Business income tax measures in Canada’s 2025 Federal Budget

The 2025 Federal Budget (Budget 2025) introduced a number of business income tax measures aimed at stimulating investment and accelerating the transition to a clean economy. Key initiatives include temporary immediate expensing for manufacturing and processing buildings, reinstated and enhanced accelerated capital cost allowance rates for LNG facilities, significant expansions to the Scientific Research and Experimental Development program, and targeted incentives for clean technology, critical minerals, and carbon capture projects. Budget 2025 also addresses a technical tax concern by tightening rules on refundable tax deferrals within Canadian corporate groups.

Immediate expensing for manufacturing and processing buildings

The capital cost allowance (CCA) system enables businesses to deduct the cost of depreciable property over time, with rates designed to reflect the useful life of assets. Under current rules, manufacturing or processing buildings in Canada qualify for a combined CCA rate of 10%, 4% under Class 1, plus an additional 6% provided that at least 90% of the building’s floor space is dedicated to manufacturing or processing goods for sale or lease.

Budget 2025 introduces a temporary measure allowing immediate expensing for eligible manufacturing or processing buildings and qualifying improvements. This means taxpayers can claim a full 100% deduction in the first year the property is used for manufacturing or processing, provided the 90% usage requirement is met. Eligible additions or alterations to such buildings acquired on or after November 4, 2025 (“Budget Day”) and used before 2030 will also qualify for this accelerated deduction.

To be eligible, the property must be acquired on or after Budget Day, become available for use before 2030, and meet the 90% floor space requirement. Used property may qualify if it was not previously owned by the taxpayer or a non-arm’s-length person and was not transferred on a tax-deferred rollover basis. Recapture rules may apply if the building’s use changes after the deduction is claimed.

The measure applies to property first used before 2030. For later years, the enhanced deduction phases out: 75% for property first used in 2030 or 2031, 55% for property first used in 2032 or 2033, and no enhanced rate after 2033. After this period, the regular CCA rules will resume.

Accelerated CCA rates for LNG equipment and related buildings

The accelerated CCA for liquefied natural gas (LNG) equipment and related buildings expired at the end of 2024. Budget 2025 proposes to reinstate accelerated CCA for property acquired on or after Budget Day and before 2035, provided it is used in low-carbon LNG facilities. Eligibility will depend on meeting new emissions performance standards. Facilities in the top 25% for emissions performance will qualify for the same accelerated rates previously available, 30% for LNG equipment and 10% for non-residential buildings. Facilities in the top 10% will qualify for an enhanced rate of 50% for LNG equipment and 10% for related buildings. Facilities outside the top 25% will not be eligible. Details on the emissions performance requirements will be released at a later date.

Scientific Research and Experimental Development (SR&ED) tax credit

The SR&ED tax incentive program allows businesses to deduct qualifying expenditures in the year they are incurred and generally claim an investment tax credit. Under current rules, Canadian-controlled private corporations (CCPCs) can claim a fully refundable investment tax credit at an enhanced rate of 35% on up to $3 million of qualifying SR&ED expenditures annually. This expenditure limit is phased out for CCPCs with taxable capital employed in Canada between $10 million and $50 million in the previous year and is shared among associated corporations.

The 2024 Fall Economic Statement proposed increasing the expenditure limit to $4.5 million and raising the taxable capital phase-out thresholds to $15 million and $75 million. Budget 2025 confirms these changes and further increases the expenditure limit for the enhanced 35% refundable credit to $6 million. These measures apply to taxation years beginning on or after December 16, 2024. Budget 2025 also extends eligibility for the 35% refundable credit to certain Canadian public corporations and restores eligibility for specific capital expenditures under the SR&ED program.

In addition to legislative changes, Budget 2025 announces significant administrative reforms to improve program efficiency. The Canada Revenue Agency (CRA) will introduce an elective pre-claim approval process to provide upfront technical approval of eligible projects, cutting review times for these claims to 90 days from 180 days. The CRA will also increase the use of artificial intelligence to streamline low-risk claims, eliminate unnecessary steps, and reduce burdensome information requirements. These administrative changes are expected to take effect April 1, 2026, alongside targeted consultations to further modernize the program, including a review of Form T661.

Clean economy and climate competitiveness strategy

Budget 2025 reinforces Canada’s commitment to building a clean economy by introducing a climate competitiveness strategy aimed at creating an investment environment that positions Canadian businesses to compete globally. A key component of this strategy is the continued use of targeted tax incentives to accelerate the adoption of clean energy and technology.

Carbon Capture, Utilization, and Storage Investment Tax Credit (CCUS ITC)

The CCUS ITC provides a refundable credit of up to 60% for eligible costs incurred to acquire or install equipment used in qualifying carbon capture projects where captured carbon dioxide is put to an approved use. The credit rate varies based on the type of equipment and the timing of the expenditure.

For expenditures incurred from January 1, 2022, to December 31, 2030, full rates apply:

• 60% for equipment used in direct air capture projects;
• 50% for equipment used in other carbon capture projects; and
• 37.5% for transportation, storage, and utilization equipment.

Initially, these rates were scheduled to drop by half starting in 2031. However, Budget 2025 extends the full rates until December 31, 2035, after which reduced rates will apply for expenditures incurred between 2036 and 2040.

Additionally, Budget 2025 postpones the Government’s planned review of the CCUS ITC. Instead of conducting the review before 2030 as announced in the 2022 Federal Budget, the review will now occur before 2035.

Clean Technology Manufacturing Investment Tax Credit (CTM ITC)

The CTM ITC provides a refundable credit of 30% on eligible capital costs for property used in clean technology manufacturing. The credit applies to property acquired and available for use after December 31, 2023, and before January 1, 2035, provided the property is used in a qualifying manufacturing activity.

A qualifying use includes activities that produce all or substantially all qualifying materials, which currently include lithium, cobalt, nickel, copper, rare earth elements, and graphite. The credit begins to phase out gradually, starting in 2032.

To encourage investment in the extraction, processing, and recycling of critical mineral co-products and by-products, Budget 2025 proposes to expand the list of critical minerals eligible for this investment tax credit to include antimony, indium, gallium, germanium, and scandium.

This expanded definition applies to clean technology manufacturing property acquired and available for use on or after Budget Day.

Clean Electricity Investment Tax Credit (CE ITC)

The CE ITC is a refundable tax credit equal to 15% of the capital cost of eligible property used for low-emission electricity generation, electricity storage, and interprovincial or territorial transmission infrastructure. The credit applies to property acquired and available for use on or after April 16, 2024, for projects that began construction on or after March 28, 2023. Under existing rules, the capital cost of eligible property is reduced by any government or non-government assistance received.

Budget 2025 introduces two significant changes.

• First, the Canada Growth Fund (CGF) is now recognized as a qualifying entity for the CE ITC, acknowledging its role as an equity investor in clean electricity projects. Importantly, financing provided by the CGF will not reduce the capital cost of an eligible property for the purpose of calculating the credit. This measure aligns with similar treatment previously granted to the Canada Infrastructure Bank. These changes apply to property acquired and available for use on or after Budget Day.
• Second, Budget 2025 removes conditions previously imposed on provincial and territorial Crown corporations to be eligible, which required jurisdictions to commit to achieving net-zero by 2050, pass credit benefits to ratepayers, and meet public reporting requirements. These changes are expected to apply retroactively to property acquired and available for use since April 16, 2024.

Finally, Budget 2025 announces the Government’s intention to consult Canadians on introducing domestic content requirements for both the CE ITC and the Clean Technology Investment Tax Credit. Further details on this consultation will be provided at a later date. Legislation to implement the CE ITC is expected soon, with retroactive application anticipated.

Critical Mineral Exploration Tax Credit (CMETC)

Flow-through shares allow qualifying corporations to renounce certain exploration expenses to investors, enabling those investors to deduct the expenses in calculating their taxable income. The CMETC provides an additional benefit by granting a non-refundable tax credit equal to 30% of specified Canadian exploration expenses incurred in mining activities primarily targeting designated critical minerals.

Currently, critical minerals eligible for the CMETC include 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 expands this list to include bismuth, cesium, chromium, fluorspar, germanium, indium, manganese, molybdenum, niobium, tantalum, tin, and tungsten. Once enacted, Canadian exploration expenses related to these minerals will qualify for the credit if renounced under a flow-through share agreement. This expanded eligibility applies to agreements entered into after Budget Day and on or before March 31, 2027.

The definition of Canadian Exploration Expense (CEE)

CEE represents a category of deductible costs that mining corporations can transfer to investors through flow-through shares. Investors who acquire these shares are entitled to claim a 100% immediate deduction for the renounced CEE when calculating taxable income and may qualify for further incentives, such as the flow-through mining expenditure tax credit or the CMETC.

Under current provisions of the Tax Act, CEE includes expenses incurred to determine the quality of a mineral resource in Canada. Budget 2025 proposes to amend these rules to clarify that such expenses do not include costs related to assessing the economic viability or engineering feasibility of the resource. This clarification is intended to nullify the impact of the recent British Columbia Supreme Court decision in Seabridge Gold Inc. v. British Columbia (2025 BCSC 558), which held that “quality” could encompass expenses related to determining economic viability under the provincial equivalent of CEE. The proposed amendment will apply as of Budget Day.

Refundable tax on investment income and proposed changes

Canadian-controlled private corporations (CCPCs) and substantive CCPCs pay a refundable tax on investment income, which can later be recovered when taxable dividends are paid, based on the assumption that individual shareholders will be taxed on those dividends. Under existing rules, an additional refundable tax under Part IV of the Tax Act applies to private corporations and certain non-private corporations that receive taxable dividends from a “connected corporation” (generally where the recipient controls the payer or owns more than 10% of its voting shares and value) if the payer is entitled to a refund of its own refundable taxes.

Currently, if the recipient corporation’s balance-due day for this additional tax falls after the payer corporation’s balance-due day for the year in which the dividend was paid, the payment of refundable tax can effectively be deferred. This deferral can be extended by moving dividends through a chain of connected corporations with different year ends.

Budget 2025 seeks to curb this deferral strategy by introducing a rule for dividends paid between affiliated corporations (as defined under existing Tax Act affiliation rules). Under the proposal, the payer corporation’s refund would be suspended if the recipient corporation’s balance-due day for the year in which the dividend is received is later than the payer’s balance-due day. This measure would apply to dividends paid in taxation years beginning on or after Budget Day.

Two exceptions are proposed:

• Acquisition of control: Dividends paid by a corporation that undergoes an acquisition of control within 30 days of payment will be exempt. This accommodates pre-closing dividends often paid during share sale transactions, which could otherwise be caught by the rule due to the deemed year-end triggered by the acquisition.
• Subsequent dividend payments: Where each recipient corporation in the chain pays a dividend on or before its own balance-due day, the rule will not apply, as no deferral would occur in such cases.

Missing measures

Two anticipated tax measures that we noted in our Post 2025-election – Tax policies expected under the new Canadian Government, were absent from Budget 2025:

• the introduction of an innovation-focused flow-through share regime, and
• a patent box regime.

These omissions are significant because both initiatives were highlighted in the Liberal Party’s April 2025 election platform. The proposed flow-through share regime was expected to support sectors such as artificial intelligence, quantum computing, biotechnology, and advanced manufacturing, modeled on the existing regime for mining exploration companies. Similarly, the patent box regime, designed to encourage the commercialization of intellectual property in Canada, was the subject of a Department of Finance consultation in 2024 alongside the SR&ED program. Budget 2025 provides no indication as to whether these proposals have been deferred or abandoned.