Federal Budget 2025 promises big, bold measures, but delivers modest change without the ‘austerity budget’ promised

Every young government seeks to impress with its debut tax and spending plan. Federal Budget 2025 was Prime Minister Mark Carney’s first opportunity to reset Canada’s fiscal direction. While it delivers new tax incentives designed to spur business investment, along with a smattering of personal and corporate tax measures, it is far from the transformative budget that was floated by Finance Minister Francois-Philippe Champagne.

The opening paragraphs of the budget sum up Canada’s current geopolitical reality: “The world is undergoing a series of fundamental shifts at a speed, scale, and scope not seen since the fall of the Berlin Wall. The rules-based international order and the trading system that powered Canada’s prosperity for decades are being reshaped—threatening our sovereignty, our prosperity, and our values. Long-standing supply chains and trade relationships that once ensured stable growth, good jobs, and affordable products are being disrupted … This is not a transition. It is a rupture—a generational shift taking place over a short period of time. This new reality is reshaping Canada’s economic foundations.”

Factor in massive deficits and a surging national debt that exploded under the previous Trudeau government, ongoing tariff threats from South of the Border, stubbornly high cost of living, flagging national productivity, a sclerotic tax system and Carney’s precarious minority government position, and it’s clear his government was walking a tightrope in preparing a set of proposals intended to help us emerge from a sludge-like, slow-growth economic quagmire.

It appears that this budget is a wager on attracting significant investment in Canada, which would in turn increase productivity and lessen our reliance on the U.S. The question remains: Will the government’s claim that Canada potentially has the “lowest marginal effective tax rate” (METR) in the G7—which apparently results from the “Productivity Super-Deduction” (a term used to describe the enhanced tax incentives introduced in the budget)—be enough to offset the damage that has already been done, and continues to be done, due to the Trump tariffs?

The fact is, investment in Canada has decreased substantially in the last several years as capital continues to flee the country. In May of this year, for example, Canadian investors poured $13.4 billion into foreign securities, while foreign investors reduced their Canadian securities holdings by $2.8 billion. The ensuing $16.2 billion net outflow of funds is the fourth month of net outflows, for a total of $83.9 billion. And that’s merely looking at the outflow of capital related to securities. Time will tell if the government’s wager reverses that trend and brings in the expected $1 trillion of new investment, while bolstering productivity.

Curiously, they don’t seem to be troubled by the country’s increasingly dire financial situation.

You may recall that in the 2024 Fall Economic Statement, Ottawa projected deficits of $42.2 billion for 2025-26 and $31 billion for 2026-27. As has been the case for more than a decade, those estimates were not reliable. Now, the projections are for deficits of $78.3 billion for the 2025-26 fiscal year, $65.4 billion for 2026-27, $63.5 billion for 2027-28, $57.9 billion for 2028-29 and $56.6 billion for 2029-30. These shortfalls are driven by outsized spending to counter Trump’s tariffs and may be worsened by slowing growth. An expenditure review promises to save the treasury $60 billion over five years, largely through restructuring and consolidation measures and cuts of nearly 40,000 federal employees by 2028-29.

Over that time, the federal debt-to-GDP ratio is expected to increase to 43.3 per cent in 2028-29 from the current 42.4 per cent before settling at 43.1 per cent by 2029-30. But any economic hiccups or a new U.S. trade levy could easily render these projections moot. These figures are likely more fiscal aspiration than bankable certainty.

Still, the Carney government’s budget is marginally friendlier to businesses than that of previous Liberal governments, with measures intended to boost our country’s global competitiveness. Some of the key proposals include:

Corporate and personal tax measures

• A new measure that would enable businesses to immediately expense 100 per cent of the costs of eligible manufacturing or processing buildings (including building additions or alterations). To be eligible for expensing, the property must not have been previously owned by the taxpayer or a non-arm’s-length person, and must not have been transferred to the taxpayer on a tax-deferred “rollover” basis. The measure would be in effect for eligible property on or after budget day, while the property would need to be used for manufacturing or processing before 2030
• The government confirmed that it would move forward with previously announced measures that would allow for expedited business deductions, including the reinstatement of the Accelerated Investment Incentive (providing an enhanced first-year write-off for most capital assets); immediate expensing of manufacturing or processing machinery and equipment; immediate expensing of clean energy generation and energy conservation equipment, and zero-emission vehicles; immediate expensing of productivity-enhancing assets, including patents, data network infrastructure and computers; immediate expensing of capital expenditures for scientific research and experimental development
• The elimination of the Underused Housing Tax. Under the proposal, the UHT would not be payable—and taxpayers would not be required to file a UHT return—for the 2025 and subsequent calendar years. UHT filing and payment requirements would still apply for the 2022 to 2024 calendar years
• An enhancement to the Scientific Research and Experimental Development Tax Incentive Program, that would “… increase the expenditure limit on which the SR&ED program’s enhanced 35 per cent tax credit can be earned, to $6 million from the previously announced $4.5 million.” The measure would apply for taxation years beginning on or after December 16^th, 2024. The government confirmed that it plans to proceed with previously announced SR&ED enhancements such as an increase to the “… prior-year taxable capital phase-out thresholds for the SR&ED program’s enhanced 35 per cent tax credit”, an extension of the enhanced credit to eligible Canadian public corporations and a restoring of the eligibility of SR&ED capital expenditures
• An extension of the Carbon Capture, Utilization, and Storage (CCUS) investment tax credit rates by five years, making expenditures incurred from 2022 to 2035 eligible for these rates
• Elimination of the tax on luxury aircraft and vessels
• A new non-refundable Top-Up Tax Credit—that would apply for the 2025 to 2030 tax years—to maintain the current 15 per cent rate for non-refundable tax credits claimed on amounts in excess of the first income tax bracket threshold
• A streamlining of rules relating to registered plan investments in small businesses, enabling RDSPs to acquire shares of specified small business corporations, venture capital corporations and specified cooperative corporations, while shares of eligible corporations and interests in small business investment limited partnerships and small business investment trusts would no longer be qualified investments. The amendments would take effect on January 1^st, 2027
• A deferral of the proposed implementation date of bare trust reporting requirements to December 31^st, 2026, from December 31^st, 2025
• A broadening of the current anti-avoidance rule for direct trust-to-trust transfers to include indirect transfers of trust property to other trusts (an effective tightening of the ’21-year trust rule’)
• Automatic tax-filing for lower-income Canadians (previously announced)
• A temporary Personal Support Workers Tax Credit that would provide eligible personal support workers working for eligible health care establishments with a refundable tax credit of 5 per cent (up to $1,100) of eligible earnings
• $115.7 million over four years, beginning in 2026-27, and $10.1 million per year ongoing, for a Canada Disability Benefit payment of $150

Growth funding and business supports

• $213.8 million over five years for a new Major Projects Office to speed the development of infrastructure projects in the national interest
• $925.6 million over five years, starting in 2025-26, for artificial intelligence infrastructure investments
• Beginning in 2026-27, $1 billion over three years to launch the new Venture and Growth Capital Catalyst Initiative, along with $750 million to support start-up growth funding
• $51 billion over 10 years for a new Build Communities Strong Fund to support nationwide infrastructure projects
• $109.2 million in 2025-26 to the Agriculture and AgriStability program to boost compensation rates for agricultural producers
• $75 million over five years, beginning in 2026-27, for the AgriMarketing Program to promote agriculture, fish and seafood products in new markets
• $97.5 million over two years, starting in 2025-26, to temporarily increase the Advance Payments Program’s interest-free limit to $500,000 to support canola advances for the 2025 and 2026 program years
• $372 million over two years, starting in 2026-27, for a new Biofuels Production Incentive
• As much as $700 million over two years, starting 2025-26, in loan guarantees for businesses operating in the forestry sector
• $500 million over three years, starting in 2026-27, to renew and expand forestry market and product diversification programs
• $5 billion over six years, starting in 2025-26, for the Strategic Response Fund in order to support businesses impacted by U.S. tariffs
• Nearly $116 million in funding over five years to support a new federal Buy Canadian policy
• $79.9 million over five years, starting in 2026-27, to support the new Small and Medium Business Procurement Program
• $5 billion over seven years, starting in 2025-26, to create a new Trade Diversification Corridors Fund
• $1 billion over four years, starting in 2025-26, to create a new Arctic Infrastructure Fund

Defence

• $81.8 billion over five years to increase funding for the Canadian Armed Forces
• $30.8 million over four years, starting in 2026-27, to establish a new Defence Investment Agency
• $52.5 million over five years, starting in 2026-27, to increase capacity for the Industrial Security Program

Budget 2025 also confirms that the government intends to proceed with certain previously announced measures that were announced on August 15^th, 2025. The most notable include:

• Capital Gains Rollover on Small Business Investments
• Tax exemption for sales to Employee Ownership Trusts
• EIFEL Rules
• Substantive CCPCs
• Assurance that Canada Carbon Rebates for Small Businesses are provided tax free
• GST rebate for eligible first-time homebuyers

A full list of previously announced measures is available here

While the government seemed intent on bringing forth a new era of Canadian corporate competitiveness, the direct measures that could have had the greatest impact in terms of spurring investment—everything from corporate tax cuts to tax restructuring—were completely overlooked. Moreover, there was no real mention of a comprehensive review of our overall tax system, which has become increasingly complex over the past decade.

Most of the budget’s proposed ‘generational investments’ may not move the productivity needle as expected, yet the fiscal mire continues to deepen. Without proper tax reform, it’s questionable whether the tax incentives provided by this budget will galvanize the business community to make the level of investment needed to spark a Canadian economy crippled by growth-killing uncertainty. At the very least, the promised investment in infrastructure and housing spending should provide some relief, but not in the short run. Unfortunately, near term support is what the Canadian public needs as they struggle to make ends meet.

When the country, and especially businesses, needed big and bold, we were mostly left with bland and boring. We’ll see if the Liberals’ continued big spending proves prudent or is a dangerous miscalculation that limits the prosperity of future generations.

Armando Iannuzzi, Co-Managing Partner

For more information on Budget 2025, contact a member of our team.