Canada’s Federal Budget 2025: The Cost of Playing It Safe
As former Toronto Blue Jay Rickey Henderson noted, “you can’t steal second base and keep one foot on first.” The act of stealing a base requires leaving a secure position for an insecure one: to accept risks to achieve a new objective. When it released its federal budget on November 4, 2025 (“Budget 2025”), the Liberal Government had a chance to steal second. However, Budget 2025’s foot never leaves first.
Budget 2025 is safe, from a tax perspective; it provides previously announced tax incentives for growth and innovation, but does not take any significant risks. Mark Carney promised a “transformational, generational budget.” From a tax perspective, Budget 2025 is not it. To be “transformational” might mean to lower the corporate tax rate to encourage small businesses to grow and hire. It might mean increasing the GST to raise money to pay for the promised spending or a comprehensive tax review to cut out red tape and make the tax system easier to use. It might have also meant following through on innovation-first policies included in the liberal campaign platform, such as the introduction of a “patent box” that would reduce the tax rate on the commercialization of intellectual property to keep talent and life sciences in Canada or the expansion of flow-through shares to the high-tech, innovative industry that would allow innovative companies to raise money more easily. However, bold, transformational concepts like these are missing from Budget 2025.
Time will tell if the previously announced tax incentives lead to growth and innovation or if the Liberal Government should have started the runner.
Here are the three things everyone needs to know about Budget 2025 (albeit most we already knew):
1. Productivity Super-Deduction
Budget 2025 packages up previously announced tax incentives into one “Productivity Super-Deduction” to try to spur new capital investment. These measures will allow businesses to write off the cost of their investments more quickly. These include:
- reinstatement of the incentive that provides an enhanced first-year write-off for most capital assets; and
- 100% first-year write-off for manufacturing or processing machinery and equipment, certain clean energy assets, productivity-enhancing assets (including patents, data network infrastructure, and computers), and capital expenditures for scientific research and experimental development.
In addition, Budget 2025 introduces a new tax incentive to allow for immediate expensing for manufacturing and processing buildings and for the reinstatement of accelerated capital cost allowances for liquified natural gas equipment and related buildings for low-carbon facilities.
Budget 2025 notes that the Productivity Super-Deduction will directly increase Canada’s competitiveness with the US and will lower Canada’s marginal effective tax rate (an indicator of how one dollar of additional business investment is taxed) by more than two percentage points.
2. Enhancement of the Scientific Research and Experimental Development Tax Incentives
Budget 2025 notes that the Scientific Research and Experimental Development (SR&ED) tax incentive program helps Canadian businesses, specifically small businesses, conduct new and advanced research. Budget 2025 notes that the Government intends to proceed with enhancing the SR&ED program, mostly through previously announced measures, including:
- allowing more scaling businesses to benefit from the SR&ED program’s enhanced 35% tax credit by increasing the taxable capital phase-out thresholds from $10 million – $50 million to $15 million – $75 million;
- offering more generous credits by increasing the annual expenditure limit on which the 35% enhanced credit can be earned from $3 million to $6 million (starting in taxation years beginning on or after December 16, 2024), giving certain corporations up to $2.1 million in refundable credits;
- broadening program access by extending the 35% enhanced credit to eligible Canadian public corporations; and
- renewing support for capital investment by restoring the eligibility of SR&ED-related capital expenditures to the SR&ED program (starting in taxation years beginning on or after December 16, 2024).
For public corporations to be eligible for the enhanced credit, earlier released draft legislation noted that such public corporations must (1) be resident in Canada, (2) have a class of shares listed on a designated stock exchange or be a “public corporation” for tax purposes, (3) not be controlled, directly or indirectly, in any manner whatever, by one or more non-resident persons; and (4) would not, if each share that is owned by a non-resident person (as determined, absent actual knowledge, based on publicly available information, including information filed pursuant to securities laws) were owned by a particular person, be controlled by the particular person.
In addition, Budget 2025 proposes to reform the administrative process for making SR&ED program claims to simplify and streamline the process.
3. Nothing New on the Personal Tax Front
Budget 2025 reinforces the middle-class tax cut announced in May 2025, which will reduce the first marginal personal income tax rate from 15% to 14.5% for the 2025 taxation year and to 14% for the 2026 and subsequent taxation years. It also notes that the Government will proceed with the proposed increase in the lifetime capital gains exemption to apply to up to $1.25 million of eligible capital gains announced in the 2024 budget. Also, Budget 2025 does not include the Canada Entrepreneurs Incentive, which was designed to complement the two-thirds capital gains inclusion rate that was scrapped right before the election.
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