Inside the budget: How tax changes will impact clients

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Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves.

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Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth in Toronto

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This year’s 2025 federal budget included a number of tax measures that will affect Canadians – some on the personal side and some on the business owner side. Let’s go over a few of the most interesting ones, not all of them, but a few of the most interesting ones that I think would have the widest impact for advisors, and the clients as well.

So let’s start with Canadian tax rates. So Canadians currently pay tax at graduated tax rates, meaning that the higher your income is, the higher your rate of tax is. The government already announced the middle-class tax cut back in May, which is now before Parliament, that effectively reduces the tax rate on the first bracket of income down to 14.5% this year, from 15%, going down to 14% in 2026.

Now there were no changes to the tax rates in the budget. However, one of the problems that the budget tried to address is the problem with the reduction of the lowest tax bracket. You see, when you apply the rate to the lowest level of income, it’s also the same rate that is used that is applied to the value of most of the non-refundable credits. So in other words, when the lower tax bracket was reduced from 15% to 14.5%, the value of most non-refundable credits also dropped. Which meant that in very rare cases, if someone had [a] significant amount of non-refundable tax credits that was higher than the first income tax bracket – so that’s about $57,000 in 2025 – the loss and the value of those credits can actually exceed the savings from the tax reduction, which is going to counter the government’s goal in dropping the tax rate.

And again, this is rare, but it can happen in situations where individuals have very large expenses, such as medical expenses or perhaps tuition expenses, especially since some of those expenses, for example, like tuition, can be carried forward to other years. So to ensure that no taxpayer in this circumstance has their tax liability actually go up, as opposed to go down as a result of the middle-class tax cut, the budget is introducing a new non-refundable credit called the Top-Up [Tax] Credit. And this credit effectively maintains the current 15% rate, to the extent that any non-refundable credits claimed are higher than the first income tax bracket threshold.

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Another change that might be interesting for some taxpayers is a change to the Home Accessibility Tax Credit. As a reminder, that’s a non-refundable tax credit on $20,000 of eligible home renovations to improve the safety, accessibility, or functionality of a dwelling for someone who’s 65 or older, or eligible for the Disability Tax Credit.

Now there’s also the Medical Expense Tax Credit, which is also an available credit, available for various medical- and disability-related renovation expenses. And under the current rules, you can actually double dip and claim both expenses, or both credits for the same expense.

The budget will end this. Starting 2026, you’re no longer going to be able to claim any expense that was claimed under the medical expense credit as a Home Accessibility Tax Credit, as well.

They’ve also introduced a new credit for personal support workers, PSWs, that is a refundable credit that starts in 2026. It goes through 2030, and has a maximum value of $1,100.

When it comes to personal tax planning, one of the things that they did also mention was around the 21-year rule for trusts. So most trusts are deemed to have disposed of all of their property at fair market value on their 21st anniversary, and every 21st anniversary thereafter. And the reason for the 21-year rule, as it’s become known, which has been around since 1972 when tax reform came in, is meant to prevent trusts from being used to indefinitely postpone tax on accrued gains.

So there have been some planning techniques that have been around for a little while to try to get around a specific anti-avoidance rule. The anti-avoidance rule says that if you roll out property from a trust, which you can do in most situations at the property’s adjusted cost base to a beneficiary, if you try to roll it into another trust, then the second trust continues the 21-year anniversary calendar that the first trust had. But there have been techniques that have been developed to effectively transfer property to a new trust to avoid this anti-avoidance rule.

For example, what can happen is you can transfer your property out of your trust on a tax-deferred basis to a beneficiary, which is a corporation, and that corporation ultimately is owned by another trust. And the government is shutting that down effective immediately, as of November 4, 2025.

On a positive note, they’ve canceled the Underused Housing Tax that came to effect back in January 2022. It applies to owners of vacant and underused residential property that were typically owned by non-resident, non-Canadians. It’s 1% of the value of that property, and this budget basically eliminates it for 2025. So no UHT is payable, no returns are fileable for the 2025 and future tax years.

They’ve also canceled the luxury tax, but only on boats and airplanes. You might recall back in 2022, the government introduced a luxury tax on vehicles above $100,000, and airplanes above $100,000, and boats over $250,000. This budget effectively ends the luxury tax on both planes and boats immediately. So that does not apply as of November 5.

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On the business side, of course, the big news is the immediate expensing for manufacturing and processing buildings. So tax depreciation, which we often refer to – capital cost allowance is the technical name – effectively allows a business to write off the cost of capital purchases over time. And that’s typically done through the CCA system, the capital cost allowance system, where depreciable property is allocated to a certain category, [and] that category has a percentage, and you can decline, on a declining balance write off that, you know, against your income every year.

So under the current rules, if you have a building that’s used to manufacture or process goods for sale, there is a CCA rate of 4%, [and] an additional 6% depreciation rate for a manufacturing or processing building. And to qualify for this special rate, the extra 6%, at least 90% of the building’s floor space has to be used for manufacturing or processing goods for sale or lease.

The budget is planning to provide an immediate expensing for the cost of those buildings – 100% write off in the first tax year that the property is used for manufacturing or processing. And that’s effective immediately for any buildings acquired on November 4, or thereafter. And as long as you put that building into use before 2030, you get 100%. If it’s 2030 or 2031, you get 75% – a declining write off. And then after that, 2032, 2033, it drops to a 55% write off.

They’ve also canceled the Canadian Entrepreneurs’ Incentive. This was introduced in the last year’s 2024 federal budget, and that would have reduced the capital gains tax rate on up to $2 million of capital gains when an individual sells a qualifying business. [It] was starting to be $400,000 this year, going up in increments of $40,000 though until it hit $2 million by 2029. And that would be in addition to the newly enhanced $1.25 million lifetime capital gains exemption.

So the budget is canceling the Canadian Entrepreneurs’ Incentive altogether, in light of its decision earlier this year not to proceed with the proposed increase to the capital gains inclusion rate, which would have went to two-thirds, from 50%.

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And I think finally, I will point out that for tax filers, our tax system is based on self-assessment and self-reporting. And technically, while only individuals that have tax payable need to file a tax return. If you don’t file a tax return, you are not eligible to receive various benefits and credits, and that’s because the CRA needs to know how much you’re entitled to based on your family income, or your net income.

So the budget actually proposes to amend the Income Tax Act to allow the CRA to actually file your return for you if you meet certain conditions, like you’re low income, you’ve got all of your income from sources to which T-slips already have been filed with the CRA, and you haven’t filed in the last, at least once in [the] last three years. CRA will always ask for permission first before filing a return for you, but if they don’t hear back from you within 90 days, then they can file the return on your behalf, allowing you to collect government benefits. You can always elect out of this, and this could actually begin as early as spring 2026 for 2025 tax returns.

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