Tax Perspectives: Review Of 2025 And 2026 Outlook

Over the past years the Government of Canada ("Government") has furthered tax reform by announcing legislative proposals and draft legislation and enacting technical amendments to Canadian tax law addressing a wide range of tax measures. 2025 continued that trend.

Following the announcement of Prime Minister Justin Trudeau's resignation as Prime Minister and leader of the Liberal Party of Canada, Parliament was prorogued until March 24, 2025, which resulted in the termination of Parliamentary business. With the subsequent election of Prime Minister Mark Carney's minority Liberal government, Canadians anticipated the Government's legislative proposals aimed at fulfilling its election platform promise to "build Canada strong".

With minimal Parliamentary business for much of the year, the pace of legislative proposals was slower in 2025 than in prior years. However, we did see the introduction of significant legislative packages, implementing many of the tax measures proposed by the prior Liberal government and new measures which reflect the stated priorities of the current Government. As opposed to relying on broad corporate tax rate reductions to encourage growth in the private sector, the Government's fiscal measures are aimed at promoting growth and Canadian investment through targeted incentives, such as the accelerated deduction of certain capital expenses, which are meant to reduce marginal effective tax rates for capital intensive businesses. The Government is also prioritizing large, nation-building and infrastructure projects. The Government hopes that these efforts will mitigate Canada's economic reliance on the United States, while encouraging greater corporate investment in Canada.

Although the effect of the Government's 2025 fiscal measures remains to be seen, it has signaled a willingness to drive internal economic productivity and growth through investment in Canadian industry and its natural resources. Given economic uncertainties and trade tumult, it is unclear whether the Government's priorities will be advanced by such measures, or if more sweeping policy changes are required.

This publication provides an overview of the important Canadian legislative and judicial tax developments of 2025, and looks ahead to potential significant Canadian tax changes in 2026. The goal is not to be comprehensive, but rather to highlight the developments we consider to be most impactful to a broad audience of our clients. Our commentary is divided into the following sections:

• Income Tax Legislative Developments and Outlook
• Commodity Tax Developments and Outlook
• Tax Disputes and Litigation Developments and Outlook
• Charities and Non-Profits Developments and Outlook

Income Tax Legislative Developments and Outlook

The significant volume of new proposals, draft legislation and tabled legislation implementing previously announced proposals included the following.¹

• On January 31, 2025, Finance announced a deferral to the implementation of the proposed capital gains inclusion rate increases from June 25, 2024 to January 1, 2026. Then, on March 21, 2025, Prime Minister Carney announced that the Government would cancel the proposed capital gains inclusion rate change.
• On February 21, 2025, Finance released draft legislation to implement the electric vehicle supply chain investment tax credit ("EV ITC").
• On March 3, 2025, the Government announced the extension of the mineral exploration tax credit for an additional two years, until March 31, 2027.
• On August 15, 2025, Finance released draft legislation for a number of previously announced proposals ("August 15 Proposals") such as proposed amendments to the Global Minimum Tax Act ("GMTA"), proposed amendments to the Act and the Regulations relating to Budget 2024 and other proposals, including the implementation of a crypto-asset reporting framework and the common reporting standard, enhanced Canada Revenue Agency ("CRA") audit and information-gathering powers, elective exemptions from the excessive interest and financing expenses limitation ("EIFEL") rules for interest and financing expenses incurred for arm's length financing used to build, acquire, or convert a property into eligible purpose-built rental housing or carry on a Canadian regulated energy utility business, enhanced tax incentives for scientific research and experimental development ("SR&ED") and other technical amendments including clarifications to the bare trust reporting rules.
• On August 20, 2025, the CRA released an update to its guidance on the mandatory disclosures rules.
• On September 10, 2025, the CRA announced administrative changes to its voluntary disclosures program ("VDP"), which came into effect on October 1, 2025, to expand eligibility criteria and provide additional relief for income tax and GST/HST applicants.
• On November 4, 2025, the Government released the 2025 federal budget ("Budget 2025") which included a number of measures to allow for the immediate expensing for manufacturing and processing buildings, the modernizing of Canada's transfer pricing rules and amendments to and extensions of, the clean economy tax credits. The McCarthy Tétrault LLP overview of Budget 2025 provides a more detailed review.
• On November 17, 2025, the Minister of Finance and National Revenue ("Minister") tabled a Notice of Ways and Means Motion in the House of Commons to seek approval of the Government's fiscal policy as outlined in Budget 2025.
• On November 18, 2025, Bill C-15, the Budget 2025 Implementation Act, No. 1, was tabled and received first reading in the House of Commons in the First Session of the 45^th Parliament. Bill C-15 introduced a number of previously announced tax measures including, among other measures, the clean electricity investment tax credit ("CE ITC"), significant enhancements to the SR&ED program, discretion for the CRA to waive the withholding requirement for payments made to a non-resident service provider where certain conditions are satisfied, and an increase in the lifetime capital gains exemption to $1.25 million.
• On November 25, 2025, Finance released explanatory notes relating to the measures set out in the November 17, 2025 Notice of Ways and Means Motion.

REPEAL OF PROPOSED INCREASE TO CAPITAL GAINS INCLUSION RATE

Cancellation of Ancillary Measures

On March 21, 2025, Prime Minister Carney announced that the Government would abandon the proposed increase to the capital gains inclusion rate from one-half to two thirds for capital gains realized on or after June 25, 2024, as contemplated in the 2024 federal budget ("Budget 2024") proposals. These proposals were included in a Notice of Ways and Means Motion on September 23, 2024 (the "Capital Gains Proposals") but were never enacted. In light of the cancellation, Finance announced that several ancillary measures relevant to the Capital Gains Proposals would also be cancelled, including:

• the Canadian Entrepreneur Incentive, which would have permitted certain individuals to reduce by half the capital gains inclusion rate applicable to a disposition of certain shares or qualified farm or fishing property, up to a maximum of $2,000,000 of capital gains in 2029 and subsequent taxation years; and
• proposed amendments to the alternative minimum tax ("AMT") which would have removed a rule that proposed to limit the deduction of certain resource expenses in computing "adjusted taxable income" to specified resource income of a taxpayer. As part of the Capital Gains Proposals, the Government proposed to limit the add-back (for purposes of computing a taxpayer's adjusted taxable income) on the disposition of flow-through shares to the "true" capital gain realized on the disposition of such shares as opposed to three-tenths of the capital gain that would have been realized by a taxpayer.

For more details regarding these measures, please see:

• 2025 Canadian Federal Budget Commentary – Tax Initiatives

PRODUCTIVITY SUPER-DEDUCTION

As part of its commitment to encourage productivity and growth in Canada, Budget 2025 introduced a "productivity super-deduction" comprised of several previously announced measures, including the immediate expensing of SR&ED capital expenditures, and two new measures: (i) the immediate expensing of manufacturing or processing machinery and equipment, and (ii) the reintroduction of accelerated capital cost allowance("CCA") for liquified natural gas ("LNG") equipment and other non-residential buildings.

Budget 2025 asserted that the productivity super deductions will reduce Canada's marginal effective tax rate ("METR") for corporations to 13.2%, which would be the lowest METR in the G7, and below the average METR as measured by the Organisation for Economic Co-operation and Development ("OECD").

As a result, the Government anticipates that the productivity super-deduction will make Canada's overall METR lower than the United States' METR, which it hopes will increase Canadian competitiveness vis-à-vis the United States.

Immediate Expensing for Manufacturing and Processing Buildings

Budget 2025 proposed to temporarily increase the CCA rate for buildings used or acquired for use for eligible manufacturing or processing (including eligible additions and alterations) up to a maximum of a 100% deduction for the first taxation year that such property is used for manufacturing or processing. In general, eligibility for immediate expensing would require: (i) the property to be acquired on or after November 4, 2025, (ii) the property be first used for manufacturing or processing before 2030, and (iii) a minimum of 90% of the floor space of the property be used to manufacture or process goods for sale or lease.

Property which has been used prior to its acquisition by the taxpayer will be eligible for the enhanced accelerated rates for the first taxation year if the following conditions are satisfied: (i) the taxpayer nor any person with whom the taxpayer does not deal at arm's length previously owned the property; and, (ii) the property was not transferred to the taxpayer on a tax-deferred basis.

Where eligible property was acquired on or after November 4, 2025, and is first used for manufacturing or processing in 2030 or later, the enhanced first-year CCA rates are gradually reduced as follows:

• eligible property that is first used for manufacturing for processing in 2030 or 2031 will be eligible for an accelerated 75% first-year deduction; and
• eligible property that is first used for manufacturing for processing in 2032 or 2033 will be eligible for an accelerated 50% first-year deduction. The enhanced first-year CCA rates will be entirely phased out for property first used in manufacturing or processing after 2033.

Accelerated CCA Rates for LNG Equipment and Related Buildings

Budget 2025 also proposed to reinstate accelerated CCA rates for LNG equipment and facilities, which expired in 2024. A prior temporary measure had increased the CCA rate for LNG equipment from 8% to 30%, and the CCA rate on certain LNG buildings from 6% to 10%.

In contrast, Budget 2025 introduced new CCA measures which provide for an accelerated CCA rate for LNG equipment and buildings acquired on or after November 4, 2025, and before 2035. In order to qualify for accelerated rates of CCA, the relevant LNG equipment or facility must satisfy certain emissions performance standards:

• LNG facilities that are in the top 25% of emissions performance are eligible for an accelerated CCA rate of 30% for certain LNG equipment and 10% for related buildings; and
• LNG facilities that are in the top 10% of emissions performance are eligible for an accelerated CCA rate of 50% for certain LNG equipment and 10% for related buildings.

LNG facilities that do not satisfy the top 25% threshold for emissions performance are not eligible for the enhanced CCA rate.

For more details on the productivity super-deduction, please see:

• 2025 Canadian Federal Budget Commentary – Tax Initiatives

PILLAR TWO – GMTA

In October 2021, the members of the OECD and the Inclusive Framework confirmed their intention to move forward with a Two-Pillar solution to address the digitalization of the economy. Pillar One proposes to reallocate a portion of the profits of large multinational enterprises ("MNEs") to market jurisdictions, while Pillar Two imposes a 15% global minimum tax on MNEs with consolidated financial accounting income of €750 million or more.

UTPR

On August 12, 2024, Finance released draft legislative proposals ("GMTA Proposals"), which among other things, contained amendments to implement the undertaxed profits rule ("UTPR") into the Global Minimum Tax Act ("GMTA").

Very generally, the UTPR is a backstop to the income inclusion rule ("IIR") and ensures that MNE groups are subject to top-up tax on the profits of low-tax constituent entities that do not have a relevant parent entity in a participating jurisdiction. The UTPR allows other adopting jurisdictions (e.g., Canada) in which the MNE group is located to impose a top-up tax on under-taxed income in foreign jurisdictions.

The Government did not introduce legislation to implement the UTPR in 2025. However, it did confirm its intention to implement the GMTA Proposals in connection with the GMTA (including the UTPR) in Budget 2025. Further, Budget 2025 also affirmed the Government's intention to enact certain measures, including administrative guidance released by the OECD since the enactment of the GMTA.

On June 28, 2025, the G7 announced that it had reached an agreement to introduce a "side-by-side" system ("G7 Statement") whereby the Pillar Two rules and the United States' global intangible low-taxed income ("GILTI") minimum tax would continue to co-exist. In particular, the G7 Statement provides that U.S.-parented groups, including their foreign subsidiaries, would be exempt from the IIR and the UTPR. In exchange for this concession, the United States agreed to remove proposed Internal Revenue Code Section 899 from the One Big Beautiful Bill Act. Of note, the GILTI and Pillar Two rules have material differences, which may have an impact on Canada's implementation of the UTPR.

As of the date hereof, there have been no further details announced regarding the implementation of the side-by-side approach².

For more details regarding these measures and the UTPR, please see:

• 2025 Canadian Federal Budget Commentary – Tax Initiatives
• A Big Beautiful Blog: Base Erosion, Canada, and Big American Bill

CRYPTO-ASSET REPORTING FRAMEWORK AND COMMON REPORTING STANDARD

As part of the August 15 Proposals, Finance released draft legislative proposals to create new Part XXI of the Act, implementing the OECD's crypto asset reporting framework ("CARF") and related amendments to the common reporting standard.

The proposed amendments to the CARF would, among other things:

• expand the reach of the common reporting standard to cover central bank digital currencies (i.e., digital fiat currency issued by a central bank) and "specified electronic money products" (e.g., a digital representation of a fiat currency), which are currently not reportable under the CARF;
• exempt custodians from reporting the gross proceeds from the sale of a financial asset (including a "relevant crypto asset") under the common reporting standard, provided that such amounts are reported under new Part XXI of the Act; and
• impose additional reporting requirements in respect of f inancial accounts and accountholders. Budget 2025 confirmed the Government's intention to implement the CARF and common reporting standard amendments with the application deferred until January 1, 2027.

For more details regarding the CARF, please see:

• Federal Government releases proposals relating to information reporting of crypto-assets and certain clean technology and resource tax credits

Footnotes

1. All statutory references herein are to the Income Tax Act (Canada) (“Act”) unless specifically otherwise noted.

2. Prior to publication, the OECD released administrative guidance on the side-by-side approach and other Pillar Two issues on January 5, 2026, and Finance released draft legislation to modify the UTPR on January 29, 2026.

To read this article in full, please click here.

To view the original article click here

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.