Yesterday’s Federal Budget projected a $78 billion deficit for the 2025-26 fiscal year, as the Federal government increases spending on housing, defence and security, infrastructure, and investments in productivity and competitiveness. You can read the full budget here.
But that’s not all! As usual, the Budget also announced significant tax changes for business owners. There were no changes to tax rates or increases in income tax or sales taxes. The most relevant changes for most business owners include:
Immediate Expensing for M&P Buildings
The Budget includes a proposal to allow for an immediate deduction of the full cost of buildings used 90% or more for manufacturing and processing (M&P) based on floor space. This means that, rather than claiming capital cost allowance (CCA) at a rate of 10% per year on a declining balance basis, your business would be allowed a full deduction. Other conditions will apply, including that neither the person acquiring the building nor any other non-arm’s length person may have previously owned the property, and the property cannot have been acquired on a tax-deferred “rollover” basis. This deduction would be available for M&P buildings acquired on or after November 4, 2025, and before 2030, after which this deduction is gradually phased out before the full CCA regime kicks back in in 2033.
Enhancements to SR&ED Credits
If your business undertakes research and development – which may include many activities you undertake to develop a product or gain new knowledge – you may be eligible for free money from the Federal and provincial governments in the form of scientific research and experimental development (SR&ED) tax credits. Most Canadian-controlled private corporations can earn tax credits at a federal rate of 35% of SR&ED expenditures up to a $3 million expenditure limit, after which a lower 15% credit applies. The Budget proposes to increase this expenditure limit to $6 million, effective retroactively for taxation years that begin on or after December 16, 2024. This is consistent with the government’s announcement in the 2024 Fall Economic Statement.
The expenditure limit is gradually reduced once a corporation’s taxable capital – together with taxable capital of associated corporations – exceeds $10 million and is eliminated once taxable capital was $50 million, at which point only the 15% credit would be available on all of a corporation’s SR&ED expenditures. The Budget proposes to increase these thresholds to $15 million and $75 million, respectively, also consistent with the 2024 Fall Economic Statement.
These changes, will make the higher 35% SR&ED tax credits available to more businesses. If you would like to know more about SR&ED tax credits and learn whether your business is undertaking activities that may qualify you for these credits, speak to your Gauvreau / ONBusiness advisor who can connect you with one of our specialists.
So long, UHT!
The Underused Housing Tax (UHT) is being repealed! The Budget proposes that no UHT would be payable and no UHT returns would need to be filed for 2025 and future years. The UHT has been widely criticized as affecting too many Canadians and imposing onerous tax reporting obligations since its inception in 2022. UHT filings and amounts owing would still apply for 2022 to 2024.
Bare Trust Reporting is Deferred (Again)
The Budget proposes to defer reporting for bare trust arrangements another year, meaning that no filings for bare trusts would be required for 2025. The first filings would only be due by March 31, 2027, in respect of the 2026 taxation year. The proposed bare trust reporting rules have also drawn the ire of the Canadian public and accountants for being too broadly applicable. Many innocent scenarios would be caught, requiring individuals to have to report assets they own for the benefit of someone else to the CRA – for example, a parent who is on title to a child’s house for financing reasons, or an adult child who is on an elderly parent’s accounts as a joint owner. We hope that the government will eventually abandon the bare trust reporting rules altogether.
Commitment to the $1,250,000 Capital Gains Exemption
The government has indicated it plans to enact the increase to the lifetime capital gains exemption to $1,250,000, as indicated in the 2024 Federal Budget. This increase is supposed to be effective as of 2024 but it has not yet been enacted into law, and so it is reassuring that the government has indicated that it soon will be – especially after many business owners have already filed their 2024 tax returns using this higher exemption!
Canada Carbon Rebate for Small Businesses
This rebate was paid to eligible business owners in the fall of 2024. Then Minister of Finance, Chrystia Freeland, had announced that it was a non-taxable rebate for business owners, even though this contradicted our tax laws at the time! The Federal government has reiterated its intent to revise our tax laws to ensure that the rebate will be considered tax-free.
Luxury Tax on Aircraft and Vessels
The Budget proposes to eliminate the luxury tax on sales, importations, and improvements of subject aircraft and subject vessels after November 4, 2025. However, the luxury tax on subject vehicles priced over $100,000 would continue to apply.
Other Changes
The Budget included many other changes, including credits for eligible Personal Support Workers, automatic tax filing for certain low-income individuals, various clean energy and technology incentives, an expansion to the Critical Mineral Exploration Tax Credit, anti-avoidance rules, a commitment to enact previously-proposed measures from past budgets, and more.
While we did not address these in this message because they do not affect the vast majority of those of you receiving this email, if you have any questions, please do not hesitate to reach out to your Gauvreau / ONBusiness advisor.
What’s Next?
Note that these measures are not yet law. The Budget must pass a vote of confidence in the House of Commons, otherwise these measures may never become law, and we may be faced with a Federal election. Anything is possible here, given that the current Federal government is a minority government. Stay up to date by subscribing to our emails and following us on social media.