2025 Federal Budget: A Strategic Shift Toward Growth and Innovation.

  • The annual expenditure limit eligible for the enhanced 35% investment tax credit increases to $6 million, up from $4.5 million.
  • The 35% rate (vs. the lower 15% rate) will now apply to certain small public companies and larger private firms, with phase-outs beginning at $15 million in taxable capital and ending at $75 million.
  • Capital expenditures used in SR&ED will qualify for both a 100% deduction and investment tax credits.
  • A new elective pre-claim approval process will allow businesses to vet SR&ED projects with CRA in advance, reducing disputes and processing time.
  • Extension of the estate loss carryback rule to three years (retroactive to deaths after August 12, 2024).
  • A new healthcare worker tax credit starting in 2026, offering 5% of eligible remuneration up to $1,100.
  • Automatic tax return completion by CRA for low-income individuals starting in 2025, improving access to credits like the GST rebate.

A Budget for All Canadians

Set against a backdrop of global economic uncertainty, rising unemployment, and affordability challenges, the budget aims to unify rather than divide. Rather than focusing solely on the middle class, it presents initiatives designed to benefit Canadians broadly, regardless of income bracket or business size.

Business Incentives: Fueling Innovation and Expansion

Enhanced SR&ED Tax Credits

The Scientific Research and Experimental Development (SR&ED) program sees a significant boost:

100% Expensing for Manufacturing Buildings

Businesses acquiring buildings used primarily (90% or more) for manufacturing or processing can now deduct 100% of the cost immediately, provided the property is new or acquired at arm’s length. This applies to buildings acquired after November 4, 2025, and 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.

Corporate Structures: Anti-Avoidance Measures

A new rule targets tiered corporate structures with staggered year-ends, commonly used to defer taxes through dividend refunds. Under the new regulation, refunds will be suspended until dividends reach individual shareholders or non-connected corporations. This change, effective for taxation years beginning after November 4, 2025, encourages alignment of year-ends or earlier dividend payments to avoid penalties.

Personal Tax Updates

Notably absent from the budget is the previously proposed increase in the capital gains inclusion rate from 50% to 66.7%, a move welcomed by investors and family trusts. However, the budget may still proceed with a proposal to deny 50% of investment council fees for Alternate Minimum Tax (AMT) purposes.

Other personal tax measures include:

Loss carry back for estates: 

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. 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.

Credit for healthcare workers:

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.

Repeals and Deferrals

Bare Trust Reporting is deferred for another year, now due in March 2027. The Underused Housing Tax (UHT) is repealed for 2025 onwards, though filing obligations remain for 2022–2024. The Luxury Tax is removed for boats and aircraft, but retained for vehicles over $100,000.

Administrative and Compliance Enhancements

CRA will increasingly leverage artificial intelligence to streamline operations and target non-compliance, particularly in SR&ED claims and personal services businesses. A $75 million allocation over four years will fund investigations into the trucking industry, particularly with respect to the incorporation of truck drivers, who take the position that they are self-employed.  This project may extend to looking at personal services business, has the potential to broaden beyond the trucking industry, and become a major source of controversy.

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.

Conclusion

The 2025 Federal Budget represents a strategic pivot toward fostering innovation, supporting business growth, and simplifying tax compliance. With no major adverse tax changes and a clear focus on economic stimulation, the government appears to have genuinely turned the page on its previous tax-heavy approach.

 

This article is intended for general information purposes only and does not constitute professional advice.  Income tax law and regulation change frequently and the content on this article may no longer reflect the current state of the law. If you have any specific questions, you should consult a professional services advisor or email us for further advice.