Canada Federal Legislative Amendments 2025

September 23, 2025

Overview

On August 15, 2025, the Department of Finance released a series of draft legislative proposals for public consultation. Canadians had until September 12, 2025, to make any submissions to the federal government.

These proposals include tax measures which had either previously been announced through the 2024 Federal Budget, the 2024 Fall Economic Statement (“FES”), or through earlier draft legislation (i.e., August 2024 proposals, etc.). The proposed legislation implements a broad set of measures that cover areas including CRA compliance powers, the Global Minimum Tax and other international tax alignment, tax credits, the crypto-asset reporting framework and other technical amendments, some of which are presented below.

Corporate Income Tax Measures

Scientific Research & Experimental Development (SR&ED) Program

As initially proposed under the 2024 FES, for taxation years beginning on or after December 16, 2024, the maximum qualifying expenditure limit on which Canadian-Controlled Private Corporations (“CCPCs”) could claim a 35% refundable SR&ED investment tax credit (ITC) was increased from $3 million to $4.5 million.

Additionally, the prior-year taxable capital phase-out threshold levels, as they pertain to CCPCs’ SR&ED maximum qualifying annual expenditure limit determination, were also increased from a range of $10 million to $50 million, to a range of $15 million to $75 million. Moreover, CCPCs’ will now have the option to determine their annual qualifying expenditure limit based on their associated group’s gross revenue. Parallel changes are also introduced to align the phase-out thresholds for the determination of CCPCs’ qualifying income limit, which may affect the refundability of their ITC claims.

Regarding certain eligible public corporations (i.e., small Canadian public corporations), the 2024 FES proposed extending the 35% refundable SR&ED ITC up to a maximum qualifying expenditure limit of $4.5 million. Contrary to CCPCs, public corporations would base their expenditure limit on the average annual revenue of the three previous fiscal years on a consolidated basis, using $15 million and $75 million as the upper and lower thresholds, respectively. An important distinction to make is that the refundable ITC for eligible public corporations will be strictly limited to current expenditures. Any capital expenditure, as well as any current expenditure exceeding the $4.5 million limit, will continue to qualify for the standard 15% non-refundable ITC.

Finally, in line with this, it was proposed to reinstate the eligibility of capital expenditures for SR&ED tax incentive purposes, which were removed in 2014. For acquired property and lease costs incurred on or after December 16, 2024, these capital expenditures would qualify for the SR&ED deduction as well as the ITC (with the applicable rate depending on the taxpayer’s status). A partial refundability of 40% will also apply for CCPCs claiming the enhanced 35% ITC.

As previously noted in the 2024 FES, these proposed changes mark the initial phase of broader reforms to the SR&ED tax incentive program aimed at further promoting and enhancing innovation. The government has indicated that additional details, including potential updates to the definition of qualified expenditures, would be provided as part of Federal Budget 2025.

EIFEL Rules & Exemptions

As initially announced in Budget 2024 and further detailed in draft legislation released on August 12, 2024, the federal government seeks to expand the exemption regarding the Excessive Interest and Financing Expenses Limitation (EIFEL) rules for certain Public-Private Partnership (“PPP”) infrastructure and utility projects. Specifically, this targets the following two situations:

Interest and financing expenses incurred before 2036 from arm’s-length borrowings used to construct, acquire, or convert a property into purpose-built residential rental (PBRR) housing in Canada.
Interest and financing expenses incurred from financing used to earn income from a Canadian-regulated energy utility business (CREUB).

Also, certain technical refinements have been introduced, as part of the August 15, 2025, proposals, to address stakeholders’ feedback:

It was clarified that the exemption conditions apply to the taxpayer or a partnership (of which the taxpayer is a member) that enters the financing arrangement giving rise to the exempt interest or financing expenses.
Under the CREUB exemption, any property acquired using borrowed funds that generate excluded interest is now excluded from the “all or substantially all” asset-use condition.
Under the PBRR exemption, borrowed amounts will need to be used directly by the taxpayer to acquire, construct, or convert the property into a PBRR.
To apply for either the CREUB or PBRR exemption, elections must now be made by the taxpayer directly (and not by a partnership in which the taxpayer is a member).
A new rule was introduced under both exemptions to confirm that a taxpayer is not considered to be carrying on a business or activity of a partnership merely due to its partnership interest.
A deeming rule was enacted for consolidated groups, whereby net income reported in consolidated financial statements from a CREUB (carried on by the taxpayer or a related partnership) is excluded from the group’s adjusted net book income for EIFEL purposes.

These measures are set to apply retroactively to taxation years beginning on or after October 1, 2023, which is essentially the effective date of entry into force of the EIFEL regime. It is also worth mentioning that the filing deadline to elect into either of the two new exemptions will be extended to 90 days following royal assent of the enacting legislation.

CCPCs and Substantive CCPCs – Deferral Planning Through Foreign Affiliates

The government is moving forward with measures that were previously announced in Budget 2022 and later drafted on August 9, 2022, aimed at curtailing the tax-deferral advantage available to CCPCs and substantive CCPCs earning passive investment income through controlled foreign affiliates. Subject to certain revisions based on stakeholder feedback, they are set to apply to taxation years beginning after April 6, 2022.

Such proposals reduce the relevant tax factor (“RTF”) used in determining the foreign accrual property income (“FAPI”) deduction for foreign taxes paid from 4 to 1.9, identical to the factor used for individuals. Consequently, full deductibility would now require a foreign tax rate of 52.63%, up from the previous 25% threshold.

The most recent August 15, 2025, legislative proposals contain amendments to the definition and concept of the foreign accrual business income (“FABI”) carveout, which was introduced as part of the August 2024 proposals to allow CCPCs and substantive CCPCs to exempt, from the application of the lower RTF, certain types of income. Such proposed amendments significantly expand the scope of the FABI carveout concept to better align with income that would not be considered aggregate investment income if earned directly in Canada by a CCPC or substantive CCPC, while preserving anti-avoidance protections.

Non-compliance with information requests

Draft legislation released on August 15, 2025, proposes to subject certain taxpayers who did not comply with a court order issued and compelling them to answer or provide the CRA with certain information to a potential penalty of up to 10% of the underlying tax payable. It is important to note that such proposed penalty would only be applicable for taxation years to which the non-complied information relates, where the related taxes payable are not less than $50,000. The penalty is not intended for third-party information requests (e.g., to banks or advisors). As with the Notice of Non-Compliance (“NoNC”) regime, a privilege carve-out applies where the taxpayer’s refusal is based on a reasonable claim of solicitor–client privilege.

These adjustments respond to stakeholder feedback and aim to preserve deterrence while avoiding punitive outcomes in cases of good-faith difficulty.

The package also clarifies and strengthens related information-gathering powers. The CRA may require information under oath or affirmation during an audit and seek judicial authorization more efficiently for “unnamed persons” requirements. In response to concerns raised in consultation, the 2025 draft removes the earlier proposal that would have required compliance “without cost to His Majesty.”

From a policy perspective, these measures align Canada with a broader international trend toward more assertive tax enforcement. They do not eliminate taxpayers’ rights, but they do increase the cost of non-cooperation. Organizations that maintain strong records, clear governance over audit responses, and early legal oversight on contentious items will be best positioned to navigate audits efficiently once the legislation is enacted.

Qualified Crypto-Asset Reporting Framework and the Common Reporting Standard

For calendar years beginning in 2026, draft legislation proposes to introduce the OECD’s Crypto-Asset Reporting Framework (CARF) into Canadian law. This measure represents a significant step in extending international tax transparency standards to digital assets and is implemented through a new Part XXI of the Income Tax Act. Crypto-asset service providers (CASPs) – including exchanges, brokers, dealers, and certain custodial wallet providers – will be required to collect user information and report annual transaction data to the Canada Revenue Agency (CRA). Although CARF was first announced in Budget 2024, it was not included in the August 2024 draft legislation. The August 2025 release reflects the government’s decision to adopt the OECD framework in full, bringing Canada into alignment with global standards.

To prevent duplication, the draft legislation also amends the Common Reporting Standard (CRS) rules under Part XIX of the Act. A new category of “relevant crypto-asset” has been introduced, ensuring crypto-assets and digital money products are integrated into the existing financial account reporting framework. Entities that primarily trade or hold crypto-assets on behalf of others, such as exchanges, custodial wallet providers, and investment funds will be treated as reporting financial institutions under CRS and subject to the same due diligence and reporting obligations as traditional institutions. In addition, holdings of electronic money products and central bank digital currencies will be treated as depository accounts under CRS, subject to limited exceptions. Importantly, transactions reportable under CARF will generally be excluded from CRS reporting, avoiding double reporting. These CRS amendments are also scheduled to apply beginning with the 2026 reporting year.

Although these measures introduce new compliance costs, they also provide clarity by aligning crypto-assets with established international tax reporting standards. For tax professionals, the emphasis will be on advising CASPs as they implement new systems, and on assisting clients in reconciling their crypto reporting with their tax filings. With the first reports due in 2027 for the 2026 calendar year, both service providers and investors have limited time to prepare for this new regime.

Amendments to the Global Minimum Tax Act

On August 13, 2025, Finance issued draft legislative proposals to amend the Global Minimum Tax Act (“GMTA”) to provide their views of the June 2024 and January 2025 OECD Administrative Guidance, as well as a new deconsolidation regime for certain private investment entities.

The GMTA, enacted on June 20, 2024, implements the income inclusion rule (“IIR”) and the qualified domestic minimum top-up tax (“QDMTT”) of the OECD/G20 Pillar Two framework, generally consistent with the OECD’s GloBE model rules.

The August 2025 proposal includes the following major amendments to the GMTA:

Private group de-consolidation: A de-consolidation rule is introduced to be applied to a “private investment entity.” This rule can generally be considered applicable to a Canadian private entity that has a controlling interest in a Canadian public company and that prepares its financial statements under Canadian Accounting Standards for Private Enterprise (“ASPE”) with an election not to consolidate with the group (an election permitted under ASPE).

The starting point for determining the scope of entities covered under the GMTA is the consolidated financial statements of the ultimate parent entity (“UPE”). In situations where groups do not prepare consolidated financial statements under an acceptable accounting standard, the GMTA’s “deemed consolidation test” requires looking at whether entities would be consolidated if the UPE were to prepare consolidated financial statements under an acceptable framework. Under the existing rules, the private investment entity would generally be the UPE of an MNE group for GMTA purposes, even though it does not prepare actual consolidated financial statements.

Under the proposed amendments, the group is effectively split into smaller deemed MNE groups. The private investment entity, together with any privately held subsidiaries, is deemed to be a second MNE group, separate from the public group comprised of the public company and its subsidiaries. Each group is still deemed to be a qualifying MNE group, even if it does not meet the EUR 750 million annual revenue threshold, and thus is required to prepare separate top-up tax calculations.

An anti-avoidance rule is included in the proposal to prevent the de-consolidation rule from applying, if any transaction is undertaken with the main purpose of making the rule applicable.

Alignment with OECD guidance: Other amendments largely implement OECD’s recent Commentary and Administrative Guidance, including:

The definitions of “recapture exception accrual,” “substitute loss carry-forward recapture amount,” “substitute loss carry-forward tax credit,” and “unclaimed accrual.”
Location rule to determine an entity’s jurisdiction for GMTA purposes.
Currency conversion rule.
Push-down of deferred tax expense to a controlled foreign company (“CFC”) under a blended CFC tax regime and introduction of the “specified jurisdictional effective tax rate”.
Allocation of covered taxes for hybrids and flow-through entities.
Optional five-year election to exclude deferred tax expense from the push-down allocation.
Adjustments for impairments and reversals, mandated for both the adjusted GloBE carrying value and GloBE income/loss calculations. Implementation of the “Switch-off Rule” for applying QDMTT safe harbour.
Grace period rules for certain pre-GloBE arrangement deferred tax assets (DTAs) (permits capped, time-limited recognition of their reversals and an anti-acceleration rule for policy changes after November 18, 2024).

All of the amendments are effective for fiscal years that begin on or after December 31, 2023.

Personal and Trust Income Tax Measures

Capital Gains Rollover

The draft legislation proposed on August 15, 2025, includes enhancements to the capital gains rollover rules for eligible small business corporation (ESBC) share dispositions, as announced in the 2024 Fall Economic Statement. Under prior rules, when an individual disposed of ESBC shares and reinvested the proceeds in replacement ESBC shares, they had to acquire the replacements within the year of disposition or within 120 days following the end of that year. The proposed amendment allows until the end of the calendar year following the year of disposition to acquire replacement shares. Additionally, the definition of qualifying ESBC shares is broadened to include both common and preferred shares, and the asset carrying value ceiling threshold for ESBCs (including related corporations) is raised from $50 million to $100 million.

Workers Cooperatives & Employee Ownership Trusts (“WC&EOT”)

Another significant proposal included in the August 15, 2025, draft legislation package is the new capital gains exemption — up to $10 million — to encourage business owners to transfer their companies to employee-owned worker cooperatives. First announced in Budget 2024 as part of the broader push toward employee ownership, the measure complements (rather than replaces) the Employee Ownership Trust (EOT) regime introduced in 2023. In general terms, an individual who sells shares of a qualifying business to a worker cooperative corporation (WCC) may elect to exclude up to $10 million of capital gains from tax for qualifying dispositions occurring between January 1, 2024, and December 31, 2026. Where multiple owners sell shares of the same business, the $10 million cap is shared among them; the aggregate exempt gain for a single business transfer cannot exceed $10 million. To facilitate vendor-financed transactions, the draft extends the capital gains reserve to ten years (from five), allowing tax recognition to align with payment schedules, and provides a 15-year exception to the shareholder loan and deemed interest benefit rules, paralleling relief available for EOT transactions.

Reporting requirements by Non-profit Organizations (“NPO”)

As announced in the 2024 Fall Economic Statement, draft legislation introduces new reporting obligations for non-profit organizations (NPOs), including agricultural organizations, boards of trade, chambers of commerce, etc. NPOs with total gross receipts — including capital amounts — exceeding $50,000 in a fiscal period will be required to file an annual information return. Those that do not meet this or any other filing threshold will instead be required to submit a new short-form return. This simplified filing will need to disclose key information such as the names and addresses of directors, officers, or trustees; total assets and liabilities; annual receipts; and a summary of activities, etc. This return is due within six months following the end of fiscal periods beginning after December 31, 2025.

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