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If you were hoping Budget 2026 would finally deliver the comprehensive tax reform that economists, tax practitioners, business groups and think tanks have been urging for years, keep waiting. What you get instead is 532 pages built around a collection of simplification measures, some genuinely welcome, which Ottawa calls “the most ambitious tax simplification effort in decades.” That oversells it. Rates, the tax base and the long list of tax expenditures go untouched, and the government concedes that “deeper reforms will take time.” Meanwhile, the deficits stay above $50 billion every year, and interest costs head past $85 billion.  

A year ago, we said the government was maxing out the country’s credit card. It’s still swiping. 

Economic Highlights 

• No changes to personal or corporate tax rates. Despite pre-budget media reports of a small business rate cut, there isn’t one.  

• The 2026-27 deficit is projected at $62.3 billion and stays above $52 billion every year through 2030-31. There is no path to balance. Last year’s (2025-26) deficit came in at an estimated $39.3 billion, half of what Budget 2025 projected, thanks to stronger tax revenues, including oil-related gains, and departments spending well below plan. Don’t mistake that for restraint. Since the spring update, revenues are up about $134 billion over six years, and the government spent more than all of it on about $152 billion in new measures. The advertised “$34 billion lower deficit” only exists because Finance now assumes about $76 billion of approved spending won’t go out the door on time; 

• Public debt charges rise from $60.2 billion in 2026-27 to $85.5 billion in 2030-31, an increase of $25.3 billion or 42%, while revenues grow only 16%. By 2030-31, about 13.6 cents of every revenue dollar goes to interest; 

• Federal debt grows from $1.36 trillion to $1.59 trillion, with debt-to-GDP stuck at about 40%; and 

• The government claims a balanced “day-to-day operating budget” from 2027-28. It gets there only by counting revenue given up through the Productivity Mega Deduction and other investment tax breaks as capital. That’s a presentation choice, not discipline. The PBO has already said Ottawa’s definition of capital is too broad. On the normal measure, the deficit never falls below $52 billion.

Tax Highlights 

The following is an executive summary of the main taxation highlights in the Budget: 

• No structural tax reform. A second tranche of simplification measures is promised for the Spring Economic Update 2027; 

• Nothing new on trust reporting. The bare trust rules enacted in Bill C-15 (Royal Assent March 26, 2026) apply for the first time to 2026 year-ends, with T3 returns and Schedule 15 due March 31, 2027; 

• The deadline to file a notice of objection becomes one year after the notice of assessment is sent. For individuals and graduated rate estates, it’s the later of that and two years after the filing due date. Extension applications disappear. This applies to assessments sent starting three months after royal assent; 

• The T1135 filing threshold doubles from $100,000 to $200,000, and the simplified reporting threshold rises to under $500,000, for taxation years ending after 2026; 

• Personal instalment thresholds rise from $3,000 to $7,500 ($4,500 in Quebec) and are indexed, for taxation years beginning in 2028. Individuals whose main income is from a business can make one December 31 instalment of two-thirds of their tax owing; 

• May 15 becomes the single T1 filing and balance-due date for everyone, starting with the 2027 taxation year. The self-employed lose their June 15 filing date; 

• Optional flat-rate claims replace receipts for certain moving, clergy residence, labour mobility, home accessibility, adoption, celiac, incontinence and service dog expenses, generally from 2027; 

• “RRSP for life”: the government intends to merge the RRSP and RRIF rules, ending the forced conversion at 71. Minimum withdrawals continue. Comments are due January 8, 2027; 

• The new Canada Growth Incentive provides a capital gains exemption of up to $15 million per individual per business. It only covers new shares issued after Budget Day and before 2037, held for 36 months, in CCPCs with under $100 million in assets. It keeps the sector carve-outs from the abandoned Canadian Entrepreneurs’ Incentive and adds farming, fishing, forestry, mining, utilities and franchises. Existing owners get nothing; 

• The small business investment rollover is enhanced. The reinvestment period becomes three years, or up to five years using a SAFE, for dispositions after 2026.  Unfortunately, these rules under section 44.1 of the Income Tax Act are still very restrictive, and these proposed amendments will not likely result in more usage; 

• A promised “Canada Creative Credit” would effectively make up to $45,000 of artists’ business income tax-free. Details come in spring 2027—just what the system needs: another sector carve-out.  In the meantime, expect many to describe themselves as artists.  Hmmm… perhaps we’re taxation artists?; 

• Part VI.1 tax no longer applies to dividends paid by CCPCs after Budget Day. For other corporations, the dividend allowance rises to $1.5 million. Consultation on the broader preferred share regime closes January 8, 2027; 

• Corporations no longer need to file certified directors’ resolutions with elections, such as capital dividend elections; 

• The government is consulting on corporate loss transfers within wholly owned groups, the third attempt since 1985. The proposal covers current-year non-capital losses only, and only within a single province. Comments are due January 8, 2027; 

• For corporate non-resident vendors, withholding on dispositions of taxable Canadian property drops from 25% and 50% to 15% and 30%, and fully deferred section 85 rollovers become exempt from withholding, starting in 2027; 

• The excess corporate holdings regime for private foundations is repealed, starting with taxation years beginning in 2027; 

• IPPs are targeted with a broader definition, the prohibited, non-qualified investment and advantage rules, and revocation if assets exceed 200% of liabilities; 

• The rule denying tax-free distributions to non-residents now covers indirect distributions, such as through a Canadian corporation with a non-resident shareholder. Effective Budget Day; 

• The Canada Revenue Agency (“CRA”) will be able to report tax debts over $50,000 to credit bureaus once all appeal rights are exhausted; 

• Fixed-dollar penalties double or triple and are indexed every five years. Medium and large entities face three and eight times the base amounts; 

• More boutique credits: clean technology and clean electricity ITCs are extended to 2040, the journalism labour credit expands to audio and video news, flow-through mining exploration credits are extended to 2032, the Canada Caregiver Credit becomes refundable, and a $4.1 billion one-time benefit cheque goes out in early 2027; 

• SR&ED expands ($930 million) to cover certain commercialization expenses, including regulatory testing and the costs of registering and maintaining intellectual property; and 

• Helium exploration and development costs now qualify as CEE and CDE, and antimony is added to the critical mineral exploration tax credit, both from Budget Day; 

• The government is consulting on bringing Canada’s Common Reporting Standard rules in line with the international standard, which will reach some private investment entities and partnerships. Comments are due December 31, 2026.
  

 

A. Analysis of Select Tax Matters in the 2026 Budget (and Pre-Budget)  

1. Canada Growth Incentive – Capital Gains Exemption 

The proposed new Canada Growth Incentive – Capital Gains Exemption (CGI-CGE) includes a massive capital gains exemption that allows Canadian resident individuals to claim up to a $15-million tax exemption on capital gains realized from the sale of qualifying shares in eligible Canadian corporations. This $15-million limit applies separately per individual for each distinct qualifying business. Therefore, it could be used multiple times in the lifetime of a person.

Key Criteria & Exclusions 

Qualifying Individuals: Must be individuals (not trusts) who are Canadian residents during the claim year and were at least 18 years old when acquiring the shares, whether owned directly or through a partnership. 

Qualifying Shares & Asset Limits:

At the time of issuance of the shares (certain continuity rules are expected to accommodate share exchanges and corporate reorganizations):  

• • Shares must be directly issued by a Canadian-Controlled Private Corporation (“CCPC”) for cash or employment services.  

• • All or substantially all of the fair market value of the corporation’s assets must be attributable to assets used, or reasonably intended to be used within 36 months, principally in a qualifying business carried on primarily in Canada. 

• • The corporation (and related entity group) cannot exceed $100 million in combined asset value.  

• • If shares were held through a partnership, the individual partner must have been a partner and 18 years old at the time the shares were acquired by the partnership.

Throughout the period of owning the shares: 

• • At least 50% of asset value must be attributable to assets used, or reasonably intended to be used, principally in a qualifying business. 

• • For the 24 months after the share issuance, the qualifying business would be required to be carried on primarily in Canada. 

At the time of disposition: 

• • For at least 36 consecutive months immediately before the disposition, the share must have been held by the qualifying individual or the partnership of which the qualifying individual was a member. 

• • The corporation must be resident in Canada and either private or listed on a designated stock exchange in Canada. 

• • • All or substantially all of the fair market value of the corporation’s assets must be attributable to assets used principally in a qualifying business.

Qualifying Businesses 

Active business other than the following excluded businesses: 

• a business providing consulting services, a professional practice of an accountant, lawyer, notary, physician, other health care practitioner, engineer, architect, and any business whose principal asset is the reputation or skill of one or more employees; 

• a business operating in the agricultural, fishing, forestry, mining, financial, insurance, utilities, real estate, food and accommodation, arts, recreation, or entertainment sectors; and 

• a business operating under a licensing or franchising agreement.

Additional Rules 

A CGI-CGE claim will not prevent the application of Alternative Minimum Tax (AMT). Exempt gains are included at 30% for AMT purposes, the same as LCGE gains. There will be rules to limit the use of the Lifetime Capital Gains Exemption (LCGE) and CGI-CGE on the same transaction, presumably with a corresponding limit reduction. This tax exemption is proposed to apply to the sale of shares issued on or after Budget Day (November 5, 2026) and before 2037 (and could be extended).

Commentary  

The CGI-CGE has the potential to offer massive tax savings for qualifying businesses. It appears to be modelled on the U.S. Qualified Small Business Stock (QSBS) exemption (along with the ESBC rollover described below). 

Similar to the QSBS, most services and resource-related businesses are excluded. The remaining qualifying businesses primarily targeted appear to be technology and manufacturing (brick-and-mortar retail potentially). Similar to our comments about the Canadian Entrepreneurs’ Incentive (which was scrapped in 2025 along with the capital gains inclusion rate increase), it would be preferable if the CGI-CGE were applicable to a wider range of businesses.  

The CGI-CGE creates some planning challenges as qualification tests are present at the time the shares are issued, throughout the holding period, and at the time of disposition. Each share issuance would have to be analyzed for each corporate year to confirm qualification, which may result in a substantial compliance burden. The result may lead to surprises and incongruous qualification among shareholders or even among various shares held by an individual.  

In particular, the test requiring all or substantially all (90%) of the assets of the business to be used principally in a qualifying business carried on primarily in Canada may be difficult to meet for new shares issued (particularly employee stock compensation) as the business matures. 

Since the CGI-CGE applies to shares issued on or after Budget Day, new reorganizations and share issuances will need to be completed to qualify. The required 36-month holding period before disposition will limit the availability of the CGI-CGE and reward those who complete tax planning well in advance of sale. Based on the government’s predicted fiscal impact of the CGI-CGE not beginning until 2029, there may be no way to accelerate the 36-month holding period.  

Although the CGI-CGE provides up to $15M of capital gains exemption (for each business), AMT will still apply (unlike the QSBS). For an Alberta resident, a $15M capital gain fully excluded under the CGI-CGE should still result in over $1M of immediate tax, recoverable as a credit against regular tax over the following seven years, to the extent regular tax exceeds AMT in those years.  

It must be noted that no draft legislation was provided on this proposal, as such keen attention will be needed to see what share continuity rules will exist and the impact this may have on common planning structures (trusts, for example). 

Along with the LCGE, the CGI-CGE relies on a share sale to unlock its benefits. This raises a fundamental policy question: why construct tax incentives that reward a sale to larger (often foreign) buyers, rather than incentivizing long-term growth and reinvestment, particularly in the technology and manufacturing sectors?

 

2. Canada Growth Incentive – Rollover for Investments in Small Businesses  

The Canada Growth Incentive proposed by Finance also includes a number of adjustments to the “small-business share rollover” rules, presently set out in section 44.1 of the Income Tax Act. These rules, as they currently exist, allow an individual to defer the realization of capital gains (and the accompanying tax liability) when they sell certain eligible corporate shares (referred to here as the “old shares”) and promptly reinvest the proceeds for new eligible corporate shares (the “replacement shares”).   

The adjustments proposed under the Canada Growth Incentive would loosen some of the restrictive criteria that must be met for an individual to be eligible for this capital gains deferral. In particular, Finance proposes to extend the period of time following the sale of the old shares in which the individual must acquire the replacement shares, and to reduce the proportion of active business assets that must be maintained by the corporation throughout the period in which the individual owned the old shares before their sale. 

Extended Replacement Period 

Under the current rollover rules, the individual must acquire the replacement shares within the same year that the old shares were disposed of, or within the following calendar year, to be eligible for the capital gains deferral. The proposed changes under the Canada Growth Incentive extend this period, giving the individual up to three full calendar years following the year in which the old shares were sold to acquire the replacement shares.   

Finance intends to extend the replacement period by two more years in circumstances where the individual has put up capital (within the initial three-year replacement period) for shares to be issued at a future date (specifically to address the rise in popularity of simple agreements for future equity (SAFEs), with no draft legislation accompanying this proposal; we are keen to see how SAFEs get legislatively defined or included). This would give the individual up to five years following the year in which the old shares were sold to acquire the replacement shares under a qualifying agreement for future equity.  

 What we find interesting is that there is an inherent timing issue, and the Budget proposal handles this via a reserve mechanism. So you sell in year 1, but you don’t make the next qualifying investment until year 4, so you need to carry the gain on your return over the years by taking a reserve and reversing the reserve until you either qualify for the deduction or the gain is simply included in income. The budget is clever enough to include an interest clause that calculates interest from the year of disposition until the end of the year of inclusion, which makes sense, but is essentially a potential interest-bearing loan for several years (without collection efforts). No draft legislation exists yet to know if this will be penalized further, and interest rates on tax are generally steep, but maybe some entrepreneurs would find this type of deferral planning useful. 

Active Business Requirement 

The proposed changes would also significantly reduce the threshold for the proportion of active business assets that must be maintained by the corporation while the individual holds the old shares. Under the current legislation, shares are only eligible for the capital gains deferral if they are shares of an “eligible small business corporation” (“ESBC”). For a corporation to meet this definition at any particular time, “all or substantially all” of the fair market value of its assets must be attributable to:  

a) assets that are used principally in an active business carried on primarily in Canada by the corporation (or by another ESBC that is related to the corporation); and/or

b) shares issued by or debt owing by another ESBC that is related to the corporation

This essentially means that at least 90% (which is generally how the CRA interprets the phrase “all or substantially all”) of the assets of the corporation (or of its related subsidiary) must be active business assets, used principally in a business carried on in Canada. 

For the sale of the old shares to be eligible for the capital gains deferral, the current legislation requires that this “all or substantially all” active business asset threshold be maintained throughout the period during which the individual owned the old shares before they are sold. This can be especially burdensome, as it requires the corporation to carefully monitor its passive assets (like cash reserves, investments or, in some cases, accounts receivable and intercorporate loans) to ensure they do not reduce the proportion of the corporation’s active assets to below 90% at any point during the shareholding period, which must be at least 185 days, but can be as long as two years prior to the share sale.  

The changes proposed by Finance would replace the phrase “all or substantially all” with “primarily” (interpreted to mean over 50% instead of 90%) for the period during which the individual holds the old shares prior to their sale. This much lower threshold gives the corporation considerably more flexibility to accrue passive value without the risk of falling offside the active business asset requirement during the shareholding period. Importantly, this modification only applies to the shareholding period, which means that the corporation will still need to meet the “all or substantially all” threshold when the individual is issued or sells shares. 

Rollover Rules Remain Restrictive 

The small-business share rollover could be a powerful tax-planning tool, at least for those taxpayers who can make use of it. The incentive is capable of giving taxpayers a full deferral of capital gains on qualifying share sales. In theory, this could be claimed and reclaimed over and over again through successive share sales, provided the proceeds from each sale are reinvested in another eligible small business corporation.  

Despite its potential advantage, the small-business share rollover mechanism is often ignored in a lot of the conventional tax planning that is done today. Realistically, this incentive will not be especially useful for many taxpayers since it requires the reinvestment of capital by the taxpayer. However, there certainly are entrepreneurs and investors in Canada that could benefit from a mechanism like this, which enables them to cash out of one business on a tax-deferred basis by reinvesting their capital in their next project.  

While the changes proposed by Finance do help remove some of the conditions that restrict the use of the small-business share rollover incentive by Canadians, many other restrictive conditions and limitations remain. Professional corporations, specified financial institutions, and real-estate-based businesses are still excluded from this particular incentive. Moreover, the incentive is still only available to taxpayers who are individuals, which precludes the use of this mechanism by corporations or trusts, which are common elements in broader tax planning strategies. The changes proposed by Finance may not be enough to broaden the utility of the small-business share rollover mechanism by Canadians if these other fundamental restrictions remain unaddressed.

 

3. The Productivity Mega Deduction (Pre-Budget: September 2026) 

The Productivity Mega Deduction was introduced as a pre-Budget proposal on September 15, 2026, with accompanying draft legislation released that same day. Budget 2026 confirms it at an estimated cost of $36.1 billion over five years, the single largest measure in the budget. It also covers Canadian development expenses incurred on or after September 15, 2026.   

Rather than deducting a portion of the capital cost of depreciable property over several tax years, the proposed Productivity Mega Deduction would allow taxpayers to deduct the entire cost of eligible depreciable capital property in the year of acquisition.  

The proposed Productivity Mega Deduction would provide immediate tax relief for the purchaser. Assume an Alberta-based corporation purchases eligible equipment for $1,000,000. Assuming the corporation is taxed at the combined Federal and Alberta general tax rate of 23%, by immediately expensing the equipment in the year of acquisition, the corporation would receive a deduction of $230,000. Assuming the corporation financed the equipment for $1,000,000, the tax savings from expensing the equipment could then be applied against the outstanding loan, reducing the remaining liability to $770,000.

It should be noted that there is no fixed end date for the Productivity Mega Deduction. Additionally, unlike previous immediate expensing initiatives, there is no dollar amount threshold or shared limitation within an associated group of taxpayers. Therefore, the Productivity Mega Deduction would be the most flexible and widely available capital cost allowance tool for Canadian taxpayers, once enacted. 

The proposed Productivity Mega Deduction would apply to most depreciable capital property acquired on or after September 15th, 2026. However, there are specific exclusions to take note of: 

• The following asset classes are ineligible for the Productivity Mega Deduction: 

• • Buildings and additions to buildings, included in Classes 1 and 3. 

• • Intangible assets such as goodwill, licences, and franchises included in Class 14. 

• • Property included in Class 51, such as regulated natural gas distribution pipelines. 

• • Industrial mineral mines or the right to remove minerals from one. 

• • Timber limits or the right to cut timber, excluding timber resource properties. 

• • Qualified liquefaction equipment 

• The following assets are also not eligible for the Productivity Mega Deduction: 

• • Assets received from a non-arm’s length party. 

• • Assets received via a tax-deferred rollover, such as a Section 85 rollover. 

• • Assets that were previously used by the taxpayer. 

• • • For example, assets previously leased by a corporation and then subsequently purchased from the lessor would not be eligible for the Productivity Mega Deduction. 

• • Assets that are not “available for use” by the end of the taxation year. The deduction is claimed in the year the property becomes available for use, under the existing available-for-use rules.

There are also additional restrictions and rules for vehicles allocated to Classes 10 and 10.1. In addition to the above restrictions, vehicles are only eligible for the Productivity Mega Deduction if they were assembled in Canada. Therefore, it is advisable that businesses review the assembly history of vehicles before committing to a purchase; otherwise, a valuable tax incentive could become unavailable.   

Class 10.1 vehicles, often referred to as “passenger vehicles”, are also eligible for the Productivity Mega Deduction. These are vehicles that have a specific capital cost threshold (up to $39,000 in 2026). When a business sells a depreciated/expensed capital asset, the business may incur an income inclusion, referred to as recapture, if the business sold the assets for proceeds greater than the remaining capital cost. Class 10.1 vehicles have previously been exempt from recapture. However, if a Class 10.1 vehicle was immediately expensed via the Productivity Mega Deduction, the sale proceeds of the vehicle will become subject to recapture. A tax election will become available allowing taxpayers to exclude Class 10.1 vehicles from being immediately expensed. However, this election must be filed no later than the tax filing due date of the taxpayer for the year in which the Class 10.1 vehicle was acquired. 

Corporations, partnerships, and individual taxpayers are all eligible to utilize the Productivity Mega Deduction when it becomes available.

Corporations could use the Productivity Mega Deduction to create a tax loss in a taxation year. This would allow the corporation to either carryback or carryforward the tax loss to a previous/future tax year to offset taxable income.

Eligible partnerships, which are partnerships where all the partners are: 

• Corporations; or

• Other eligible partnerships

Can also create a tax loss via the Productivity Mega Deduction and allocate those losses to its partners.

Unfortunately, non-eligible partnerships and individual taxpayers are unable to create a tax loss with the Productivity Mega Deduction. The deduction would only be able to offset the current year taxable income earned by the non-eligible partnership or individual taxpayer.

Any depreciable capital assets that were not eligible for the Productivity Mega Deduction could still benefit from one of the other accelerated capital cost allowance initiatives, including: 

• The Reaccelerated Investment Incentive. 

• • Currently enacted under Bill C-15.

• Immediate Expensing for Manufacturing and Processing Buildings 

• • Introduced in the November 4th, 2025, Federal Budget. 

• • Yet to be enacted.

Although the Productivity Mega Deduction was created to stimulate the Canadian economy and for Canada to remain competitive on the global stage when attracting foreign investment, this measure falls short for Canadian businesses that do not rely on significant capital investment.

Additionally, taxpayers who initially benefit from the Productivity Mega Deduction will be surprised when they later sell the immediately expensed assets. The proceeds received from disposing of the assets will exceed the remaining capital cost of the assets, resulting in recapture. While the Productivity Mega Deduction may create upfront tax relief for Canadian taxpayers, it may also bring a “surprise tax” in the form of recapture later in the taxpayer’s operations, effectively turning a timely tax deduction into a possible tax deferral.

 

4. Instalment Payments for Individuals and Corporations 

Under current rules, many Canadian individuals and corporations are required to make quarterly or monthly tax instalment payments if their net tax owing exceeds $3,000. These rules are designed to ensure steady tax collection on income not subject to source withholdings (e.g., business income, investment returns, dividends, rental revenue, etc.). These requirements have long imposed an administrative burden and cash-flow strain on smaller businesses and individual taxpayers. 

Budget 2026 proposes a welcome adjustment to these rules by raising the instalment thresholds for the 2028 taxation year (or tax years that begin on or after January 1, 2028 in the case of corporations):

• Increased Thresholds: The basic instalment threshold will rise from $3,000 to $7,500 for corporations and individuals outside Quebec (from $1,800 to $4,500 for Quebec resident individuals). 

• Indexed for Inflation: To prevent bracket creep from pulling lower-risk taxpayers back into the instalment regime over time, these new thresholds will be indexed to inflation annually (rounded to the nearest $500). 

• Same Multi-Year Logic: The underlying mechanism remains unchanged; instalments are only triggered if net tax owing exceeds the new threshold in both the current taxation year and at least one of the two preceding years. Any remaining balance will continue to be due on the standard balance-due date.

Expanding the Single Annual Instalment Option for Business Income 

In addition to raising the dollar thresholds, Budget 2026 takes aim at paperwork for self-employed Canadians. Currently, only individuals whose primary source of income is farming or fishing enjoy the flexibility of making a single annual tax instalment instead of four quarterly payments. 

Starting in 2028, Budget 2026 proposes to extend this single-instalment option to all individuals whose primary source of income is from a business (including professional and commission-based income). Under the proposed framework, eligible self-employed individuals can make a single payment equal to two-thirds of their estimated net tax owing by December 31, with the remaining balance paid by their regular filing and balance-due date. This change aims to streamline cash flow management and reduce non-compliance risks for entrepreneurs and independent professionals.

 

5. Income Tax Return Filing and Balance-Due Dates for Individuals 

Individual tax season in Canada has been governed by a bifurcated deadline structure: most taxpayers must file and pay by April 30, while self-employed individuals and their spouses enjoy an extended filing deadline of June 15—even though any balance owing remains strictly due on April 30. This misalignment has long created administrative confusion, inadvertent late-payment interest charges for self-employed taxpayers, and a high-stress bottleneck for tax practitioners across the country.  

Budget 2026 proposes a shift by establishing a single deadline, May 15, for all individual T1 tax returns and balance-due payments.  

Starting with the 2027 taxation year (filed in spring 2028), all individuals—including self-employed Canadians and their spouses or common-law partners—will have until May 15 to file their T1 return and pay any remaining tax balance. The proposal replaces both the standard April 30 date and the June 15 self-employed extension, bringing payment and filing dates into alignment.  

From a tax administration perspective, this proposal is practical. Harmonizing the filing and tax due dates makes inherent sense, and all taxpayers benefit from an extra two weeks to pay their taxes. Self-employed individuals (and their spouses) now have to file a month earlier (but most of these individuals still needed to essentially have their return prepared in order to know how much to pay). Selfishly, having personal tax season extend into May doesn’t provide much appeal, as spreading out the demands of personal tax season now pushes close to Victoria Day. However, it must be said that we’ve heard from many firms that the personal tax season demands are very high, and we can’t help but think an extra 15 days will be welcome by many practitioners.

 

6. Northern Residents Deductions 

The Northern Residents Deductions (NRD) are intended to offset the cost of living in remote regions; however, rigid limitations have historically curbed the deduction’s true value for many northern workers and families. Budget 2026 proposes key changes to modernize both the residency and travel components starting in the 2027 taxation year: 

• Residency Deduction Restrictions Removed: Taxpayers will no longer have their residency deduction clawed back by non-taxable employer board and lodging benefits. Additionally, the proposal eliminates the rule capping the residency deduction at 20% of net income, allowing lower-income northern taxpayers to claim their full entitlement. 

• Travel Deduction Levelled Out: Currently, taxpayers without employer-provided travel assistance are capped by a $1,200 “standard amount” allocation per trip. Budget 2026 eliminates this restriction entirely. All eligible northern residents—regardless of whether their employer provides travel benefits—can deduct actual travel costs up to the lowest return airfare to the nearest designated city.

This is an overdue simplification.

 

7. Expansion of the Intergenerational Farm and Fishing Property Rollover 

Under existing tax rules, Canadian farmers and fishers can transfer qualified farm or fishing property (or shares/interests in family farming or fishing corporations and partnerships) to the next generation on a tax-deferred basis. However, the definition of a “child” under the Income Tax Act has historically been limited to direct lineage (children, stepchildren, grandchildren, and great-grandchildren).  

Budget 2026 proposes a long-overdue expansion of the intergenerational rollover rules to be broader and more inclusive:  

• Effective for transfers occurring on or after January 1, 2027, the tax-deferred rollover will be expanded to include transfers to a niece, nephew, grandniece, or grandnephew (including those of the taxpayer’s spouse or common-law partner).  

• This change ensures that farm and fishing business owners who do not have direct descendants (or whose children choose alternative career paths) can pass the family operation down to extended family members who are actively involved without triggering immediate capital gains liabilities.  

This is a sensible and pragmatic policy shift that reflects the reality of demographic trends in Canada’s agricultural and fishing sectors. Many family operations are carried on by extended family members, and forcing a taxable disposition simply because the successor is a niece or nephew rather than a child has created artificial succession barriers. Expanding eligibility to extended family provides vital flexibility for long-term tax planning.

 

8. Registered Disability Savings Plan 

To prevent beneficiaries from missing out on critical federal grants and bonds, a temporary measure allowed a “qualifying family member” (defined as a parent, spouse, common-law partner, or sibling) to establish an RDSP as the plan holder. That relief was set to expire at the end of 2026. Budget 2026 removes this deadline by proposing to make the Qualifying Family Member measure permanent.    

This is a common-sense tax administration extension and maintains equity.

 

9. Optional Flat Amounts for Personal Income Tax Deductions and Credits 

Budget 2026 reduces administrative friction by introducing optional flat-amount calculation methods for specific personal tax deductions and credits starting in the 2027 taxation year.  

Under the proposed rules, eligible taxpayers can choose to claim a standardized flat rate instead of gathering receipts and itemizing actual out-of-pocket expenses for certain deductions and credits, including:  

• Moving Expense Deduction – $1,000 for individuals undertaking an eligible relocation. 

• Labour Mobility Deduction for Tradespeople – $1,500 for Eligible tradespeople and apprentices relocating temporarily for work. 

• Home Accessibility Tax Credit – $1,000 for individuals undertaking qualifying accessibility renovations. 

• Adoption Expense Tax Credit – $1,200 per adopted child in the year an adoption is completed 

This is a sensible and pragmatic policy shift toward tax simplification. While taxpayers will still need to establish their underlying eligibility, eliminating receipt-tracking for small, routine claims will significantly ease compliance for individuals and reduce audit friction with the CRA. Giving taxpayers the option to choose between actual expenses or a standardized flat rate should ensure no one is penalized.

 

10. Foreign Income Verification Statement – Form T1135 

Canadian taxpayers holding foreign investments have faced the onerous compliance burden of filing Form T1135 (Foreign Income Verification Statement). Originally introduced to track tax evasion, the static $100,000 cost-base threshold has increasingly ensnared average investors and retirees holding modest international equities or foreign assets simply due to asset growth and inflation. 

Budget 2026 proposes a long-overdue easing of these reporting obligations for taxation years and fiscal periods ending after 2026: 

• The total cost-base threshold triggering the requirement to file Form T1135 will increase from $100,000 to $200,000. 

• The CRA will expand access to the simplified reporting method, raising the upper limit from less than $250,000 to less than $500,000 in total foreign asset cost throughout the year. 

This is a win for compliance simplification. Doubling both the basic filing limit and the simplified reporting threshold should eliminate unnecessary paperwork for thousands of middle-class investors holding foreign ETFs or small international portfolios. However, taxpayers should remember that while reporting requirements are being streamlined, the underlying obligation to report and pay tax on all worldwide income remains entirely unchanged. 

We hope Budget 2027 goes one step further and eliminates the need to report foreign equities held in a Canadian brokerage account. If someone is receiving T slips on their assets, why in the world should they need to file a T1135?

 

11. Apprentice Vehicle Mechanics’ Tools Deduction 

Historically, apprentice mechanics seeking to maximize tax relief had to navigate a cumbersome two-tier system: first claiming up to $1,000 under the general “tradespeople’s tool expenses deduction”, and then claiming a separate “apprentice vehicle mechanics’ tools deduction” for the remaining “extraordinary portion” of their tool costs (subject to income-based reductions). 

Budget 2026 drastically simplifies this mechanism starting in the 2027 taxation year: 

• Apprentice vehicle mechanics will no longer have to split their tool claims across two separate deductions. Instead, all eligible tool costs can be claimed under a single consolidated apprentice deduction. 

• The deduction will equal the total cost of eligible new tools acquired in the taxation year, minus only the Canada Employment Credit amount. It will no longer be reduced by the $1,000 tradesperson limit or capped by 5% of apprenticeship income. 

• Eligible apprentice vehicle mechanics’ tools will be carved out of the general tradespeople’s tool deduction to avoid double-dipping. However, mechanics who work in another qualifying trade outside their vehicle apprenticeship can still utilize the general tradesperson deduction for those separate tool expenses. 

This is a procedural cleanup. The prior calculation was unnecessarily complex and penalized low-earning apprentices who needed significant up-front tool investments to start their careers.

 

12. Medical Expense Tax Credit and Disability Supports Deduction 

Claiming medical expenses has required meticulous receipt-tracking and complex calculations. Budget 2026 proposes a simplification of the Medical Expense Tax Credit (METC) and Disability Supports Deduction (DSD) by easing documentation rules and introducing optional flat-amount claims. 

• Documentation Simplified (Effective 2026): 

• • No prescriptions or certification of medical condition required for certain expenses generally used exclusively for medical purposes (See Schedule Below) 

• • Only certification of the medical condition required for certain expenses that may have a non-medical purpose (See Schedule Below) 

• New Optional Flat-Amount Claims: Instead of tracking every receipt and incremental cost, taxpayers can elect standardized flat amounts for specific categories: 

• • Gluten-Free Food (Effective 2026): An optional $1,000 flat claim for celiac taxpayers, eliminating the tedious calculation of price differentials between gluten-free and regular products. 

• • Incontinence Products (Effective 2027): An optional $500 flat claim for certified incontinence supplies. 

• • Service Dogs (Effective 2027): An optional $2,000 flat claim for annual care and maintenance of a service dog (the initial acquisition cost can still be itemized separately). Other service animals remain under itemized rules. 

• • These flat-amount options are subject to anti-avoidance provisions and limitations which allow the flat-amount to one individual claiming for an eligible individual (per category). Thus, if multiple individuals wish to claim expenses in respect of the same eligible individual, the flat-amount would not be available, and itemized expenses and receipts would be required. 

This is a practical improvement. Replacing tedious math with optional flat rates is welcome.

 

13. Deductibility of Expenses Against Commission Income 

Under current tax rules, employees who earn commission income face an “either/or” trap when claiming employment expenses. If they choose to deduct expenses under the special commission-employee provision (which covers items like home office expenses, advertising, entertainment, and cell phone costs, up to the amount of their commission income), they are strictly barred from deducting travel or motor vehicle expenses under the general employee rules. This forces commission salespeople to perform dual calculations each year to determine whether it was more advantageous to claim motor vehicle expenses under general rules or forgo them entirely to claim other commission-related costs. 

Budget 2026 proposes to eliminate this rigid restriction starting in the 2027 taxation year. Commission employees will no longer have to choose between rules. They will be permitted to claim travel and motor vehicle expenses under the general employee provisions and claim other qualifying employment expenses under the commission-employee rules (capped at their commission income). 

This is a welcome inclusion in the Budget.

 

14. Scholarship, Fellowship, and Bursary Income 

Students will no longer lose their “qualifying student” status (or their eligibility for the scholarship exemption) simply because their employer or another arm’s-length third party provided financial support for their studies. This will apply to 2027 and later years. This is a welcome change.

 

15. Deductibility of Expenses by Employed Artists 

Budget 2026 proposes to eliminate the lesser of $1,000 and 20% of income caps starting in the 2027 taxation year. The current restrictive dollar and percentage caps will be replaced with a single ceiling equal to 100% of the artist’s employment income for the year from specified artistic activities.

 

16. Volunteer Firefighters and Search and Rescue Volunteers Tax Credit 

Under existing rules, Canadians who provide essential emergency response services can claim either the Volunteer Firefighters Tax Credit or the Search and Rescue Volunteers Tax Credit. Both non-refundable tax credits allow eligible volunteers to claim a maximum credit calculated as 14% of a $6,000 baseline amount (yielding up to $840 in federal tax savings). 

However, taxpayers are currently forced to choose between the two credits. Crucially, hours logged as a volunteer firefighter cannot be combined with search and rescue volunteer hours to meet the required 200-hour service threshold and vice versa. 

Budget 2026 proposes to streamline these measures starting in the 2027 taxation year. The two existing credits will be merged into a single Volunteer Firefighters and Search and Rescue Volunteers Tax Credit calculated on the same $6,000 base amount at the 14% non-refundable rate. Volunteers will now be able to aggregate hours worked across both volunteer firefighting and search and rescue activities to satisfy the mandatory 200-hour annual threshold. 

This is a small but practical administrative fix.

 

17. RRSP For Life 

One of the most rigid milestones in Canadian retirement tax planning has been the mandatory age 71 deadline. By December 31 of the year an individual turns 71, they are legally required to close their Registered Retirement Savings Plan (RRSP) (typically by converting the accumulated funds into a Registered Retirement Income Fund (RRIF), purchasing an annuity, or deregistering the account in a single, heavily taxed lump sum).

Budget 2026 announces the federal government’s intention to dismantle this dual structure by merging the core features of the RRSP and RRIF into a single, unified vehicle under the Income Tax Act: an “RRSP for life.”

• Taxpayers will no longer be forced to convert their RRSP into a RRIF at age 71. The same registered vehicle can remain open for the account holder’s entire lifetime.  

• The change streamlines account administration, but it does not alter decumulation rules. Starting at age 72, account holders will still be subject to mandatory annual minimum withdrawal requirements to ensure retirement savings are gradually drawn down and taxed.

Alongside the structural merger, the government has launched public consultations to resolve long-standing friction surrounding RRSPs upon the account holder’s death:   

• Currently, Tax-Free Savings Accounts (TFSAs) allow a surviving spouse or common-law partner to step directly into the deceased’s account as a “successor holder.” The government is considering adapting this mechanism for RRSPs. This would keep the account open seamlessly until the surviving partner’s death, bypassing the need to include the account’s total value in the deceased’s final tax return and utilize the corresponding deduction.  

• Under current rules, transferring RRSP funds to a surviving spouse or eligible dependent involves a multi-step process: an initial income inclusion on the deceased’s return paired with an offsetting deduction for the recipient. Budget 2026 explores replacing this cumbersome process with direct, tax-free account-to-account transfers for qualifying survivors.  

This proposal is one of the most substantial structural shifts to Canadian retirement tax rules in a while. Converting an RRSP to a RRIF has long been a purely administrative hurdle that created unnecessary paperwork for financial institutions and confusion for seniors. Creating a continuous “RRSP for life” is a sensible simplification.  

However, the real potential value of this proposal lies in potentially granting RRSPs “successor holder” capabilities and direct transfer mechanisms would bring them into line with TFSAs, eliminating the tax traps and probate delays that currently occur when handling registered accounts upon death. 

Taxpayers should note that this proposal does not alter the underlying RRIF minimum withdrawal percentages. For clients concerned about forced income spikes, bracket creep, or Old Age Security (OAS) clawbacks late in retirement, strategic tax planning—such as early, deliberate RRSP drawdowns prior to age 72—will remain just as essential as before.  

Time will tell whether aligning RRSPs with TFSAs can be accomplished.

 

18. Excess Corporate Holdings Regime for Private Foundations 

The excess corporate holdings (ECH) regime was originally introduced to prevent high-net-worth donors from using private registered charities to maintain covert control over operating businesses. This has produced one of the most complex administrative burdens in the charity sector. Under current rules, a private foundation must continuously track and report its shareholdings—and those of non-arm’s length “relevant persons”—to ensure combined ownership does not exceed 20% of any class of shares in a corporation, forcing mandatory divestments when thresholds are breached. 

Budget 2026 proposes to eliminate the excess corporate holdings regime for taxation years beginning on or after January 1, 2027. 

Instead of maintaining a separate, complex reporting and divestment framework for private foundations, Budget 2026 aligns the rules across the philanthropic sector by extending the long-standing corporate control prohibition that currently applies to public foundations. 

This is a welcome change.

 

19. Objections to Assessments 

Navigating tax disputes with the CRA has long been governed by strict, compressed timelines. Under current rules, most taxpayers have just 90 days from the date a Notice of Assessment is sent to file a formal Notice of Objection. While individuals and graduated rate estates enjoy a slightly flexible deadline (the later of 90 days from the assessment date or one year from the original return filing due date), missing these dates historically forced taxpayers to submit a formal application for an extension of time. Because the CRA granted these extension applications in almost every instance, the two-step process served primarily as an administrative burden and a procedural trap for taxpayers. 

Budget 2026 proposes to eliminate this extra hurdle by significantly expanding the statutory deadlines to file a Notice of Objection directly: 

• Extended Objection Window for Most Taxpayers: For corporations, trusts, and other entities, the deadline to file a Notice of Objection will be extended from 90 days to one year from the date the Notice of Assessment is sent. 

• Extended Window for Individuals and Graduated Rate Estates: The deadline for individuals and graduated rate estates will be extended to the later of one year after the Notice of Assessment is sent and two years from the tax return filing due date for that taxation year. 

• Elimination of Time Extension Applications: Because the objection deadlines are being directly expanded to match the former extension window, the formal process of applying to the CRA for an extension of time to file an objection will be eliminated. 

• Effective Date: This change will apply to assessments sent on or after the date that is three months after Royal Assent. 

This is a pragmatic and welcome administrative streamlining. The existing 90-day window was often too tight for taxpayers and their advisors to gather documentation, analyze complex audit findings, and draft formal objections. However, the loss of the ability to apply for an extension means that this measure ultimately does not “move the needle” much.

 

20. Disclosure of Tax Debt to Credit Bureaus 

Budget 2026 allows the CRA to report unpaid tax debts directly to credit bureaus (Equifax and TransUnion), effective upon Royal Assent. 

The CRA can only report a tax debt if all four conditions are met: 

1. The outstanding debt (Income Tax or GST/HST) exceeds $50,000. 
2. All rights to object to or appeal the assessment have expired or been exhausted.
3. The CRA sends a formal notice at least 30 days prior to reporting.
4. The CRA has attempted collection and offered the taxpayer a chance to enter a reasonable payment arrangement.  

A CRA credit hit can freeze bank lines, trigger loan defaults, and lower commercial credit scores. Taxpayers with large balances should proactively negotiate a payment plan or file a formal objection to prevent disclosures.

 

21. Trust Distributions to Non-Residents 

For background, the current Act, in subsection 107(2), permits most inter vivos trusts and testamentary trusts to distribute property to a Canadian resident beneficiary on a tax-deferred basis. Any accrued gain would typically be deferred until the beneficiary disposes of the property at a later point in time.

However, this tax-deferred rollover is not available where a beneficiary is a non-resident of Canada. Instead, subsection 107(5) applies subsection 107(2.1) to the distribution, such that the trust is deemed to have disposed of, and the non-resident beneficiary deemed to have acquired, the property at fair market value. The rationale is that Canada is thus able to tax the accrued gain during the time the trust held the property (otherwise capital gains that should be subject to Canadian tax could largely avoid Canadian tax).

The 2026 Federal Budget proposes to amend subsection 107(5) of the Act, effective for distributions on or after Budget Day, to also capture indirect distributions of trust property to non-resident beneficiaries; in doing so, it proposes to replace subsection 107(5) with the following:

“Distribution to non-resident 

(5) Subsection (2.1) applies (and subsection (2) does not apply) in respect of a distribution of a property by a trust, in satisfaction of all or part of a capital interest in the trust, to 

(a) a non-resident person, unless the property is described in any of subparagraphs 128.1(4)(b)(i) to (iii); or 

(b) a corporation resident in Canada or a partnership, any share or interest in which is held, directly or indirectly in any manner whatever, by a non-resident person.”

The proposed amendment is intended to deny the subsection 107(2) rollover where trust property is distributed to a Canadian corporation or partnership in which a share or interest is held, directly or indirectly, by a non-resident person. However, the wording proposed by Finance may be broader than necessary to address the intended policy concern. For example, “any share or interest” and “directly or indirectly” may give rise to unintended consequences such as:

• A Canadian corporation beneficiary in which a non-resident holds 0.01% of the non-voting shares and a Canadian corporation wholly owned by a non-resident would each acquire the property at fair market value, despite the first being substantially held by residents of Canada. 

• Subsection 107(5)(a) provides a carve-out for property described in 128.1(4)(b)(i) to (iii), which includes real property in Canada, Canadian resource property, and timber resource property. However, subsection 107(5)(b) does not expressly state the same carve-out. Thus, if a trust holds real property in Canada and distributes it to a Canadian corporation, with a non-resident shareholder (even holding 0.01% of non-voting shares), it would trigger a tax event at the fair market value on the date of the transfer. Additionally, dividends flowing up to the non-resident shareholder would be further subject to withholding tax pursuant to subsection 212(2) (at the rate of 25% unless reduced by a tax treaty). 

• A testamentary trust or estate that distributes property to a Canadian resident corporation, whose shares are held by the deceased’s children, one of whom is a non-resident, is subject to 107(5), even if the non-resident child does not directly receive the distributed property. This may cause a subsequent disposition at fair market value on the date the property is distributed. 

The Department of Finance and the CRA have long had issues with distributions to Canadian resident corporations with non-resident owners and have flagged such transactions as possibly being subject to the GAAR, as well as being a “notifiable transaction”. This budget proposal simply legislates away these concerns. We recommend practitioners be on alert to the potential consequences of the proposed revisions to subsection 107(5).

 

22. Registered Pension Plans

The 2026 Budget proposes amendments to the Act that appear to provide greater certainty of the tax consequences from a revocation of a registered pension plan. 

For individual pension plans, the definition of an IPP is broadened from January 1, 2027. From January 1, 2028, the controlling individual would owe tax equal to 50% of the fair market value of non-qualified or prohibited investments and 100% of the value of any advantage, and a plan whose assets exceed 200% of its pension liabilities could be revoked on at least 30 days’ notice from the CRA. Owner-managers with overfunded IPPs should review their funding and investments before 2028.

 

23. Build Canada Workers Benefit

Budget 2026 proposes to enhance and rename the Canada Workers Benefit as the Build Canada Workers Benefit. This revitalized refundable tax credit lowers the working income threshold for eligibility and phases out the Advance Canada Workers Benefit, with the resulting savings to be reinvested in the enhanced Build Canada Workers Benefit.

 

24. Taxable Preferred Shares 

Part VI.1 tax applies to taxable Canadian corporations that pay taxable dividends (including 84(3) deemed dividends) on so-called “taxable preferred shares” (the definition of which is worded so broadly that it includes most preferred shares). Part VI.1 tax, which ranges from 25% to 40% of the dividend amount, is levied on the dividend payor, so in situations involving deemed dividends on share redemptions, the payor would generally be the shares’ issuing corporation.

Normally, Part VI.1 tax risk on deemed dividends arising on redemptions of preferred shares between related taxpayers is low due to the “substantial interest” carve-out; substantial interest is defined as where the shareholder is related to the dividend-paying corporation or owns at least 25% of the votes and value of all issued shares of that corporation.

Nevertheless, the taxable preferred share regime was drafted so broadly that it can apply to taxpayers and situations it was likely never intended to. For instance, assume an Estate of a deceased taxpayer is left with Opco (CCPC) preferred shares from an earlier estate freeze. The Estate opts to donate the preferred shares to a registered charity for a donation tax credit to offset tax liabilities of the Estate or on the deceased’s terminal T1. The same shares are later redeemed by the charity; an 84(3) deemed dividend arises (paid by Opco and received by the charity) and, presuming the charity does not own at least 25% of the votes and value of all issued shares of Opco, Part VI.1 tax would apply to Opco, subject to the annual $500,000 dividend allowance threshold (and the potential exception in the mid-amble of subsection 191(4), fact dependent of course).

Budget 2026 proposes to exempt dividends paid by CCPCs from the taxable preferred share regime by excluding dividends paid by such corporations from Part VI.1 tax. The exemption would apply to dividends paid on or after Budget Day 2026. For other corporations, the dividend allowance rises from $500,000 to $1.5 million (with the reduction threshold rising from $1 million to $3 million) for taxation years ending after 2026. This is a welcome change, as the complex and broad nature of the regime could unfairly be applicable against taxpayers beyond the original intention of the legislation.

 

25. Corporate Tax Elections 

Various provisions of the Act or Regulations require that a certified copy of a corporate resolution be provided in respect of an election or transfer. For example, section 2101 of the Regulations requires, as part of a valid capital dividend election, that a certified copy of the directors’ resolution authorizing the election be provided as part of the submission. As another example, subsection 127(15) requires the same in respect of the transfer of qualified expenditures for the purposes of the SR&ED regime.

Presumably, the original rationale for this procedural requirement was that of an evidentiary one – to show that the underlying election or transfer was subject to corporate authorization and approval.

Budget 2026 proposes to eliminate this procedural requirement for elections and agreements made on or after Royal Assent of the enacting legislation. Although this procedural “hoop” is not always an onerous one to jump through, the proposal is a welcome step towards simplifying otherwise ordinary and mundane transactions under the Act.

 

26. Corporate Loss Transfers 

Currently, Canadian tax rules do not easily permit intercorporate loss utilization. For example, a parent company cannot directly use non-capital losses of a wholly-owned subsidiary without prior planning or a corporate reorganization. As a result, the CRA has long blessed certain accepted forms of corporate loss utilization methods¹ such as interest-based loss consolidation planning.

Budget 2026 is soliciting stakeholder discussion for the introduction of a corporate loss transfer rule.  This is a welcome and long overdue discussion. Other jurisdictions in the world, such as the United States, have had mechanisms in place permitting loss utilization across a corporate group for well over a century. Canadian corporate taxpayers within the same economic group should indeed be able to utilize losses across different related entities without having to resort to complex reorganizations or planning.

The current parameters for the corporate loss transfer rule would seem to allow only non-capital losses between i) a parent and a wholly-owned (directly or indirectly) subsidiary and ii) two subsidiary corporations that are wholly owned, directly or indirectly, by the same parent corporation. Furthermore, the rule would only be available for Canadian resident corporations that are subject to Part I tax.

It is unknown why Finance seems to be restricting the loss transfer rule to only non-capital losses for now. Perhaps it is because it has always been easier to utilize capital losses within the same corporate group compared to non-capital losses – for example, a parent transferring assets with accrued gains on a tax-deferred basis to a subsidiary with capital loss carryforwards, then having the subsidiary sell the asset for FMV proceeds back to the parent. Regardless, allowing non-capital losses, but not capital losses, to be transferred within a corporate group seems to make little sense from a policy perspective.

Finance is also rightfully concerned about the possibility of unintended tax benefits arising that are not justified based on the underlying economic reality. The example given in the backgrounder is that of a Parentco investing $100 in Subco; Subco subsequently loses the $100 in a failed business venture, then transfers the non-capital loss to Parentco under the new rules. On paper, Parentco now has $100 in losses from Subco and $100 in ACB in Subco, which is now presumably worthless. Parentco could then dissolve or dispose of Subco and claim $100 in capital losses – Parentco has only suffered $100 in economic losses yet has $200 of tax losses.

To prevent such unintended tax benefits, new rules will have to be drafted. A simple solution to Finance’s example would be to implement a dollar-for-dollar ACB grind to Parentco, equal to the amount of losses transferred. Or alternatively, a stop-loss rule could apply to suspend the capital loss on disposition of Subco until such time Parentco sustains sufficient economic losses. As Finance correctly infers, the challenge will be in drafting these new rules to apply against the entire corporate group. Whatever the case, the new loss transfer regime and its accompanying anti-avoidance rules will surely add to the ever-increasing complexity of Canada’s tax system; the Act already has a myriad of stop-loss and ACB grinding provisions – what’s another one on the pile?

 

¹See Income Tax – Technical News No. 30.

 

27. Administrative Penalties 

Budget 2026 is proposing an inflation adjustment to several fixed-dollar administrative penalties under the Act, with a subsequent indexation adjustment to inflation once every five years. The changes would apply to taxation years or fiscal periods ending after 2027. The list of administrative penalties affected is long. However, below is a list of some of the more commonly encountered fixed-dollar penalties that are subject to the inflation adjustment:

• 85(8)(b) – Penalty for late-filed section 85 elections 

• 96(6) – Penalty for late-filed subsection 97(2) elections (tax-deferred rollover of property to a partnership) 

• 162(7) – General administrative penalty for failure to file an information return or failure to comply with a duty or obligation under the Act or Regulations. This encompasses information returns such as the T1134s, T1135s, and T3 returns. 

• 162(7.01) – General administrative penalty for failure to file prescribed information returns. This includes most “T-slip” returns (T5, T4, T3, T4A, etc.).

Also part of the review is the calibration of certain penalties in accordance with the size of the taxpayer. The new sizing is divided into medium and large corporations or partnerships pursuant to proposed subsection 162(7.11) – a taxpayer that does not fall into the medium or large categories would default to the “normal” penalty amounts.  

For corporations, the new sizing rules piggyback off the existing definition of “large corporation” under subsection 225.1(8). Medium corporations are those with taxable capital employed in Canada of more than $10 million and up to $50 million. Large corporations are those with taxable capital employed in Canada in excess of $50 million. The test takes into account the capital of the corporation and any corporation that is related to the particular corporation. For CCPCs, the test considers only other associated corporations.  

For partnerships, the test is instead a gross revenue test; a medium-sized partnership is a partnership that had gross revenues of at least $2 million but less than $10 million for the fiscal year preceding the fiscal period to which the penalty applies, and a large-sized partnership is one with gross revenues of $10 million or more. 

According to the draft legislation, the difference between a “small”, medium, and large-sized taxpayer for a fixed-dollar administrative penalty under subsection 162(7) is as follows:

• “Small” – Greater of $100 and $25 times the number of days (not exceeding 100) during which the failure continues, for a maximum penalty of $2,500.  

• “Medium” – Greater of $300 and $75 times the number of days (not exceeding 100) during which the failure continues, for a max penalty of $7,500.  

• “Large” – Greater of $800 and $200 times the number of days (not exceeding 100) during which the failure continues, for a max penalty of $20,000.

In effect, the medium-size calibration increases the penalty three-fold, while the large-size status increases the penalty eight-fold from the baseline measurement of a “small” taxpayer. Although the max penalty amounts may not appear that material to a medium– or large-sized taxpayer, it is important to remember that a 162(7) penalty is calculated for each instance of a failure to comply or file an information return; as such, taxpayers with an extensive history of non-compliance could find that the penalties quickly rack up. We also note a sweeping inflation adjustment for penalties, but no corresponding sweeping inflation adjustments for deduction or credit amounts (although many are pegged to inflation, certainly not all). 

 

28. Taxable Canadian Property 

Budget 2026 proposes targeted amendments to the rules that apply where a non-resident disposes of “taxable Canadian property” (“TCP“). The amendments would

(i) relieve certain fully tax-deferred section 85 rollovers of TCP from section 116 withholding and remittance requirements; 

(ii) reduce the withholding and remittance rates where a non-resident vendor is a corporation; and  

(iii) expand the anti-avoidance rule in subsection 69(11) for rollovers of TCP by a non-resident.

Background on TCP and Section 116 Requirements 

Very generally, TCP can be described as Canadian real property, Canadian resource and timber resource property, property used in a business carried on in Canada, and shares or interests that derive more than 50% of its fair market value, directly or indirectly, from such property.  

Where a non-resident vendor (the “Vendor”) disposes of TCP, the Vendor must notify the CRA, either before the disposition as per subsection 116(1), or not later than 10 days after the disposition pursuant to subsection 116(3). After satisfying the CRA of security, the sum of the vendor’s tax liability, or remittance, the CRA typically issues a “comfort letter” with a clearance certificate to follow. 

Pursuant to subsection 116(5), unless a certificate has been issued, the Purchaser may be liable for tax for a proportion of the purchase price (the “Withholding Amount”). The Withholding Amount must be remitted by the Purchaser to the CRA within 30 days after the end of the month of the transaction. That said, given the long processing times to receive a clearance certificate, the CRA provides an administrative exception that the Purchaser is not required to remit the Withholding Amount within the specified time if a comfort letter has been issued. 

The current Withholding Amount for a Purchaser is 25% for dispositions of most TCP, including real property held as capital property. The Withholding Amount is 50% for specified TCP described in subsection 116(5.2), which is, in general, life insurance policy in Canada, Canadian resource property, Canadian real property (other than capital property), or depreciable taxable Canadian property (“Specified TCP”).

Subsection 85(1) and 85(2) Excluded Transfers: 

The proposed amendments and additions to section 116 would relieve the Purchaser of the strict subsection 116(5) liability and not require the Purchaser to remit the Withholding Amount to the CRA, regardless of whether the transferred property is TCP or Specified TCP, if:

(i) The transferred property is eligible property pursuant to subsection 85(1.1) or subsection 85(2), as the case may be; 

(ii) The transferred property was acquired pursuant to either subsection 85(1) or 85(2), at an elected amount equal to the Vendor’s cost base;  

(iii) The Vendor and Purchaser file the appropriate election under subsection 85(1) or 85(2) within 30 days from date of the transfer; and 

(iv) Pursuant to subsection 116(5.02), the Purchaser provides notice to the CRA of the transaction within 30 days from the date of transfer. 

 Practitioners should note the following in respect of these transfers: 

(i) The Purchaser is required to conduct reasonable inquiry that no amount in respect of the disposition shall be included in the Vendor’s taxable income. This may include ensuring that the elected amount is equal to the Vendor’s cost base. 

(ii) The 30-day deadline from the date of transfer to file the 85(1) or 85(2) election and notify the CRA of the transfer are both conditions precedent in order for Purchaser to qualify for the section 116 relief.  

 If the foregoing is satisfied, the Purchaser should not be liable under subsection 116 to withhold a portion of the elected amount/purchase price, and the Vendor may no longer need to obtain a clearance certificate.

Reduction in the Withholding and Remittance Requirements: 

If the Vendor is a corporation, as per the proposed subsection 116(5.6), the Withholding Amount would be reduced as follows:

(i) For TCP, the Withholding Amount would be reduced from 25% to 15%.

(ii) For Specified TCP, the Withholding Amount would be reduced from 50% to 30%.

Anti-Avoidance Rule Amendments: 

For background, subsection 69(11) is an anti-avoidance rule which, very generally, applies where a taxpayer disposes of property for proceeds less than its fair market value (i.e a subsection 85(1) or 85(2) rollover), and it may reasonably be considered that one of the main purposes of the series of transactions that includes the disposition was to obtain the benefit of either (a) a deduction in computing income, taxable income, taxable income earned in Canada or tax payable that is available to a non-affiliated person, or (b) an exemption from tax available to any person, in each case in respect of a subsequent disposition of “the property or property substituted for the property”. Where the subsequent disposition occurs within three years after the original disposition, the taxpayer is deemed to have disposed of the property at its fair market value at the time of the original disposition. 

Budget 2026 proposes to introduce subsection 69(15), which modifies how subsection 69(11) applies when a non-resident disposes of property that is TCP. Particularly, it modifies subsection 69(11) by:

(i) Extending the “window” for the disposition from three years to five years; and 

(ii) Expanding “the property or property substituted for the property” to also include any property that, at any time during the 60-month period beginning at the time of the original disposition, derives more than 50% of its fair market value, directly or indirectly, from the property or substituted property. 

Overall, these proposed amendments and additions are welcome.

SCHEDULE:  List of METC reduced documentation items (Effective 2026) 

• No Prescriptions or Certification of Medical Condition Required:  

• • Insulin 

• • Device or equipment designed exclusively for individuals suffering from a severe chronic respiratory ailment or a severe chronic immune system dysregulation (e.g., CPAP) 

• • Infusion pump, including disposable peripherals, used in the treatment of diabetes 

• • Blood coagulation monitor, including disposable peripherals, for anti-coagulation therapy

• Only Certification of the Medical Condition:  

• • Liver extract injectable or vitamin B12 for use by an individual who has pernicious anemia 

• • Device or equipment exclusively designed to pace or monitor the heart of an individual who suffers from heart disease 

• • External breast prosthesis for use by an individual who has had a mastectomy 

• • Teletypewriter or similar device, including a telephone ringing indicator, for use by a mute or deaf individual to make and receive phone calls 

• • Optical scanner or similar device designed to be used by a blind individual to read print. 

• • Device or software designed to be used by an individual who is blind or has a severe learning disability to read print 

• • Power-operated lift or transportation equipment designed exclusively for use by, or for, a disabled individual, to allow the individual to gain access to different areas of a building, to assist the individual to gain access to a vehicle, or to place the individual’s wheelchair in or on a vehicle 

• • Device designed exclusively to enable an individual with a mobility impairment to operate a vehicle 

• • Braille printer designed exclusively to be used by a blind individual 

• • Electronic speech synthesizer for use by a mute individual 

• • Visual or vibratory signalling device, including a visual fire alarm indicator, for an individual with a hearing impairment 

• • Device designed to be attached to infants diagnosed as being prone to sudden infant death syndrome in order to sound an alarm if the infant ceases to breathe 

• • Talking textbook for use by an individual with a perceptual disability in connection with their enrolment at an educational institution in Canada or a designated educational institution 

• • Braille note-taker designed to be used by a blind individual 

• • Page turner designed to be used by an individual who has a severe and prolonged impairment that markedly restricts their ability to use their arms or hands 

• • Altered auditory feedback device designed to be used by an individual who has a speech impairment 

• • Standing device designed to be used by an individual who has a severe mobility impairment