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On Aug 15, 2025, the Canadian Government, through its Ministry of Finance and National Revenue, released for public consultation draft proposals for legislation in order to implement some previously announced tax measures and changes. These tax changes are numerous; however, this article will discuss some notable ones.
The notable changes include:
1. Expanding the definition of an eligible small business corporation share and easing certain requirements for the capital gains rollover on business investments:
The proposals relax the capital gains rollover rule under section 44.1 of the Income Tax Act. This rollover mechanism in s. 44.1 only works when: A person disposes of eligible small business corporation shares and acquires replacement shares that also meet that definition. Under the current definition of "eligible small business corporation share" in s. 44.1: It must be a common share issued by a corporation; at the time of issuance, the corporation must be an eligible small business corporation; and immediately before and after the share is issued, the "total carrying value of the assets" of the corporation and its related corporations must not exceed $50,000,000.
However, with the proposed amendments, the total carrying value of the assets of the corporation and corporations related to it is increased from $50 million to $100 million for a share to qualify as an "eligible small business corporation share". This means that medium-sized, growing companies are now included, encouraging more investment in them.
The requirement that the share must be a "common share" is also removed from the definitions of both "eligible small business corporation share" and "qualifying disposition". This allows shares that are not common shares (such as certain preferred shares) to qualify for the rollover.
The foregoing will make it simpler and more attractive for people to take money out of one successful, active small business and into another, without having their investment capital reduced by taxes upfront.
2. Introducing a new $10 million capital gains exemption for qualifying business sales to worker cooperatives, and making technical adjustments to the current exemption for sales to employee ownership trusts:
The proposed measure introduces a capital gains exemption of up to $10 million for the disposition of an eligible business to a worker cooperative. This substantially increases the appeal of selling a business to a worker co-op.
Additional technical amendments are also proposed for Employee Ownership Trusts (EOTs), providing further clarity on the conditions required to qualify for existing tax exemptions on dispositions to EOTs.
3. Raising the annual expenditure limit and taxable capital phase-out thresholds for the enhanced 35% scientific research and experimental development (SR&ED) investment tax credit, extending the refundable credit to small publicly traded companies, and restoring eligibility for capital expenditures:
The annual expenditure limit for the enhanced 35% SR&ED investment tax credit available to CCPCs and their associated corporations is being increased from $3 million to $4.5 million. This expands the amount of eligible spending on which such companies can claim the enhanced credit. In addition, the initial taxable capital phase-out threshold will rise from $10 million to $50 million, while the upper threshold—at which the limit is eliminated—will increase from $15 million to $75 million. The enhanced 35% refundable credit will also become available to small public corporations that meet these new taxable capital thresholds. CCPCs will also have the option to choose a gross revenue calculation over a taxable capital calculation to determine their eligibility for refundable ITCs. This adjustment will benefit new businesses that have accumulated capital assets but have not yet started generating significant revenues.
The amendments also restore the eligibility of capital expenditures for the purpose of calculating a taxpayer's qualified SR&ED expenditures. This applies to property acquired on or after December 16, 2024 and effectively reintroduces credit-for-equipment arrangements—allowing companies to claim SR&ED credits on capital assets used in research and development. This measure supports businesses in acquiring and developing the tools necessary for innovation.
4. Strengthening reporting obligations for non-profit organizations (NPOs) to increase sector transparency:
Proposed amendments to subsection 149(12) of the Income Tax Act expand the reporting obligations for NPOs that are tax-exempt and currently required to file information returns when their dividends, interest, rentals, or royalties exceed $10,000 in a fiscal period; their total assets exceed $200,000 at the end of the preceding fiscal period; or they were required to file an information return under this subsection for a prior fiscal period. Under the amendments, these NPOs must also file an additional annual information return if their receipts—including capital receipts—exceed $50,000 for the fiscal period. The return must be submitted no later than six months after the end of the taxation year. These changes apply to fiscal periods beginning on or after January 1, 2026.
5. Implementing the Organization for Economic Co-operation and Development's Crypto-Asset Reporting Framework in Canada, along with related updates to the Common Reporting Standard:
Proposed amendments are introduced to implement the OECD's Crypto-Asset Reporting Framework (CARF) in Canada, which is a new international standard for the automatic exchange of information on transactions in crypto-assets. This ensures that exchanges and brokers dealing with crypto-assets report transaction information to tax authorities, with penalties for non-compliance. The new rules ensure that crypto assets are tracked in the same way as traditional investments (stocks, bonds) are already tracked through the Common Reporting Standard (CRS). Amendments are proposed to the CRS to ensure it does not overlap with or apply to transactions and arrangements covered by CARF, thereby ensuring consistency between the two frameworks for collecting crypto tax in Canada.
6. Expanding the Canada Revenue Agency's tax audit tools to improve access to information, including a new penalty for non-compliance:
The CRA can enforce lawful requests for information or documents from a taxpayer via a court order. Where the court order relates to a request to a taxpayer himself, rather than a third party, the taxpayer will be liable for penalties. However, the penalty will not be imposed where the taxpayer refused such requests upon a reasonable belief that it was protected under solicitor-client privilege, or if the taxes are less than $50,000.
7. Providing an exemption from the excessive interest and financing expenses limitation (EIFEL) rules for loans used to acquire, build, or convert purpose-built residential rental housing:
The CRA can also issue a notice of non-compliance with additional penalties where the taxpayer remains in default of the court order.
The EIFEL rules limit the amount of interest a business can deduct. This is a surplus stripping measure to prevent taxpayers from over-deducting interest expenses in order to strip taxable income out of the Canadian tax base.
An exception currently applies in the case of an arm-length loan arrangement of a taxpayer or partnership. This exception is now proposed to be extended, on an elective basis, to certain arm's length interests and financing expenses incurred to build or acquire purpose-built residential rental housing.
To qualify, the debt must fund the acquisition, construction, or conversion of a building that contains at least four residential apartment units or at least ten private rooms or suites, with at least 90% of such rental properties offered for or rented for a continuous period of at least 28 days (essentially excluding short-term rentals). These changes will apply to taxation years that begin on or after October 1, 2023.
8. Providing an EIFEL exemption for debt used to finance regulated Canadian energy utility operations:
A further elective exception from the EIFEL rules is proposed for arm's length interest and financing expenses incurred by a taxpayer or partnership carrying on a regulated energy utility business in Canada, i.e., businesses that produce or supply electricity or natural gas, and prices of their products or services are approved by a government agency. This is implemented by amending the definition of "excluded entity" in subsection 18.2(1) of the Income Tax Act. This will ensure that the EIFEL rules do not unintentionally raise financing costs and, in turn, the cost of services for consumers.
9. Implementing the outstanding portion of the measure regarding substantive Canadian-controlled private corporations and passive income earned through foreign affiliates, initially proposed in Budget 2022:
The amendments tighten Canada's rules to remove tax-deferral advantages for CCPCs and substantive CCPCs that earn investment income through controlled foreign affiliates. Effective generally for taxation years beginning on or after April 7, 2022, the relevant tax factor (RTF) is reduced from 4 to 1.9, meaning foreign tax must now be at least 52.63% (instead of 25%) to fully offset Foreign Accrual Property Income (FAPI). The rules also revise how repatriated FAPI is integrated by adjusting GRIP and CDA calculations, largely excluding certain inter-corporate dividend deductions from GRIP and instead addressing them through CDA. Additional exclusions apply for de facto capital-return deductions beginning after August 9, 2022.
New elective carve-outs (available for years beginning after 2025 unless elected earlier) allow CCPCs to treat portions of dividends or FAPI as "Foreign Accrual Business Income (FABI) surplus" items calculated using the higher RTF of 4, with corresponding GRIP, CDA and surplus-balance adjustments, and a broadened definition of FABI to better align with income that would not be aggregate investment income if earned directly in Canada.
10. Introducing routine technical amendments to ensure the tax system continues to reflect its intended policy goals:
The documents contain detailed amendments and notes on a wide range of topics in the Income Tax Act, the Excise Tax Act, and the Global Minimum Tax Act. Specific examples include adjustments to definitions, cost base rules, and cross-references within the tax statutes, all of which serve to ensure the underlying policy objectives of the various tax regimes (like EIFEL, EOT, and SR&ED) are met.
Tax laws are vast and complex. These "routine technical amendments" are essentially housekeeping: fixing drafting errors, clarifying vague definitions, and updating cross-references to ensure different sections of the law work together as they were intended.
11. Restricting input tax credits (ITC) for redeemed coupons so that they apply only to payments made solely for commercial purposes:
The amendment to subsection 181(5) of the Excise Tax Act limits the availability of the ITC on a payment for coupon redemption to where the payment is made "exclusively in the course of commercial activities" of the person making the payment. New subsection 181(6) is added to provide a rule to determine when a payment is made by a person "exclusively in the course of commercial activities" for the purpose of the redemption rule.
PRO TAX TIPS: Adapting to Canada's Tax Changes: Expert Guidance When It Matters Most
Navigating this new barrage of changes will undoubtedly create fresh realities and opportunities for tax planning. Now more than ever, consultation with Canadian tax lawyer experts is essential. Our top Canadian tax lawyers are ready to help you review or develop tax plans that align with these amendments, ensuring you stay compliant and avoid unintended consequences.
Frequently Asked Questions (FAQs)Bottom of Form
What changes are proposed for the SR&ED investment tax credit?
The annual expenditure limit for the enhanced 35% SR&ED credit is raised from $3 million to $4.5 million, and the taxable capital phase-out thresholds increase from $10–15 million to $50–75 million. Refundable credits will now apply to small public corporations meeting the new thresholds, and capital expenditures are restored as eligible for the credit.
What is Canada's approach to crypto-asset reporting under the draft legislation?
The legislation implements the OECD's Crypto-Asset Reporting Framework (CARF), requiring exchanges and brokers to report transactions to tax authorities. Adjustments to the Common Reporting Standard (CRS) ensure no overlap with CARF rules.
What new powers does the CRA gain under the draft legislation?
The CRA can enforce court-ordered requests for taxpayer information with imposed penalties for non-compliance, and also issue notices of non-compliance with additional penalties. Exceptions exist for solicitor-client privilege or if taxes are under $50,000.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
