Summer 2025: Legislative proposals

The proposals include the changes from the August 2024 proposals.

Additional changes to the trust reporting rules include:

• Oil, gas, and mining companies: Public companies using nominee or bare trusts to hold Canadian resource properties only need the trust to hold “all or substantially all” Canadian resource property, not 100%.
• Partnerships: The exemption for property held by a general partner is extended to cover property held by all partners, including limited partners.

The technical notes released alongside the drafted legislation refer to a number of other changes to the Trust reporting regulations. The notes include a revised definition of “settlor”  – a welcome alleviation to the broad definition found in ITA 17(15) – that would apply to tax years ending after December 30, 2024. The notes also propose not requiring alter ego or joint spousal or common-law partner Trusts to disclose contingent beneficiaries, as these beneficiaries may not be aware of their inclusion in the terms of the Trust. This would apply to taxation years ending after December 30, 2025. The notes also appear to suggest the repeal of the definition of a bare trust while seeking to provide more clarity on what deemed Trusts would be subject to the new reporting rules.

At this time, it is not clear why the technical notes refer to legislation not yet drafted. However, we will continue to monitor any further releases.

The proposals include the changes from the 2024 Budget.

The proposals include the changes from the 2024 Fall Economic Statement.

The proposals include the changes from the 2024 Fall Economic Statement.

The proposals include the changes from the 2024 Fall Economic Statement.

This proposal is the third version of the FABI measure, now more closely aligned with the government’s original intent from Budget 2022. The rules are generally retroactive to taxation years starting on or after April 7, 2022 (Budget date) or August 9, 2022 (first draft), though some apply only prospectively unless an election is filed.

Key changes

• The carveout is much broader, covering most FAPI service and business income. A CCPC (or substantive CCPC) can elect to apply lower “relevant tax factor” rules if the income:
  • Would not count as aggregate investment income if the CFA were a CCPC with only Canadian-source income.
    • Is not derived from deductible payments made by specified persons/partnerships that reduce their own aggregate investment income, section 123.3 liability or FAPI (other than FABI).

Practical impact

• If elected, and the CFA pays 25%+ foreign tax on the FABI, the deduction under subsection 91(4) can fully offset the FAPI inclusion.
• Provides significant relief for CCPCs with CFAs that conduct real business activities abroad for commercial or regulatory reasons.

The proposal reintroduces the August 2024 proposal, with changes to the regulated energy utility businesses (“REUB”) and purpose-built residential rentals.

Use of property test

• Under the 2024 draft, “all or substantially all” of a borrower’s property had to be used to earn REUB income. The 2025 proposals exclude property bought with borrowed money where the interest is excluded interest, to avoid disrupting group loss consolidation planning.

Partnership rule 

• New subsection 18.2(21) clarifies that a partner is not treated as carrying on the partnership’s business just because they are a member. This prevents partners from relying on partnership activities to qualify for the exemption.

Group income rule

• New subsection 18.21(9) excludes REUB income (earned directly or through a partnership) from a group’s adjusted book income if the group elects to apply the REUB exemption.

These rules apply retroactively to taxation years beginning on or after October 1, 2023.

Canada’s FAPI rules include anti-avoidance measures for “tracking interests” (e.g., shares that participate only in specific assets or income of a non-resident corporation or trust). It has been identified that this can cause issues for umbrella funds (single entities with multiple tracked sub-funds).

Non-resident trusts

• Section 94.2 currently deems a non-resident trust to be a controlled foreign affiliate (CFA) if a taxpayer or its CFA holds 10%+ of any class of interests.
• New rule: If the 10% threshold is met through a tracking class, this will not by itself make the trust a CFA.
• If a trust is deemed a CFA, FAPI will now be attributed only to the sub-fund linked to the taxpayer’s tracking interest, not the entire trust. This prevents double taxation.

Tracking interests 

• Subsection 95(11) amended to stop taxpayers from avoiding CFA status and FAPI accrual taxation through tracking arrangements.
• New subsection 95(13) from a 2019 comfort letter: The tracking interest rules won’t trigger CFA status if the structure was not intended to avoid or defer FAPI. This protects most normal investment situations, such as when Canadians hold >50% of a single tracking class in a non-resident fund.

These changes apply to taxation years of trusts and foreign affiliates starting after February 26, 2018.

The proposals include the following changes to the GMTA, which will continue to be updated to reflect additional guidance from the Organisation for Economic Co-operation and Development (“OECD”). These changes are retroactive to tax years beginning on or after December 31, 2023. 

Definitions and scope

• New definition of “private investment entity” with de-consolidation rules to address compliance/tax issues where such entities control public corporations but use ASPE.
• Updated definitions (recapture exception accrual, substitute loss carry-forward recapture amount, substitute loss carry-forward tax credit, unclaimed accrual) to reflect OECD/G20 guidance.

Entity location

• Clarifies rules for locating entities, including those moved to jurisdictions without corporate income tax. For example, if an entity continues into a no-tax jurisdiction, it is treated as located there.

GloBE income or loss

• Adjustments for impairments/reversals of asset values to align with OECD/G20 guidance.

Allocation rules

• Updated rules for tax allocation among transparent, hybrid and flow-through entities.
• New concept of “specified jurisdictional effective tax rate” for CFC regimes, adopting OECD model rules.
• New five-year election to exclude deferred tax expenses, simplifying compliance by treating them as nil in the parent jurisdiction.

Deferred tax assets (transition rules)

• Rules for handling deferred tax assets/liabilities when transitioning to Pillar Two.
• Certain deferred tax assets (e.g., from post-December 1, 2021, transactions or government incentives) are excluded.

Safe harbour and filing

• Expands definition of “designated filing entity” to allow entities in safe harbour jurisdictions to file for the group.
• Coordinating ITA changes: Recognition of foreign tax credits and accrual taxes for domestic minimum top-up taxes.

The proposals make further changes to the CRA’s audit powers, building on Budget 2024, the August 2024 draft and the expanded audit powers enacted in 2022.

Penalties

• A compliance order penalty of up to 10% of tax payable remains possible.
• However, the Minister now has discretion to impose a smaller penalty or none.
• The penalty must be fair and proportionate. If a taxpayer objects, the Minister can reduce or cancel the penalty.

Exemptions

• No penalty applies if tax payable is under $50,000 per year.
• No penalty applies if non-compliance was based on a reasonable belief that solicitor-client privilege protected the requested information.
• This solicitor-client privilege exemption also applies to penalties for notices of non-compliance.

Costs of compliance

• Earlier versions required taxpayers to comply with CRA information requests “without cost to His Majesty.” The August 2025 proposals remove this language.

Finance is moving forward with the implementation of the OECD’s Crypto-Asset Reporting Framework (“CARF”), with adjustments to the Common Reporting Standard (“CRS”). This framework aims to enhance transparency in crypto-asset transactions and facilitate the automatic exchange of information between tax authorities globally. Crypto-asset service providers will be required to report to the CRA under this new framework.

Reportable information includes:

• Annual totals of crypto-to-fiat exchanges.
• Crypto-to-crypto exchanges.
• Payments in crypto worth US$50,000 or more.

Canadian reporting rules require detailed identification and transaction data for both Canadian and non-resident customers. When the CRA receives data on non-resident customers, it must share it with their home countries. Likewise, if Canadians are reported in foreign jurisdictions that have adopted CARF, that information will be sent back to the CRA.

Exclusions: Central bank digital currencies and certain electronic money products are not covered by CARF. Instead, they fall under the CRS, which is also being updated to better coordinate with CARF and avoid duplicate reporting.

Timing:

• Rules apply for reporting years starting in 2026.
• Canadian exchanges and other entities must begin collecting customer data in 2026.
• The first international exchanges of information under CARF and the updated CRS are expected in 2027.

These amendments will allow input tax credits for redeemed coupons to be available only for payments made exclusively in the course of commercial activities, in response to a recent President’s Choice Bank decision at the Federal Court of Appeal. This proposed amendment would apply effective August 16, 2025, and in respect of any input tax credits for payments made not already claimed in a return filed on or prior to August 15, 2025

The proposed amendment (subsection 207.04(7)) would clarify that rights under certain securities lending arrangements as defined in section 260 are not non-qualified investments.

This rule would apply retroactively from January 1, 2023, where:

• The trust lends listed securities to a Canadian-resident registered securities dealer.
• The dealer must return identical securities and provide liquid collateral (cash or government debt).
• The plan holder must give written consent to the arrangement in advance.

These conditions generally align with CIRO rules.

Additional restriction: The lent security or any replacement property cannot end up with a person who is not at arm’s length with the plan holder. In practice, monitoring this is nearly impossible for both the investor and the dealer. The rule would be more workable if limited to cases where the plan holder knew or should have known the securities went to a non-arm’s length party.