DFK Tax Newsletter

Business Tax Measures – Highlights from 2025 Federal Budget

On November 4, 2025, Canada’s Minister of Finance and National Revenue, François-Philippe Champagne, tabled the Liberal Government’s budget, Building Canada Strong.  

Budget 2025 introduces a range of measures aimed at strengthening Canada’s productivity, competitiveness, and transition to a clean economy. The focus is on encouraging business investment through enhanced deductions, targeted tax credits, and administrative simplifications. 

This article focusses on the key highlights of the business tax measures which are summarized below.

Productivity Super-Deduction: Incentives to Boost Investment

Budget 2025 introduces a “productivity super-deduction”, a suite of enhanced tax incentives designed to stimulate business investment and innovation in Canada. This initiative combines previously announced accelerated deductions with new measures aimed at strengthening productivity and competitiveness.

Previously announced measures include:

• Reinstatement of the temporary accelerated investment incentive providing enhanced first-year write-offs for most depreciable capital assets.
• Temporary immediate expensing for manufacturing and processing (M&P) machinery and equipment, clean energy generation and conservation equipment, zero-emission vehicles, and patents or other productivity-enhancing assets.
• Immediate expensing of capital expenditures related to scientific research and experimental development (SR&ED).

New measures introduced in Budget 2025:

• Immediate expensing for M&P buildings – 100% capital cost allowance (CCA) in the first year a qualifying building is used for M&P, if acquired on or after November 4, 2025, used before 2030, and with at least 90% of floor space dedicated to manufacturing or processing. The 100% deduction is phased out over four years. Reduced to 75% for property first used between 2030–2031 and 50% for property used between 2032–2033. Where the use of the building is subsequently changed, recapture rules may apply to add previously deducted CCA back into income.
• Accelerated CCA for Liquefied Natural Gas (LNG) equipment and buildings – reinstated higher rates for property acquired on or after November 4, 2025 and before 2035, provided the property is used in low-carbon LNG facilities.

SR&ED Program Enhancements

Budget 2025 reaffirms the government’s commitment to modernizing the Scientific Research and Experimental Development (SR&ED) program through both enhanced incentives and administrative improvements.

Key incentive changes:

• Increases to the thresholds for the taxable capital-based phase out of the 35% refundable credit—from $10M/$50M to $15M/$75M.
• Extension of the 35% refundable credit to eligible Canadian public corporations.
• Restoration of eligibility for capital expenditures.
• Increase to the annual expenditure limit for the 35% rate from $4.5M to $6M, for taxation years beginning after December 16, 2024.

Administrative changes (effective April 1, 2026):

• Optional pre-claim technical approval process with a shortened 90-day post-claim review period (previously 180 days).
• Faster processing of low-risk claims using artificial intelligence (AI).
• Streamlined documentation requirements and a simplified Form T661.

Part IV Tax Planning – Eliminating Deferral Opportunities

Under the current rules, when a private corporation (“Opco”) pays a taxable dividend and has a refundable dividend tax on hand balance (either non-eligible, NERDTOH, or eligible, ERDTOH), it can obtain a dividend refund under subsection 129(1). If the recipient of the dividend is another private corporation (“Holdco”) connected to Opco under subsection 186(4), Holdco becomes liable for Part IV tax equal to Opco’s dividend refund under paragraph 186(1)(b) and adds the same amount to its own RDTOH balance.

However, Holdco can effectively defer paying this Part IV tax if it pays an offsetting taxable dividend and obtains its own dividend refund before the end of the same taxation year. The rules are intended to ensure that investment income earned by private corporations is ultimately distributed to individual shareholders and taxed at the personal level, rather than being indefinitely deferred within a corporate group.

A timing mismatch between the payer and recipient corporation taxation year ends can nonetheless create a deferral opportunity. For example, if Opco’s taxation year ends January 31 and Holdco’s year ends December 31, a dividend paid by Opco on January 1, 2025, would entitle Opco to an immediate dividend refund in 2025, but Holdco’s corresponding Part IV tax liability would not be due until February 2026. In some structures, the deferral could be extended even further where multiple tiers of corporations with different year-ends exist.

Proposed Measures

Budget 2025 proposes to eliminate this deferral through the introduction of new subsection 129(1.3). Under this rule, a dividend received by a corporation (directly or indirectly through trusts or partnerships) will be deemed not to be a taxable dividend—and therefore will not give rise to a dividend refund—where all of the following conditions are met:

• The dividend is not paid as part of a “butterfly” reorganization described in paragraph 55(3)(a) or (b);
• The dividend recipient corporation is affiliated with the payer corporation under subsection 251.1(1);
• The recipient is a private or subject corporation as defined in subsection 186(3); and
• The balance-due day for the recipient’s taxation year in which the dividend is received falls after the balance-due day for the payer’s taxation year in which the dividend was paid.

Where these conditions apply, the payer corporation will not receive a dividend refund, and the recipient will not incur Part IV tax, as paragraph 186(1)(b) will be amended to exclude such dividends.

Two exceptions are proposed:

1. Subsequent Dividend Payment: If the recipient (and any upper-tier affiliated corporations) pays taxable dividends on or before the payer’s balance-due day in an aggregate amount equal to the original dividend—and those dividends are not used to avoid subsection 129(1.3)—the rule will not apply.
2. Loss Restriction Event: Where the payer has been subject to a loss restriction event within 30 days of the dividend payment, subsection 129(1.3) will not apply, ensuring that pre-closing dividends in a share sale are not inadvertently caught.

A related proposed rule, subsection 129(1.32), will allow the suspended dividend refund to be released once the recipient (and any relevant upper-tier entities) pays sufficient taxable dividends that eliminate the original deferral.

In addition, subsection 129(1.2), which currently denies a dividend refund when a transaction is undertaken mainly to obtain such a refund, will be expanded to include cases where the purpose is to allow an affiliated corporation to obtain a dividend refund.

If enacted, these measures will apply to taxation years beginning on or after November 4, 2025.

Practical Considerations

While the new rules achieve their goal of closing the timing gap between dividend refunds and Part IV tax payments, they are expected to create significant administrative and compliance challenges. Accountants and tax preparers will now have to carefully review dividends received from affiliated corporations to determine whether differences in year-ends could result in a suspension of dividend refunds under subsection 129(1.3).

Later, when a corporation that has received a suspended dividend meets the criteria for the payer corporation to have its refund released, the advisor for the payer corporation will need to recognize this and report the previously suspended refund. This coordination may prove difficult, particularly when different firms handle the payer and recipient corporations, which is a common situation in private-group structures.

Overall, while the proposal effectively curtails the deferral opportunity, it introduces a layer of practical complexity that will require greater coordination and diligence from tax practitioners managing connected corporate groups.

Conclusion

Budget 2025 introduces significant measures to boost investment and innovation by introducing the new Productivity Super Deduction and SR&ED enhancements. At the same time, it closes technical loopholes, such as the Part IV dividend deferral, to ensure income is taxed appropriately. Overall, the Budget strengthens Canada’s investment competitiveness while creating new layers of compliance that advisors will need to navigate carefully.