, the government has attempted to opt for a unifying approach. This isn’t a budget just for “the middle class,” it’s positioned as a budget for all Canadians.
Within that framework, the 2025 Federal Budget introduces several measures designed to drive innovation and stimulate investment. Even if only part of the government’s agenda is realized, it has the potential to deliver lasting economic benefits. From a tax perspective, changes are limited, but the few that are included are noteworthy and we’ve highlighted the most relevant ones below.
Incentives For Business
The government will move forward with all previously announced measures that will allow businesses to write-off the cost of their investments in capital assets more quickly:
Reinstatement of the Accelerated Investment Incentive, which provides an enhanced first-year write-off for most capital assets.
Immediate expensing (i.e., 100-per-cent first-year write-off) of manufacturing or processing machinery and equipment.
Immediate expensing of clean energy generation and energy conservation equipment, and zero-emission vehicles.
Immediate expensing of productivity-enhancing assets, including patents, data network infrastructure, and computers.
Apart from the measures above which will benefit most small businesses, there are two major incentives aimed at fostering innovation which will apply more narrowly: the enhancement of scientific research and experimental development (SR&ED) tax credits, and the 100% expensing of buildings used in manufacturing and processing.
The budget proposes an important increase in the incentives for SR&ED. The amount of expenditures, qualifying for the higher investment tax credit rate of 35%, will now be $6 million annually. This is increased from the previously announced $4.5 million limit (that limit itself being an increase from the long-standing expenditure limit of $3 million, that increase being proposed in the 2024 Fall Economic Statement). This essentially doubles the amount of SR&ED expenditures eligible for the 35% enhanced investment tax credit rate. The increased limit applies to taxation years beginning on or after December 16, 2024, the date of the 2024 Fall Economic Statement. For example, a corporation with a December 31, 2025 year-end can obtain the full $6 million at the 35% rate in 2025.
In addition, the budget confirms the government’s intention to implement the following proposed changes announced in the 2024 Fall Economic Statement:
The enhanced investment tax credit rate will also apply to certain small Canadian public companies and to larger private companies. The 35% rate (vs. the lower 15% rate) is phased out based on taxable capital. The phase out will start at $15 million and be eliminated at $75 million.
In addition, certain capital expenditures used in SR&ED will qualify for a 100% deduction, and investment tax credits as well.
This is an important cornerstone of the budget, focusing on enhancing the tax system to encourage SR&ED and innovation in Canada.
An issue in the past in claiming SR&ED tax credits was the scrutiny given to the claims by CRA. The budget contains a plan for an elective pre-claim approval process whereby proposed SR&ED projects can be vetted, and their eligibility (or lack thereof) determined by CRA in advance, with a review time of 90 days. This should go a long way to reducing the amount of controversy and disputes on eligibility of R&D tax credit claims.
Analysis
The pre-claim approval process could be very valuable to companies who carry out SR&ED but are uncertain about eligibility. This will remove doubt and speed up the processing of tax credits.
The second major incentive for businesses is the 100% immediate expensing of buildings used in manufacturing and processing. In order to take this 100% deduction, a minimum of 90% of the floor space must be used for manufacturing or processing of goods for sale or lease. In addition, unless the property is new, it must be acquired at arm's length, and not on a so called “rollover" basis.
Analysis
Where a building used in manufacturing is sold at a gain and replaced, a rule called the replacement property rule can be used to postpone the gain. The replacement must cost as much or more than the sale proceeds. This is a common approach. It appears that this rule can still be used to postpone the gain, but to deduct 100% of the cost of the replacement, the building must be new.
The proposal applies to buildings acquired on or after November 4, 2025, and must be placed in use before 2030. Otherwise, the rate of depreciation is reduced to 75% (for 2030 and 2031) and 55% (for 2032 and 2033). After that, the enhanced rate of deduction will not be available.
This should create a significant incentive for expansion of manufacturing facilities, and acquisition of new facilities. For profitable companies, the deduction may produce very significant tax benefits.
A company which purchases a building that qualifies for 100% deduction may have such a large deduction that it will create a loss for tax purposes. Such a loss would be eligible to be carried back, to recover tax paid in the past three taxation years.
Tiered Corporate Structures
An anti-avoidance rule is to be introduced with respect to tiered corporate structures, which have different year ends. It has become popular to have a holding company with a taxation year different to the subsidiary, particularly where that subsidiary derives investment income (for example from rental real estate). In such a situation, the subsidiary will commonly earn income which is subject to the refundable tax system. Under this system, the corporate tax rate is approximately 50%, but where a dividend is paid, a corporate tax refund, called a dividend refund, can be claimed. This dividend refund of around 30% of income, cascades through the structure, producing equivalent tax to the holding company and so on up the chain. Having different year ends can provide a tax deferral, generally of up to 11 months. It is conceivable that there could be multiple companies in a chain, all with different year ends, extending the tax deferral further. This practice has now been targeted.
In such a structure, the corporate tax refund (or dividend refund) will be suspended until a payment is made from the top company in the chain to individual shareholders, or to companies which have less than a 10% shareholding (referred to as non-connected corporations).
This rule will have limited impact for corporations in general but will be a major issue for structures that have made use of this plan.
In order to avoid the implications of this rule, two alternatives can be considered. The first is to request a change of year end. If the year ends are aligned, the rule will not apply. The second alternative is to pay the dividend earlier, so it is not received in a later year-end but in one which ends before the year-end of the subsidiary.
The rule will apply to dividends paid in taxation years that begin on or after November 4, 2025. Thus, there is time to plan appropriately and make changes as required.
Analysis
This is a narrowly used tax planning strategy, but for the limited number of corporate groups affected by this change, professional advice will be essential to navigate the impact.
Personal Tax Changes
As previously announced, the budget confirmed that the lowest federal personal income tax rate applied to the first tax bracket (i.e. up to $57,375 for 2025) will drop from 15% to an effective 14.5% for 2025, and to 14% from 2026 onward.
As mentioned earlier, the proposal to change the inclusion rate on capital gains from a 1/2 to 2/3 is not included in the list of previously announced measures which the government intends to pursue. This is very welcome news.
However, a proposal to deny 50% of investment council fees for alternate minimum tax (AMT) purposes may still proceed. It is not certain when it will be effective.
Analysis
A disallowance of 50% of investment council fees for AMT will not be troubling for most individuals, as AMT tends to only apply in unusual situations. However, for trusts which hold investment portfolios and distribute income to beneficiaries, it may result in some tax being paid by the trust.
One proposal announced in 2024 was to extend a special loss carry back rule for estates from the first taxation year to the first three taxation years, which will be extremely beneficial in helping to avoid double taxation that could otherwise occur when an individual passes away. This was introduced as a technical change and it seems that this will proceed with retroactive effect to deaths on or after August 12, 2024.
In 2024, a special incentive called the Canadian Entrepreneurs’ Incentive was announced, which provided for a reduced inclusion rate on capital gains. It is not mentioned in the budget papers and seems to be dropped.
A special tax credit is to be given for certain healthcare workers, starting in 2026. It will provide a tax credit of 5% of eligible remuneration to a maximum of $1,100. This is designed to recognize the contribution of these workers in the healthcare system.
Starting in 2025, persons with income below the personal exemption amount will have their tax returns completed automatically by CRA, if they meet certain conditions. Many people with little or no income do not file income tax returns, and therefore do not obtain certain tax credits to which they would be entitled, such as the GST credit.
Taxes Repealed & Deferred
Reporting for bare trust arrangements was to be required for the 2025 taxation year, with tax returns due in March, 2026. This has now been deferred again for one year. This will be welcome news, greeted enthusiastically by all who may be affected.
The underused housing tax (UHT) will be repealed entirely for 2025 onwards. Nobody will be sad to see this go. Note however that the filing requirements for 2022 to 2024 remain for the taxpayers who are not exempt, with penalties for failing to file if applicable.
As an incentive for people to purchase boats and aircraft, the 10% luxury tax will be removed from such purchases, but will remain applicable to vehicles costing over $100,000.
Administrative Changes
Certain changes are being made to Canada’s transfer pricing rules. In particular, the rules will align more closely to international standards.
CRA will start to make increased use of AI in the future, in an effort to better target noncompliance situations, and to streamline its work. In particular, in determining the eligibility of SR&ED claims, CRA may use AI applications. One can also expect that CRA will make greater use of AI in looking at possible situations of unreported income or non-compliance. It will be interesting to see how this evolves, because AI can produce a completely mythical analysis on occasion, making up court cases and principles which do not exist. This is called hallucination, and hopefully this AI approach will be thoroughly tested before it is relied upon in any way.
CRA had been allocated $75 million over 4 years to pursue non-compliance in the trucking industry, particularly with respect to the incorporation of truck drivers, who take the position that they are self- employed. This project, which may extend to looking at personal services businesses, has the potential to broaden beyond the trucking industry, and become a major source of controversy.
Analysis
Be careful of situations where a corporate structure is used for an arrangement which is essentially an incorporated employee. CRA are looking at this and may feel that the funding has to be justified with results.
Conclusion
This year’s budget takes a measured but optimistic step forward. Its focus on economic growth, infrastructure investment, and business support is a welcome shift, especially after several years of challenging conditions.
Perhaps most encouraging, there were no major adverse tax changes for private businesses. Instead, the government appears to be signaling a new phase in its tax policy - one aimed at stability, innovation, and long-term growth.
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