2025 Federal Budget

Personal tax measures

Top-Up Tax Credit

The tax rate applied to most non-refundable federal tax credits is based on the first marginal personal income tax rate. The government previously announced a reduction in the first marginal personal income tax rate from 15% to 14.5% for the 2025 taxation year, and to 14% for the 2026 and subsequent taxation years. In cases where an individual’s non-refundable tax credit amounts exceed the personal income tax bracket threshold (over $57,375 in 2025), the decrease in the value of these credits from the lower rate may exceed their tax savings from the rate reduction (for example, one-time high tuition and/or medical expenses).

Budget 2025 introduces a new non-refundable Top-Up Tax Credit for the 2025 to 2030 tax years. The credit will effectively maintain the 15% rate for non-refundable tax credits claimed on amounts above the first personal income tax bracket threshold.

One-time Canada Disability Benefit Supplement

In an effort to lower barriers to accessing the Canada Disability Benefit, Budget 2025 proposes a one-time supplemental payment of $150 in respect of each Disability Tax Credit certification or re-certification. Payments are expected to be made to Canada Disability Benefit recipients before the end of 2026-2027.

Home Accessibility Tax Credit

Certain home renovation expenses, aimed at improving accessibility for eligible persons with mobility impairments, etc., currently may qualify for both the Home Accessibility Tax Credit and the Medical Expense Tax Credit. Budget 2025 proposes to prohibit the same expense from being claimed for both non-refundable tax credits, starting for the 2026 and subsequent taxation years.

Qualified investments for registered plans

Budget 2025 proposes to simplify and harmonize the qualified investment rules that apply to certain registered plans. The specific plans affected are Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Tax-Free Savings Accounts (TFSAs), Registered Education Savings Plans (RESPs), Registered Disability Savings Plans (RDSPs), First Home Savings Accounts (FHSAs) and Deferred Profit Sharing Plans (DPSPs).

The budget proposes the following amendments that would apply as of January 1, 2027:

• RDSPs would be permitted to invest in specified small business corporations, venture capital corporations and specified co-operative corporations. This brings the rules for RDSPs into alignment with RRSPs, RRIFs, TFSAs, RESPs and FHSAs.
• Shares of eligible corporations, interests in small business investment limited partnerships and small business investment trusts will no longer be qualified investments. However, interests in small business investment limited partnerships and small business investment trusts that were acquired prior to 2027 would continue to be qualified investments. The intention is that shares of eligible corporations would continue to be qualified investments under the existing rules regarding specified small business corporations.

The budget also proposes, effective November 4, 2025, that the current registered investment regime for all registered plans will be replaced with two new categories of qualified investments that do not have to be registered with the CRA. 

Automatic federal benefits for low-income individuals

Budget 2025 proposes to authorize the Canada Revenue Agency (CRA) to automatically file tax returns for certain low-income individuals for the 2025 taxation year and subsequent years. This initiative aims to ensure individuals receive the benefits they qualify for, such as the GST/HST credit and the Canada Child Benefit. Under the proposal, individuals will have a 90-day window to review and confirm a pre-filled income tax return. After this period, the CRA will have the discretion to automatically file the return on the individual’s behalf. Individuals may opt out of automatic tax filing.

To qualify, the individual must have taxable income below the lower of either the federal basic personal amount or the provincial equivalent for the taxation year. The individual must not have filed a return at least once in the preceding three taxation years and not filed a return for the current year before or within 90 days after the deadline.

Consultation on the proposal is open until January 30, 2026.

Personal Support Workers Tax Credit

Budget 2025 introduces a temporary Personal Support Workers Tax Credit applicable for the 2026 to 2030 taxation years, which would provide eligible personal support workers with a refundable tax credit of 5% of eligible earnings, providing a credit value of up to $1,100 per year.

To qualify, workers must ordinarily provide one-on-one care in support of another individual’s health, well-being, safety and autonomy, as directed by a regulated health care professional or health organization. Duties must include helping patients with activities of daily living and mobilization.

Earnings in British Columbia, Newfoundland and Labrador, and the Northwest Territories would not be eligible, as these jurisdictions have signed bilateral agreements with the federal government which provide funding over five years to increase personal support workers’ wages.

Trusts and the 21-year rule

For most personal trusts, every 21 years from its creation (and each 21-year anniversary thereafter) a trust is deemed to have sold all its capital property at its current fair market value. This “deemed disposition” triggers tax on any accrued gains, even though the assets have not actually been sold. The “21-year rule” exists to prevent trusts from deferring tax indefinitely by holding property for generations, without realizing gains.

Anti-avoidance provisions within the Income Tax Act aim to prevent the circumvention of these rules,  such as direct tax-deferred transfers of property from one trust to another, simply to reset the 21-year clock.

The 2025 federal budget proposes to expand the anti-avoidance provisions to also cover indirect transfers of property to other trusts, starting November 4, 2025. The measure targets strategies where assets are transferred on a tax-deferred basis to a beneficiary corporation owned by a new trust, which previously allowed taxpayers to sidestep the 21-year deemed disposition.

Bare trust reporting rules

Budget 2025 reaffirms the government’s plan to implement changes to the bare trust reporting requirements but postpones their application. The enhanced reporting rules for bare trusts will now apply only to taxation years ending on or after December 31, 2026.

Business income tax measures

Temporary immediate expensing for manufacturing or processing buildings

Currently, eligible manufacturing or processing buildings are subject to a maximum 10% capital cost allowance (CCA) rate. To qualify, at least 90% of the building’s floor space must be used for manufacturing or processing. Budget 2025 proposes a temporary measure allowing businesses to immediately expense the cost of eligible manufacturing or processing buildings, including any additions or alterations.

This immediate expensing is only available for newly acquired property that has not previously been owned by the taxpayer or a related party. The measure applies to property acquired on or after November 4, 2025 and first used for manufacturing or processing before 2030, and will be subject to a phase-out. If the property is first used in 2030 or 2031, a 75% first-year CCA rate will apply, and for 2032 or 2033, a 55% rate will apply. No enhanced rate is available for properties first used after 2033.

Limitation of deferral of Part IV tax using a tiered corporate structure

Budget 2025 proposes to limit Part IV tax deferral strategies that use a corporate structure with staggered year-ends. If a corporation pays a dividend to an affiliated company whose tax deadline falls later, the payer’s dividend refund will be suspended until the recipient pays a dividend to an individual or unrelated company. Certain exceptions apply where there would be no deferral, or in bona fide commercial transactions. 

Sales and excise tax measures

Underused Housing Tax (UHT)

The UHT is a federal 1% tax on the value of underused or vacant residential real estate located in Canada held by non-resident, non-Canadian owners.

Budget 2025 proposes to eliminate the UHT, starting with the 2025 calendar year, meaning no tax will be payable and no returns required for 2025 and beyond. However, all UHT rules, including penalties and interest, remain in effect for the 2022–2024 calendar years.

Luxury tax on aircraft and vessels

Currently, the federal government imposes a luxury tax on subject automobiles and planes valued over $100,000 and subject vessels (for example, boats) valued over $250,000. The amount of the luxury tax is calculated as the lesser of 10% of the total value of the subject item and 20% of the value above the applicable threshold.

Budget 2025 proposes to amend the Select Luxury Items Tax Act to end the luxury tax on subject aircraft and subject vessels, as of November 5, 2025.

Previously proposed measures

The government confirmed its intention to proceed with the following tax measures introduced by the previous government:

• Increase the lifetime capital gains exemption to apply to up to $1.25 million of eligible capital gains.
• Amendments to the Alternative Minimum Tax.
  • However, the government will not proceed with a prior proposal to fully allow resource expense deductions.
• Substantive CCPCs.
• The extension of the 2024 charitable donation deadline.
• Capital gains rollover on small business investments.
• Crypto-Asset Reporting Framework and the Common Reporting Standard (deferred application date of January 1, 2027).
• Tax exemption for sales to Employee Ownership Trusts.

The government has indicated the cancellation of the previously proposed Canadian Entrepreneurs’ Incentive.  This incentive was meant to reduce the impact of the previously proposed capital gains inclusion rate change to 66.67%, by providing a reduced tax rate on up to $2 million of capital gains on the sale of a qualifying business. As the proposed inclusion rate changes were abandoned, this proposed incentive was cancelled.