Budget 2025 Implementation Act, No. 2 | May 2026
On May 4, 2026, the federal government tabled draft legislation to implement measures from the November 2025 budget. The Budget 2025 Implementation Act, No. 2 covers a wide range of income tax, sales tax, and other changes. Below, we have highlighted the provisions most relevant to business owners, investors, and families, along with what they mean in practice.
Writing off a new manufacturing building in year one
The short version: If your business builds or buys a new qualifying manufacturing facility in Canada, you may be able to deduct the full cost in the first year rather than writing it off gradually over decades.
The new rules allow a 100% first-year deduction (called a capital cost allowance, or CCA, deduction) on eligible buildings acquired after November 3, 2025, as long as the building is new and at least 90% of the floor space is used for manufacturing or processing goods for sale in Canada. The 100% rate is available for buildings placed in service before the end of 2029, with lower rates applying after that.
Deduction rates at a glance
| Building placed in service | First-year write-off | Rate in later years |
Before end of 2029 | 100% of cost | N/A |
2030 or 2031 | 75% of cost | 6% per year |
2032 or 2033 | 55% of cost | 6% per year |
After 2033 | No bonus | 6% per year |
To access the bonus rate, you need to make a specific election on your corporate tax return for the year the building is acquired. If you miss the election, the building falls into the standard Class 1 pool at a 4% annual rate. The election cannot be made retroactively.
Buildings that were already under construction on November 4, 2025, may still qualify. The rules treat the portion of cost incurred before that date as if it was incurred on budget day, making the full cost potentially eligible.
What this means for you:
If you are planning a new Canadian manufacturing facility, the timing of construction completion and your tax year-end both matter. A building placed in service before the end of 2029 qualifies for the full 100% write-off in year one. Talk to your advisor before acquisition to confirm eligibility and ensure the required election is filed.
Claiming the full write-off comes with a 10-year condition
The short version: If you claim the accelerated write-off on a manufacturing building and later change how the building is used, you may have to pay back some of that tax benefit.
The full expensing incentive described above comes paired with a recapture rule. If, within 10 years of claiming the accelerated deduction, more than 10% of the building's floor space begins to be used for something other than manufacturing or processing goods for sale, a recapture event is triggered.
When that happens, the Canada Revenue Agency (CRA) essentially recalculates your prior deductions as if you had only ever claimed the standard rate, and the difference is included in your income in the year of the change. In practical terms, this means the accelerated benefit is clawed back if the building changes purpose.
What this means for you:
The incentive and the claw back work together as a use-it-or-lose-it structure tied to keeping the building in manufacturing use. If there is any possibility of leasing part of the building to a non-manufacturing tenant, expanding into non-manufacturing operations, or redeveloping the property within a decade, the potential recapture should be factored into the financial planning upfront.
Trust planning and the 21-year deemed disposition
The short version: A common strategy for moving assets out of a family trust before its 21st anniversary has been restricted. If you have trust structures involving private company shares, a review may be warranted.
Under Canadian tax law, most family trusts face a deemed disposition every 21 years, meaning they are treated as if they sold all their assets at fair market value. This can trigger a significant tax bill, particularly for trusts holding private company shares or real estate that has appreciated in value.
One common planning approach involved distributing trust assets into a holding company on a tax-deferred basis before the 21-year mark. Since once assets are inside a corporation, the 21-year clock no longer applies. The new legislation closes this strategy. Where a trust distributes property to a corporation and another trust holds shares of that corporation, the second trust is now treated as if it inherited the first trust's 21-year anniversary date. The clock does not reset.
A practical example: Suppose a family trust (Trust A) was established 18 years ago and holds shares of an operating company. One of its beneficiaries is a holding company owned by a second family trust (Trust B). Previously, distributing the shares to the holding company before year 21 could avoid the deemed disposition. Under the new rules, Trust B picks up Trust A's anniversary date, so the deemed disposition follows the assets into the corporate structure.
This change applies to distributions made on or after November 4, 2025. Distributions completed before that date are not affected.
What this means for you:
Families with trusts approaching their 21st anniversary should review their structures promptly, particularly where corporate beneficiaries are involved. Trusts within three to five years of the anniversary date may need to reassess any planned distributions. Distributions completed before November 4, 2025, are not affected, but the documentation supporting those transactions should be in order.
Deadline to request penalty and interest relief
The short version: There is now a formal 10-year deadline for asking CRA to waive or cancel penalties and interest. Older unresolved tax matters may need prompt attention.
CRA has always had the discretion to waive or cancel penalties and interest through what is known as the taxpayer relief program. This applies in situations such as financial hardship, CRA error, or circumstances beyond a taxpayer's control. Previously, the rules did not set a hard deadline for making these requests, though CRA's administrative policy generally limited relief to the prior 10 years.
The new legislation formalizes this as a statutory 10-year limit. Both CRA and the taxpayer must act within 10 calendar years after the end of the relevant tax year. Requests made outside that window will no longer be considered.
One notable exclusion: the waiver power does not extend to penalties arising from a court-ordered compliance order (a penalty that can arise when a taxpayer fails to comply with a formal CRA information demand). Those penalties are handled separately.
What this means for you:
If you or your business have older tax years with unresolved penalty or interest issues, the clock is now explicit. A tax year that ended more than 10 years ago will generally no longer be eligible for relief once this legislation receives Royal Assent. Matters approaching that threshold should be reviewed sooner rather than later.
Stronger CRA audit powers and consequences for non-compliance
The short version: The legislation significantly increases the consequences for failing to respond to CRA information requests during an audit, including new daily penalties, a potential 10% tax surcharge, and rules that extend the time CRA has to reassess while a dispute is active.
CRA's existing power to demand information, documents, and answers from taxpayers and third parties during an audit has been expanded and given sharper teeth. The changes are most significant for audits involving information held outside Canada, but they also affect domestic files where a taxpayer disputes or delays responding to a CRA request.
A new formal notice process
If a taxpayer does not fully comply with a CRA information demand, CRA can now issue a formal "notice of non-compliance." Once issued, a penalty of $50 per day accumulates (up to a maximum of $25,000). The taxpayer has 90 days to request a review of the notice, and CRA then has 180 days to respond. If CRA does not respond within that window, the notice is cancelled. After CRA's decision, there is a further 90-day window to seek judicial review.
A 10% tax surcharge for court-ordered compliance
If a court issues a compliance order against a taxpayer for refusing to provide information, the taxpayer now faces an additional penalty equal to 10% of the tax owing for each year covered by the order. This penalty does not apply where the taxpayer reasonably believed the information was covered by solicitor-client privilege, or where the tax owing for the relevant year is less than $50,000.
The assessment clock pauses during disputes
Normally, CRA has a limited number of years to reassess a tax return. Under the new rules, that clock is paused for as long as an information dispute is active, whether that is a judicial review of an information demand, a contested compliance order, or an outstanding non-compliance notice. This prevents taxpayers from running out the clock on CRA by prolonging an information dispute.
Foreign information requests
For information held outside Canada, the new rules set a minimum 90-day response period and narrow the grounds on which a court can set aside a CRA demand. If a taxpayer ultimately fails to produce foreign-based documents, a court can prohibit them from using those documents in any future legal proceedings related to their taxes.
What this means for you:
These changes increase the financial and procedural cost of resisting or delaying CRA information requests during an audit. Businesses and individuals in active audits, particularly those involving foreign-held information or complex information demands, should be aware that daily penalties can accumulate quickly and that the normal assessment deadlines are extended while any dispute is ongoing.
Dividend refunds and tiered corporate structures
The short version: If your business pays dividends up through a chain of holding companies, a timing difference in when each company's taxes are due can cause the dividend refund to be deferred or lost entirely. Corporations with tiered structures should review whether the new rules affect their dividend planning.
The new rules work like this. When a taxable dividend flows from a payer corporation to an affiliated corporation whose balance-due day falls later than the payer's, the dividend is treated as a "suspended dividend." The payer's dividend refund is deferred until the affiliated payee (and any parent companies above it in the chain) pays out sufficient qualifying dividends to shareholders outside the affiliated group. If those dividends are never paid, or a sale of the company triggers a loss restriction event, the refund may be lost permanently. CRA may also reassess beyond normal limitation periods to enforce the new rules across multiple tax years.
To illustrate: an operating company with a December 31 year-end pays a $100,000 non-eligible dividend in January to its holding company. If the holding company's balance-due day is June 30, the suspension applies. To avoid it, the holding company must pay at least the "suspended portion" of non-eligible taxable dividends to shareholders outside the affiliated group before the operating company's balance-due day of March 31. If it does not, the operating company's dividend refund is deferred until the holding company eventually pays qualifying dividends outside the group.
These changes apply after Royal Assent. CRA has not yet issued a prescribed form for tracking suspended dividends, and guidance on how the rules interact with trust structures is expected.
What this means for you:
Private corporations that pay dividends to affiliated holding companies should confirm whether the new suspension rules apply to their structure. Where a holding company’s balance-due day falls after the operating company’s, a dividend refund that was expected in the current year may be deferred. The simplest way to avoid the suspension is to ensure the holding company pays sufficient qualifying dividends to shareholders outside the affiliated group before the payer’s balance-due day. Structures involving multiple tiers, trusts, or year-ends that do not align will require careful tracking. Given that CRA has not yet issued prescribed forms or guidance, advisors should document the dividend flow and timing for each affected year.
Other notable changes
The legislation also includes a number of other measures that may be relevant depending on your situation:
Manufacturing tax credits: updates to the clean technology manufacturing credit and the clean electricity property credit, including new rules on related-party transfers and recapture.
Global minimum tax: amendments to Canada's 15% global minimum tax rules, which apply to large multinational groups. Includes updated filing requirements and new rules for joint venture entities.
GST/HST and Lloyd's of London: a technical fix that clarifies how GST/HST applies to insurance placed through Lloyd's of London syndicates.
Tax Court monetary thresholds: the dollar limits for the informal (lower-cost) Tax Court procedure have been increased. Under the new rules, disputes involving up to $50,000 in income tax (up from $25,000) or up to $100,000 in GST/HST (up from $50,000) can use the informal procedure.
Crypto-asset reporting: new reporting obligations for businesses that facilitate crypto-asset transactions take effect for the 2027 calendar year. More details are available in our separate technical update.
This update is prepared for general information purposes only and reflects the legislation as tabled. It does not constitute tax or legal advice. These provisions are subject to Royal Assent and may be amended. Please contact your advisor to discuss how these changes apply to your specific circumstances.
Related content
