2026 Federal Budget Commentary

• Canada is #1 in the G7 for foreign direct investment inflows per capita.
• Canada is #1 in the G7 for tax competitiveness for new business investment.
• Canada has the lowest net debt-to-GDP ratio in the G7.
• The International Monetary Fund (IMF) projects Canada to be the second-fastest-growing economy in the G7 in 2027 (second to the US).
• Nominal goods and services exports to non-U.S. destinations increased by $33 billion in 2025 and are on pace to rise by a further $57 billion in 2026
• Canada has one of the smallest deficits in the G7 as a share of the economy.
• Including all levels of government, Canada’s net debt-to-GDP ratio stands at just 9.3%, compared to the G7 average (excluding Canada) of 101.3%.
• The unemployment rate is 6.5%, near its lowest level in two years.
• The youth unemployment rate has declined from a peak of 14.6% in September 2025 to 13% as of September this year.

*G7 Countries: Canada, France, Germany, Italy, U.S., U.K., Japan

Budget 2026 proposes to introduce a new Canada Growth Incentive (CGI) capital gains exemption which would allow a Canadian-resident individual to claim a tax exemption on capital gains realized on the disposition of qualifying shares of a qualifying corporation, up to a $15-million limit. This $15 million would apply separately to each qualifying individual in respect of each business.

Qualifying Individual

A qualifying individual would have to be an individual other than a trust and be at least 18 years old at the time they acquired a qualifying share. The individual would have to be resident in Canada throughout the year in which they claimed the exemption. The claim could relate to a capital gain realized on the disposition of a qualifying share in that year or a preceding taxation year.

A qualifying share would have to be issued by a qualifying corporation to the qualifying individual (or a partnership of which the qualifying individual is a member) and owned directly by the qualifying individual or by the partnership. Where a partnership acquired a qualifying share, at the time that the partnership acquired the share, the qualifying individual would have to have been a member of the partnership and at least 18 years old.

Qualifying Shares

A share of the capital stock of a corporation would be a qualifying share of a qualifying corporation if the following conditions were met.

• At the time of share issuance:
  • the corporation must be a Canadian-controlled private corporation; and
  • all or substantially all of the fair market value (FMV) 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.
• Immediately before and after the share’s issuance, the combined carrying value of the assets of the corporation and all corporations related to it must not exceed $100 million.
• The share must have been issued either solely for cash consideration or in exchange for employment services provided by the qualifying individual to the qualifying corporation. Continuity rules would be proposed to accommodate certain share-for-share exchanges and other corporate reorganizations that could occur after qualifying shares have been issued.
• Throughout the period during which the qualifying individual or a partnership of which the qualifying individual is a member owned the qualifying share, 50 per cent or more of the FMV of the corporation’s assets must be attributable to assets used, or reasonably intended to be used, principally in a qualifying business. Further, for a minimum period of 24 consecutive months immediately following share issuance, the qualifying business would be required to be carried on primarily in Canada.
• For a minimum period of 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.
• At the time of disposition:
  • the corporation must be a Canadian-resident corporation that is either a private corporation or a public corporation listed on a designated stock exchange located in Canada; and
  • all or substantially all of the FMV of the corporation’s assets must be attributable to assets used principally in a qualifying business.

Qualifying Business

A qualifying business would be an active business other than:

• 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.

Integrity Rules

Additional rules will be proposed to prevent individuals from accessing the CGI exemption in circumstances that do not align with the intent of the measure, including the multiplication of the exemption limit through the use of multiple corporations that carry on the same underlying business. Details of these rules will be released at a later date.

Alternative Minimum Tax

Capital gains exempted through this measure would be subject to an inclusion rate of 30 per cent for the purposes of the Alternative Minimum Tax, consistent with the treatment of gains eligible for the Lifetime Capital Gains Exemption.

Interaction with Other Capital Gains Exemptions

A CGI exemption claimed on qualifying shares of a qualifying corporation would limit the ability of a qualifying individual to claim the Lifetime Capital Gains Exemption for a sale of shares of the same corporation. Similarly, a Lifetime Capital Gains Exemption claimed on the sale of shares of a corporation would limit the ability of a qualifying individual to claim the CGI exemption on the sale of shares of that same corporation.

A qualifying individual could generally claim both the capital gains exemption on a sale to an Employee Ownership Trust or a worker cooperative and the CGI exemption on the same sale of shares, with the use of one exemption having no impact on the limit available under the other exemption.

Coming into Force

This measure would apply in respect of qualifying shares of a qualifying corporation issued on or after November 5, 2026 and before 2037.

Period to acquire replacement shares

Budget 2026 proposes to increase the period to acquire replacement shares and to introduce a special provision for individuals who have entered into agreements for future equity.

First, the period to acquire replacement shares would be extended to encompass the year of disposition and the three following calendar years. In general terms, an individual who made a qualifying disposition in a taxation year and did not reinvest the proceeds in that year would be able to choose either to pay tax on the capital gain for the year of disposition or to claim a reserve that defers recognition of the gain to the following year. This deferral mechanism would be available until the end of the replacement period.

Second, an individual who, before the end of the proposed three-year replacement period, enters into an agreement with an eligible small business corporation (ESBC) under which the investor provides upfront capital in return for shares to be issued at a future date, would be able to defer the capital gain for an additional two years, for a total replacement period of up to five years. If no ESBC shares are issued to the individual under the agreement by the end of the fifth year following the year of disposition, the deferred gain would be taxed.

With respect to any proceeds of a qualifying disposition that are not ultimately invested in replacement shares, interest would apply at a prescribed rate from the balance-due day for the year of disposition to the last day of the taxation year in which the gain is taxed.

Active business requirement

Budget 2026 proposes to lower the threshold from “all or substantially all” to “primarily” for the active business requirement’s asset test that must be met throughout the period during which the individual owned the shares. However, the “all or substantially all” threshold would need to be met at the time of issuance and disposition of the shares.

Finally, the active business would be required to be carried on primarily in Canada at the time of share issuance and for a continuous period immediately following issuance. That period would be the lesser of two years and the period during which the individual owned the shares.

Coming into force

These measures would apply to qualifying dispositions that occur on or after January 1, 2027.

Budget 2026 proposes to change the T1 filing and balance-due dates to May 15 for all individuals, including self-employed individuals and their spouses or common-law partners.

For self-employed individuals and their spouses, the filing deadline would move up from June 15 to May 15, while the payment deadline would move from April 30 to May 15.

These changes would apply to the 2027 and subsequent taxation years, meaning that 2027 personal income tax returns would be due May 15, 2028.

Budget 2026 proposes to eliminate the rules that prevent commission employees from deducting travel and motor vehicle expenses under the general employee provisions when they also claim expenses under the commission-employee rules. This would allow a commission employee claiming travel or motor vehicle expenses under the general provisions to additionally claim other employment expenses as a commission employee up to the amount of their commission income. This measure would apply to the 2027 and subsequent taxation years.

Budget 2026 proposes optional flat-amount calculation methods for certain deductions and credits. Individuals would still need to establish their eligibility. These measures would apply to the 2027 and subsequent taxation years.

Moving Expense Deduction

Budget 2026 proposes to allow individuals making an eligible relocation to deduct a flat $1,000 in respect of the relocation instead of tracking and claiming their deductible moving expenses. The amount deducted would still be limited to the individual’s employment or self-employment income earned at the new location, or to the student’s taxable income from scholarships, bursaries and research grants. If an individual claims the flat amount in respect of an eligible relocation, that individual’s spouse or common-law partner would not be permitted to claim a deduction in respect of the same eligible relocation.

Home Accessibility Tax Credit

Budget 2026 proposes to allow eligible individuals who incur qualifying expenses to calculate the Home Accessibility Tax Credit using a one-time optional flat-expense amount of $1,000 for a year instead of claiming their actual expenses incurred. The following conditions would apply to any flat-amount claim:

• Only one taxpayer would be allowed to claim the flat amount in respect of the same eligible dwelling for a particular year.
• If an individual chooses to claim the credit based on their detailed expenses in respect of an eligible dwelling for a particular year, the flat amount would not be available to any claimant in respect of that dwelling for that year. Instead, each individual with eligible expenses could claim eligible expenses under the existing rules.
• An eligible individual would be allowed to claim the flat amount under the Home Accessibility Tax Credit only once in their lifetime. An individual who claimed the flat amount in a given year would, however, still be able to claim the credit in future years based on their detailed expenses, provided all eligibility requirements are met.
• Individuals claiming the flat amount would continue to be required to retain some documents that substantiate that they incurred qualifying expenses for a qualifying renovation.

Documentation Requirements for Certain Eligible Expenses

Budget 2026 proposes to simplify the Medical Expense Tax Credit (METC) while maintaining the integrity of the credit by reducing the documentation requirements for certain eligible expenses, as described below.

• For certain expenses that are incurred exclusively for medical purposes, remove the requirement for a prescription; a certification of the individual’s medical condition would continue to not be required.
• For certain expenses that may be incurred for non-medical purposes, replace the prescription requirement with a requirement that an authorized medical practitioner certify the individual’s medical condition.

The Canada Revenue Agency (CRA) would continue to have the authority to ask for additional documentation or information to verify that all requirements for claiming the METC are met. This measure would apply to the 2026 and subsequent taxation years.

Flat-Amount Method

Budget 2026 proposes to allow individuals to claim an optional flat amount in respect of the following categories of expenses. For a particular year, an individual who incurs expenses in an eligible category could choose to either claim the applicable flat amount or itemize and claim the expenses they actually incurred. An individual who chooses the flat amount would not be required to calculate the actual expenses incurred or retain receipts for those expenses. The existing eligibility conditions would continue to apply.

If the flat-amount method is chosen for a category of expenses in respect of an eligible individual, only one individual would be able to claim that flat amount and itemized expenses could not be claimed. If multiple individuals wish to claim the same category of expenses in respect of the same eligible individual, the flat amount would not be available, and each would be required to itemize their expenses and keep receipts to claim them.

Gluten-free Food Expenses

Budget 2026 proposes to allow an METC claim in respect of an individual with celiac disease based on an optional flat amount of $1,000 for incremental gluten-free food expenses incurred over a particular year. Under this method, it would no longer be necessary to calculate the incremental cost of gluten-free food products. This measure would apply to the 2026 and subsequent taxation years.

Incontinence Product Expenses

Budget 2026 proposes to allow an METC claim based on an optional flat amount of $500 in respect of these expenses incurred over a particular year. This measure would apply to the 2027 and subsequent taxation years.

Service Dog Expenses

Budget 2026 proposes to allow an METC or Disability supports deduction (DSD) claim based on an optional flat amount of $2,000 for expenses that are incurred in relation to a service dog over a particular year. The cost incurred to acquire a service dog could be itemized and claimed separately in addition to the flat amount in a particular year.

The flat-amount method would not be allowed for eligible expenses in respect of a service animal other than a dog. It would continue to be necessary, under the METC and the DSD, to itemize expenses incurred in respect of these other service animals and retain receipts. This measure would apply to the 2027 and subsequent taxation years.

Budget 2026 proposes to allow a program to qualify even where a student received financial assistance from an arm’s-length person. As a result, receiving employer or other arm’s-length assistance for a program would no longer prevent students from claiming the exemption for scholarships, fellowships or bursaries received for that program. This measure would apply to the 2027 and subsequent taxation years.

Budget 2026 proposes to replace the existing cap on the deduction with a limit equal to the amount of the artist’s employment income for the year from the specified artistic activities. This measure would apply to the 2027 and subsequent taxation years.

Budget 2026 announces the government’s intention to merge the core features of the Registered Retirement Savings Plan (RRSP) and Registered Retirement Income Fund under the Income Tax Act (Act) into a single “RRSP for life” and to make other changes to improve and modernize the RRSP tax rules.

The government is seeking Canadians’ views on this proposal.

Budget 2026 proposes to repeal the excess corporate holdings regime, which prevents a private foundation, together with relevant persons (generally non-arm’s length individuals), from holding more than 20 per cent of a class of shares of any corporation. Instead, the rules that currently prohibit public foundations from acquiring control of a corporation would be extended to private foundations. This measure would apply to taxation years that begin on or after January 1, 2027.

Budget 2026 proposes to broaden the current rollout denial rule to include indirect distributions of trust property to non-resident beneficiaries. The rollout would be denied for any property that is transferred to a corporation (or partnership) that has a direct or indirect non-resident shareholder (or partner). This measure would apply in respect of distributions of property that occur on or after November 5, 2026.

Increasing the Instalment Thresholds

Budget 2026 proposes to increase the threshold from $3,000 to $7,500 for corporations and individuals resident outside Quebec, and from $1,800 to $4,500 for individuals resident in Quebec. The thresholds would be indexed to inflation and rounded to the nearest $500. Any remaining tax payable for a taxation year would be due on the applicable balance-due date.

Coming into Force

This measure would apply to taxation years that begin on or after January 1, 2028. As with the current rules, in determining whether instalments would be required, the relevant threshold would need to be exceeded for the current year and either of the two previous years.

Allowing an Annual Instalment for All Individuals with Business Income

Budget 2026 proposes that individuals whose primary source of income is from a business (including professional or commission income) be allowed to make a single annual instalment payment, instead of quarterly instalments. The single instalment payment would equal two thirds of their combined federal-provincial net tax owing for the year and be due by December 31. The remainder would be due on the applicable balance-due date. This change would extend similar treatment to what is currently available for farming and fishing income to other business income.

Coming into Force

This measure would apply to the 2028 and subsequent taxation years.

Budget 2026 proposes to increase the threshold above which Form T1135 must be filed from $100,000 to $200,000. The CRA would also increase the threshold for simplified reporting from less than $250,000 to less than $500,000. These measures would apply to taxation years or fiscal periods that end after 2026.

Budget 2026 proposes, for most taxpayers, to amend the deadline to file a notice of objection to an income tax assessment to one year after the day the notice of assessment is sent. For individuals and graduated rate estates, Budget 2026 proposes to amend the deadline to the later of one year after the notice of assessment is sent and two years from the tax return filing due date for the taxation year being assessed. Consequently, taxpayers would no longer need to apply for an extension of time and the ability to do so would be eliminated. This amendment would apply to assessments sent on or after the day that is three months after royal assent.

Individual Pension Plans

An individual pension plan (IPP) is a defined benefit registered pension plan (RPP) with fewer than four members, at least one of whom is related to a participating employer (e.g., a controlling shareholder). Budget 2026 proposes to expand the IPP definition to include defined benefit RPPs under which all members are either related to a participating employer or do not deal at arm’s length with any member related to a participating employer. This measure would apply as of January 1, 2027.

Non-qualified Investments

Budget 2026 proposes to subject IPPs to the same advantage rules, non-qualified investment rules, and prohibited investment rules that currently apply to other registered plans of controlling individuals. Consequently, if the IPP acquires a non-qualified or prohibited investment, or if it receives an advantage, the controlling individual of an IPP would be liable to pay a tax equal to:

• 50 per cent of the FMV of a non-qualified investment or prohibited investment acquired by the IPP; and
• 100 per cent of the value of an advantage in relation to the IPP.

Coming into Force

This measure would apply as of January 1, 2028. Transitional rules would apply to investments acquired before 2028 that become non-qualified or prohibited on January 1, 2028.

Excessive Surplus

Budget 2026 proposes to impose a new condition that an IPP must satisfy to maintain its RPP registration. If the value of an IPP’s assets exceeds 200 per cent of its pension liabilities, the plan would become a “revocable plan” for RPP registration purposes. The CRA is required to issue a notice of intent to revoke at least 30 days prior to issuing a revocation letter. This would provide the plan administrator with time to take steps (such as withdrawing excess amounts) to comply with the registration condition and thus no longer be in a revocable position.

If the CRA ultimately revoked the plan’s registration, the plan could face a special tax equal to 10 per cent of its assets and would be deemed to become a retirement compensation arrangement, potentially triggering a further 50 per cent refundable tax on the deemed contribution. This measure would apply as of January 1, 2028.

Budget 2026 proposes to expand the activities and expenditures eligible under the Scientific Research and Experimental Development (SR&ED) program.

Regulatory and Certification Requirements

The expanded scope of eligible activities would include tests, technological validations, and studies conducted to meet regulatory requirements for obtaining the initial approval or certification necessary to commercialize a product or process.

To be eligible, these activities would need to directly relate to a project that is eligible under the SR&ED program’s existing rules.

The types of expenditures that could be claimed in respect of these additional eligible activities would be the same as those eligible under the SR&ED program.

Intellectual Property Protection

Eligible expenditures would be expanded to include costs related to the registration and maintenance of intellectual property (IP) protection in respect of IP developed in the course of conducting a project that is eligible under the existing scope of activities under the SR&ED program.

Eligible IP would include IP registered or protected as patents, certificates of supplementary protection, plant breeders’ rights, or copyrighted software, under the relevant Canadian legislation or equivalent legislation in another jurisdiction.

Eligible expenditures would include costs reasonably incurred to obtain and, where applicable, maintain protection for eligible IP. In general, this would include expenses incurred to prepare and file an application for an eligible form of IP protection, as well as maintenance costs payable on a periodic basis to keep IP rights in force. Eligible expenditures would not include those incurred to enforce IP rights, such as litigation costs in respect of alleged IP infringement, or those not directly connected to securing and maintaining IP rights.

While administrative fees payable to an IP office outside Canada would be eligible, costs of supporting activities, such as those in respect of preparing an application, would be eligible only if those activities are conducted in Canada.

In the event that a taxpayer disposes of IP in respect of which SR&ED support was provided for IP protection costs, recapture rules would apply in respect of the related SR&ED deduction and investment tax credit amounts.

Coming into Force

This measure would apply to taxation years that begin on or after November 5, 2026.

Part VI.1 tax on taxable preferred shares can be problematic when implementing an estate freeze and certain provisions in shareholders’ agreements. Budget 2026 proposes to introduce the following measures:

• Exempt Canadian-controlled private corporations from the taxable preferred share regime by excluding dividends they pay from Part VI.1 tax. This measure would apply to dividends paid on or after November 5, 2026.
• Increase the dividend allowance from $500,000 to $1,500,000 and the threshold for the reduction of the dividend allowance from $1,000,000 to $3,000,000. This measure would apply to taxation years that end after 2026.

These changes are welcome, as they should remove the Part VI.1 issue for most of our clients

Budget 2026 proposes to eliminate the existing requirements for corporations to file a certified copy of a resolution or authorization when making certain elections (e.g., capital dividend elections) or agreements. This measure would apply to elections and agreements made on or after the date of royal assent of the enacting legislation.

Extension to 2040
Budget 2026 proposes to extend the Clean Electricity and Clean Technology investment tax credits to eligible property that becomes available for use before 2041.

The credit rate of the Clean Technology investment tax credit would continue to be reduced to 15 per cent for its last year of availability, which would be for property that becomes available for use in 2040 instead of 2034.

Budget 2026 invites stakeholders to comment on the introduction of a corporate loss transfer rule.

The proposed rule would allow current-year non-capital losses to be transferred, by joint election, between a parent and its wholly owned subsidiaries (or between wholly owned sister subsidiaries), but only where both corporations have a permanent establishment in the same single province or territory. Comments are due to the Department of Finance by January 8, 2027.

Budget 2026 proposes several amendments to administrative penalties under federal tax statutes.

Inflation Adjustment of Fixed-Dollar Administrative Penalties
Budget 2026 proposes to increase most fixed-dollar penalties to broadly account for inflation since their enactment, so that they remain meaningful and proportionate. Generally, older penalties would increase by a factor of two or three, depending on when they were enacted, while most recent penalties would remain unchanged, subject to limited exceptions. Budget 2026 also proposes to index these fixed amounts to inflation once every five years.

Medium and Large Corporations and Partnerships
Budget 2026 proposes to calibrate certain penalty amounts by taxpayer size. These would apply to penalties for failing to provide required information on a form, failing to file certain tax forms, and failing to comply with certain other obligations under the Act.
Individuals and smaller corporations and partnerships would remain subject to a base level of fixed penalty amounts. Medium corporations and partnerships would be subject to penalties equal to three times the base amounts. Large corporations and partnerships would be subject to penalties equal to eight times the base amounts.

Medium corporations would be those that, together with any related corporations, have a combined total of more than $10 million and up to $50 million of taxable capital employed in Canada. Large corporations would be those that, together with any related corporations, have a combined total of more than $50 million of taxable capital employed in Canada. For this purpose, a corporation that is a Canadian-controlled private corporation would only be treated as related to a corporation with which it is also associated.

Medium partnerships would be those that have $2 million but less than $10 million in gross revenue and large partnerships would be those that have $10 million or more in gross revenue.

Repeated Failures
Budget 2026 proposes new penalties that would apply to repeated failures to file tax forms and repeated failures to comply with obligations that do not have a more specific penalty. These penalties would generally double the base penalty that applies in respect of the first failure. The amount of the penalty would be further increased in accordance with the calibration rules for corporations and partnerships discussed above.

These penalties would apply only to a failure in respect of a particular taxation year if the person or partnership has been liable for a penalty for the same type of failure in any of the three preceding taxation years. In addition, the person or partnership must have failed to remedy the current failure after being sent a notice, requirement or demand by the CRA.

Budget 2026 proposes changes to ensure that the GST/HST treatment of certain health care services and devices remains aligned with developments in the health care sector.

GST/HST Treatment of Massage Therapy Services
Budget 2026 proposes that qualifying massage therapists be added to the list of health care practitioners whose professional services are exempt from the GST/HST.

Qualifying massage therapy services would generally be exempt from the GST/HST if they are supplied by a person who practices the profession of massage therapy and either of the following conditions are met:

• where the person is required to be licensed or certified to practice the profession in the province in which the service is supplied, the person is so licensed or certified; or
• where the person is not required to be licensed or certified to practice the profession in that province, the person has qualifications equivalent to those necessary to be so licensed or certified in another province.

Coming into Force
This measure would apply to qualifying supplies of massage therapy services made after November 5, 2026.

Canada generally taxes non-residents on their income and gains from the disposition of taxable Canadian property (TCP).

Corporate Vendors

Budget 2026 proposes to reduce the withholding and remittance rates for non-resident corporate vendors from 25 and 50 per cent to 15 and 30 per cent.

Current and Proposed Withholding and Remittance Requirements for Non-Resident Corporate Vendors

Section 85 Rollovers

Budget 2026 proposes to exempt vendors and purchasers from the withholding and tax remittance requirements for fully tax-deferred section 85 rollovers of TCP provided that, within 30 days of the disposition, the section 85 election form is filed and the purchaser provides a notice to the CRA setting out information regarding the transaction and the vendor.

An existing anti-avoidance rule denies a tax-deferred rollover if, within three years, there is a subsequent disposition of the transferred property or substituted property, and one of the main purposes of the series was to benefit from an exemption from Canadian tax (e.g., under a tax treaty). Budget 2026 proposes to strengthen this rule for rollovers of TCP by non-residents by extending the three-year period to five years and ensuring that a subsequent disposition of a property that principally derives its value from the transferred property or substituted property is also subject to the rule.

Coming into Force

These measures would apply to dispositions that occur on or after January 1, 2027.