Canada’s Budget 2025 outlines proposed changes to business taxes, international tax rules, and sales/excise taxes, enhanced investment incentives, transfer pricing rules, and the elimination of the underused housing tax and certain luxury taxes.
Canada’s Department of Finance released the details of the Budget 2025 on 4 November 2025.
The main tax measures of the budget are as follows:
Business Income Tax Measures
Immediate Expensing for Manufacturing and Processing Buildings
The capital cost allowance (CCA) system determines the deductions that a business may claim each year for income tax purposes in respect of the capital cost of its depreciable property. Depreciable property is generally divided into CCA classes with each having its own rate in the Income Tax Regulations. These rates typically align with the expected useful life of the assets in their classes.
Currently, eligible buildings in Canada used to manufacture or process goods for sale or lease (manufacturing or processing buildings) are prescribed a CCA rate of 10%.
Budget 2025 proposes to provide temporary immediate expensing for the cost of eligible manufacturing or processing buildings, including the cost of eligible additions or alterations made to such buildings. The enhanced allowance would provide a 100% deduction in the first taxation year that the eligible property is used for manufacturing or processing, provided the minimum 90% floor space requirement is met.
Scientific Research and Experimental Development Tax Incentive Program
Under the Scientific Research and Experimental Development (SR&ED) tax incentive program, qualifying expenditures are fully deductible in the year they are incurred. Additionally, these expenditures are generally eligible for an investment tax credit.
The tax credit is provided at two rates:
- A fully refundable tax credit at an enhanced rate of 35% is available for Canadian-controlled private corporations (CCPCs) on up to CAD 3 million of qualified SR&ED expenditures annually.
- A non-refundable tax credit at the general rate of 15% is available for corporations other than CCPCs and for qualified SR&ED expenditures of CCPCs that do not qualify for the enhanced credit.
Critical Mineral Exploration Tax Credit
The Critical Mineral Exploration Tax Credit (CMETC) provides an additional income tax benefit for individuals who invest in eligible flow-through shares. The CMETC is equal to 30% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors. The following critical minerals are currently eligible for the CMETC: nickel, cobalt, graphite, copper, rare earth elements, vanadium, tellurium, gallium, scandium, titanium, magnesium, zinc, platinum group metals, uranium, and lithium (including lithium from brines).
Budget 2025 proposes to expand the eligibility of the CMETC to include the following additional critical minerals: bismuth, caesium, chromium, fluorspar, germanium, indium, manganese, molybdenum, niobium, tantalum, tin, and tungsten.
This measure would apply to expenditures renounced under eligible flow-through share agreements entered into after Budget Day and on or before March 31, 2027.
Clean Technology Manufacturing Investment Tax Credit
The Clean Technology Manufacturing investment tax credit is a refundable tax credit equal to 30% of the cost of investments in new machinery and equipment used to manufacture or process key clean technologies, or to extract, process, or recycle critical minerals essential for clean technology supply chains (i.e., lithium, cobalt, nickel, graphite, copper, and rare earth elements).
Budget 2025 proposes to expand the list of critical minerals eligible for the Clean Technology Manufacturing investment tax credit to include antimony, indium, gallium, germanium, and scandium.
Investment Tax Credit for Carbon Capture, Utilisation, and Storage
The Carbon Capture, Utilisation, and Storage (CCUS) investment tax credit is a refundable tax credit that provides support for eligible expenditures relating to CCUS.
The CCUS tax credit provides three different credit rates depending on the purpose of the equipment, with the following credit rates applying to eligible CCUS expenditures incurred from the start of 2022 to the end of 2030:
- 60% for eligible capture equipment used in a direct air capture project;
- 50% for all other eligible capture equipment; and
- 37.5% for eligible transportation, storage and use equipment.
Eligible expenditures that are incurred from the start of 2031 to the end of 2040 are subject to the lower credit rates set out below:
- 30% for eligible capture equipment used in a direct air capture project;
- 25% for all other eligible capture equipment; and
- 18.75% for eligible transportation, storage and use equipment.
Clean Electricity Investment Tax Credit
The Clean Electricity investment tax credit is a refundable credit equal to 15% of the capital cost of eligible investments in equipment related to low-emitting electricity generation, electricity storage, and the transmission of electricity between provinces and territories.
This tax credit would be available to taxable Canadian corporations, provincial and territorial Crown corporations, corporations owned by municipalities or Indigenous communities, pension investment corporations, and the Canada Infrastructure Bank. The capital cost of property that is eligible for the Clean Electricity investment tax credit may be reduced by government assistance that a taxpayer receives.
International Tax Measures
Transfer Pricing
For tax purposes, transfer pricing rules are used to allocate profit among the various entities of a multinational enterprise (MNE) group. The accepted international standard is the arm’s length principle set out in Article 9 (Associated Enterprises) of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and Capital and included in Canada’s bilateral tax treaties.
In addition, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “OECD Transfer Pricing Guidelines”) present internationally agreed principles and provide guidelines for the application of the arm’s length principle.
Recognising that MNE groups may establish conditions in their intra-group relations that differ from those that would be established between independent enterprises, and that such differences may result in distortions in the profits accrued by associated enterprises, the arm’s length principle requires that the profits accrued by associated enterprises be in accord with the profits that would have accrued had the conditions been those that would have been made between independent enterprises.
Domestic transfer pricing rules are required to ensure that the income recognised for Canadian tax purposes properly reflects the respective contributions of taxpayers and participating non-arm’s length persons in cross-border transactions. Budget 2021 announced the government’s intention to consult on updating Canada’s transfer pricing rules.
The Transfer Pricing Guidelines describe the different methods that can be used to determine whether the conditions of an in-scope transaction or series are consistent with the arm’s length principle. The new rules would provide that this determination should be made through an analysis where the most appropriate method is selected and applied in accordance with the Transfer Pricing Guidelines.
This measure would apply to taxation years that begin after Budget Day.
Sales and Excise Tax Measures
Underused Housing Tax
The Underused Housing Tax (UHT) took effect on January 1, 2022 and applies to certain owners of vacant or underused residential property in Canada, generally non-resident, non-Canadians. The UHT is imposed on an annual basis at a rate of 1% on the value of the property.
Budget 2025 proposes to eliminate the UHT as of the 2025 calendar year. As a result, no UHT would be payable and no UHT returns would be required to be filed in respect of the 2025 and subsequent calendar years.
All UHT requirements continue to apply in respect of the 2022 to 2024 calendar years. Penalties and/or interest for failing to file a UHT return as and when required, or for failing to pay UHT when it becomes due, will also continue to apply in respect of the 2022 to 2024 calendar years.
Luxury Tax on Aircraft and Vessels
The federal government imposes a tax on subject vehicles and subject aircraft with a value above CAD 100,000 and subject vessels (e.g., boats) with a value above CAD 250,000. The luxury tax is equal to the lesser of 10% of the total value of the subject item and 20% of the value above the relevant threshold. The tax is generally imposed on sales, importations, leases, and certain improvements of subject vehicles, subject aircraft, and subject vessels.
Budget 2025 proposes to amend the Select Luxury Items Tax Act (SLITA) to end the luxury tax on subject aircraft and subject vessels. All instances of the tax would cease to be payable after Budget Day, including the tax on sales, the tax on importations, and the tax on improvements.
Earlier, Canada’s government presented the Budget 2025 to the House of Commons on 4 November 2025. It emphasised a strategy to build major infrastructure, housing, and key industries to support economic growth and long-term prosperity.
