MEMO: BUDGET 2026

This afternoon, Finance Minister François-Philippe Champagne tabled the 2026 Budget, titled “Masters of Our Destiny.” In the days leading up to the Budget, the Minister promised that those who represent small and medium-sized businesses would “see themselves” in it and that the Government would begin to simplify the tax system for them.

The question, as always, is what the Government has actually delivered, and at what cost.

What was not in the Budget

First and foremost, the Budget did not address a comprehensive review and reform of the tax system.

There were no changes to personal or corporate tax rates.

There was no reduction in the small business tax rate and no increase in the $500,000 small business limit, despite a vigorous campaign by the small business community.

There was no change to the capital gains inclusion rate, which remains at 50%.

There was no change to the lifetime capital gains exemption.

There was no change to the rules relating to surplus stripping, section 84.1 or the General Anti-Avoidance Rule.

There was no tax on principal residences.

There was no mention of the bare trust reporting rules.

What was in the Budget

The new Canada Growth Incentive comprises a capital gains exemption of up to $15 million for new investments in certain Canadian businesses and an enhanced rollover for reinvestments in small businesses. More about these measures below.

The Productivity Mega Deduction, announced on September 15, 2026, is confirmed. See my September newsletter on that topic.

Canadian-controlled private corporations would be exempt from the special tax on dividends paid on taxable preferred shares.

There are new rules for individual pension plans that would make them less attractive in some circumstances.

The Government is consulting on transfers of losses within corporate groups and on an “RRSP for life”.

There are changes affecting trusts, estates and family wealth planning, including a proposal, applicable to distributions made on or after Budget Day, to deny certain tax-deferred trust distributions to corporations or partnerships with direct or indirect non-resident ownership.

The deadline for filing a notice of objection would be extended, and the T1 filing and balance-due dates for all individuals would move to May 15.

Administrative penalties would increase, making non-compliance more expensive.

There is a one-time supplement to the Canada Groceries and Essentials Benefit (formerly the GST Credit), to be paid in early 2027.

The Budget proposes to make the Canada Caregiver Credit refundable and to enhance and rename the Canada Workers Benefit as the Build Canada Workers Benefit.

Individuals would be able to claim optional flat amounts for a number of deductions and credits (including moving, certain medical and adoption expenses) instead of tracking actual expenses.

Instalment thresholds would increase to $7,500 beginning in 2028 (with a different threshold for Quebec residents), and self-employed individuals would be able to make a single annual instalment payment under specified conditions.

The Canada Revenue Agency (the “CRA”) would be able to report tax debts over $50,000 to credit bureaus only after appeal rights have expired or been exhausted, at least 30 days’ written notice has been given, and reasonable collection and repayment-arrangement steps have been taken.

The SR&ED program would be expanded to include certain regulatory testing and intellectual property protection costs.

As expected, there are extensions and expansions of the tax credits for clean electricity, clean technology and mineral exploration, and an extension of the Canadian Journalism Labour Tax Credit. In the interest of time, I will not discuss these provisions this evening.

As usual, the Budget proposes tighter international tax rules, including a consultation on the Common Reporting Standard. I do not propose to discuss these changes in tonight’s newsletter, other than a change affecting section 85 rollovers by non-residents.

Tax Measures

Canada Growth Incentive – Capital Gains Exemption

The headline measure for business owners is a new Canada Growth Incentive (“CGI”) capital gains exemption. A Canadian-resident individual would be able to claim an exemption on capital gains realized on the disposition of qualifying shares of a qualifying corporation, up to $15 million. The $15 million limit would apply separately to each qualifying individual in respect of each business.

To put that in perspective, the lifetime capital gains exemption (the “LCGE”) is $1,275,000 in 2026, after indexation. The conditions for the CGI are, however, considerably more restrictive than those for the LCGE.

Qualifying Individual

The claimant must have been at least 18 years old when the qualifying share was acquired and resident in Canada throughout the taxation year in which the exemption is claimed. A trust cannot claim the exemption. The claim may relate to a gain realized in that year or in an earlier taxation year. A qualifying share must generally have been issued directly to the individual or a partnership of which that individual was a member and must be owned directly by that individual or partnership.

The exclusion of trusts is significant. Many of my clients hold growth shares through a discretionary family trust. Those shares would not qualify.

Qualifying Shares

A share would qualify if the following conditions are met:

• at the time of issuance, the corporation is a Canadian-controlled private corporation and all or substantially all of the fair market value of its assets is 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 issuance, the combined carrying value of the assets of the corporation and all related corporations does not exceed $100 million;

• the share is issued solely for cash or in exchange for employment services provided by the individual to the corporation (continuity rules are proposed for certain share-for-share exchanges and other reorganizations after the shares are issued). It therefore appears that shares issued on a rollover would not initially qualify for the enhanced exemption;

• throughout the period the share is owned, 50% or more of the fair market value of the corporation’s assets is attributable to assets used, or reasonably intended to be used, principally in a qualifying business, and for at least the first 24 months after issuance the business is carried on primarily in Canada;

• the share is held for at least 36 consecutive months before the disposition; and

• at the time of disposition, the corporation is a Canadian-resident private corporation, or a public corporation listed on a designated stock exchange located in Canada, and all or substantially all of its assets are used principally in a qualifying business.

Qualifying Business

A qualifying business is an active business other than:

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

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

• a business operated under a licensing or franchising agreement.

  
  

Interaction with Other Rules

Gains exempted under the CGI would be included at 30% in computing the Alternative Minimum Tax, the same treatment that applies to the LCGE. A CGI claim on shares of a corporation would limit the LCGE available on shares of the same corporation, and vice versa. However, the CGI and the exemption for sales to an Employee Ownership Trust (or a worker cooperative) can both be claimed on the same sale.

Additional “integrity rules” will be released at a later date, including rules to prevent the multiplication of the $15 million limit through multiple corporations carrying on the same business.

The CGI would apply to qualifying shares issued on or after today and before 2037.

Comments

Several things stand out. First, the CGI does nothing for existing shares. In general, qualifying shares must have been issued on or after Budget Day for cash or qualifying employment services and held for at least 36 consecutive months immediately before disposition. Certain post-issuance reorganization continuity rules are contemplated but remain to be detailed. The Government’s own estimate shows no cost until the 2029–30 fiscal year. The Government will get credit for the announcement well before anyone receives the benefit.

Second, the list of excluded businesses is long. Professionals, real estate businesses, restaurants, farms and franchisees, among others, need not apply. This measure is aimed at start-ups and technology companies, rather than the typical family business.

Third, on its face, the rules would appear to give each adult family member who subscribes for shares for cash their own $15 million limit. Whether a subscription for common shares by adult children directly (and not through a family trust) after an estate freeze can qualify will depend on the integrity rules, which have not yet been released. Until those rules are published, I would not recommend restructuring on the strength of the CGI alone.

Canada Growth Incentive – Rollover for Investments in Small Businesses

Under section 44.1 of the Income Tax Act (the “Act”), an individual can defer a capital gain on the disposition of shares of an eligible small business corporation (“ESBC”) to the extent that the proceeds are reinvested in replacement ESBC shares within a prescribed period. The shares must have been held for at least 185 days; under existing rules, the corporation must satisfy an “all or substantially all” active-business asset test during ownership and its active business must have been carried on primarily in Canada for the lesser of two years and the holding period.

Budget 2026 proposes to:

• extend the replacement period to the year of disposition and the following three calendar years, with a reserve to defer the gain until the end of that period;

• allow an additional two years (a total of up to five years) where, before the end of the three-year period, the individual enters into an agreement with an ESBC to provide capital in return for shares to be issued in the future (e.g. a simple agreement for future equity, or “SAFE”); and

• relax the asset test during the holding period from “all or substantially all” to “primarily”, although “all or substantially all” would still be required at issuance and disposition. The active business would also have to be carried on primarily in Canada on issuance and for a continuous period following issuance equal to the lesser of two years and the shareholder’s holding period.

  
  

Where proceeds are not ultimately reinvested, the deferred gain would be taxed and interest would apply at the prescribed rate from the balance-due date for the year of disposition.

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

In my experience, this rollover has rarely been used, largely because the reinvestment window was too short. The extension is welcome, but the interest charge on amounts not reinvested means the deferral is not free if plans change.

Taxable Preferred Shares

The Act imposes a special tax under Part VI.1 on dividends paid on “taxable preferred shares” above a $500,000 dividend allowance, which may be reduced where taxable preferred share dividends in the prior calendar year exceed $1 million. Budget 2026 proposes to exempt Canadian-controlled private corporations from Part VI.1 tax on dividends paid on or after today, and, for other corporations, to increase the allowance to $1.5 million and the prior-year dividend threshold for its reduction from $1 million to $3 million, for taxation years ending after 2026. The Government is also reviewing the broader preferred share regime and has invited comments by January 8, 2027.

Preferred shares issued as part of an estate freeze or another corporate reorganization can be taxable preferred shares. These changes, and the outcome of the review, may therefore be relevant to certain corporate reorganizations. I will follow the discussion and report as it develops.

Individual Pension Plans

An individual pension plan (“IPP”) is a defined benefit registered pension plan with fewer than four members, at least one of whom is related to a participating employer. IPPs are commonly used to provide pensions to owner-managers. Budget 2026 proposes three changes:

• the IPP definition would be expanded to include plans in which all members are related to a participating employer or do not deal at arm’s length with a related member, so that adding family members to get above three members would no longer avoid the IPP rules (effective January 1, 2027);

• IPPs would become subject to the advantage, non-qualified investment and prohibited investment rules that apply to RRSPs and TFSAs, with the IPP’s controlling individual potentially liable for a 50% tax on non-qualified or prohibited investments and a 100% tax on advantages (effective January 1, 2028, with transitional rules); and

• an IPP whose assets exceed 200% of its pension liabilities would become a “revocable plan”, potentially leading to revocation if corrective steps were not taken after notice (effective January 1, 2028).

The Budget would also set out the consequences of revoking any registered pension plan: a special tax of 10% of the fair market value of the plan’s property immediately before revocation (subject to possible CRA relief), and deemed conversion into a retirement compensation arrangement with a 50% refundable tax on the deemed contribution net of the revocation tax.

Clients with an IPP should review the plan’s investments and funded status with their actuary well before 2028.

Corporate Loss Transfers

Corporations in Canada are taxed on a stand-alone basis, so a loss in one corporation cannot be used directly against the income of another corporation in the same group. Groups use amalgamations, wind-ups or intercompany financing arrangements to get around this, often at considerable cost.

Budget 2026 invites comments on a rule that would allow current-year non-capital losses to be transferred, by joint election, between a parent and a wholly-owned subsidiary, or between two wholly-owned subsidiaries of the same parent. As proposed, each corporation would need a permanent establishment in only one province, and the same province. Comments are due by January 8, 2027.

This has been discussed since 1985 and again in 2010. It is time the Government followed through. Given the professional fees spent every year on complex reorganizations to move losses among related companies, this could be a significant benefit.

Corporate Tax Elections

Certain elections and agreements under the Act, including capital dividend elections, currently require a certified copy of a directors’ resolution. Budget 2026 proposes to eliminate that requirement for elections and agreements made after royal assent. It is a small but welcome reduction in paperwork. Directors should, of course, still authorize the election.

Trusts, Estates and Family Wealth

Trust Distributions to Non-Residents

A personal trust can generally distribute property to a Canadian-resident beneficiary on a tax-deferred basis in satisfaction of the beneficiary’s capital interest. Under subsection 107(5), the rollover is generally denied for a non-resident beneficiary, subject to an exception for certain properties remaining within Canada’s tax jurisdiction. Some planning has used a Canadian corporation owned by a non-resident as the beneficiary to avoid that restriction.

Budget 2026 proposes to deny the rollout on any distribution of trust property to a corporation (or partnership) that has a direct or indirect non-resident shareholder (or partner). The change applies to distributions made on or after today.

Any trust approaching its 21st anniversary, or planning a distribution to a corporate beneficiary, should review the ownership of that beneficiary now. Because the proposal applies to distributions made on or after Budget Day, planned distributions within the proposed rule could be affected even if arrangements were made earlier.

Intergenerational Farm and Fishing Property

The rollover for transfers of farm and fishing property to a child (including a grandchild or great-grandchild) would be extended to nieces, nephews, grandnieces and grandnephews of the taxpayer or the taxpayer’s spouse or common-law partner, for transfers on or after January 1, 2027.

RRSP for Life

The Government intends to merge RRSPs and RRIFs into a single “RRSP for life,” eliminating the conversion requirement at age 71, although minimum withdrawals would continue. It is also considering a successor-holder feature, which would allow the plan to continue after the holder’s death until the death of the surviving spouse or common-law partner, and direct tax-free transfers to qualifying survivors in place of the current rollover mechanics on death. Comments are due by January 8, 2027.

A successor holder rule for RRSPs would be a useful addition for estate planning, bringing RRSPs into line with TFSAs.

Private Foundations

The excess corporate holdings regime, which can require a private foundation to divest excess corporate shareholdings when holdings of the foundation and relevant persons exceed 20% of a share class and the foundation itself holds more than 2%, would be eliminated. Instead, private foundations would be prohibited from acquiring control of a corporation, the rule that currently applies to public foundations. This would apply to taxation years beginning on or after January 1, 2027. Families with a private foundation that holds shares of the family company should review their position.

Registered Disability Savings Plans

The temporary rule that allows a qualifying family member (a parent, spouse or common-law partner, or sibling) to open and hold a Registered Disability Savings Plan for an adult whose capacity is in doubt, and who has no legal representative, would be made permanent. That rule was set to expire at the end of 2026.

Administrative Matters

Notices of Objection

Currently, most taxpayers have 90 days from the date a notice of assessment is sent to file a notice of objection (individuals and graduated rate estates have the later of 90 days and one year from the filing due date), with a further year to apply for an extension. Budget 2026 proposes to extend the deadline to one year from the date the notice of assessment is sent and, for individuals and graduated rate estates, to the later of that date and two years from the filing due date. Applications for an extension would be eliminated. This would apply to assessments sent on or after the day that is three months after royal assent.

Longer deadlines are welcome, but without the ability to apply for an extension, a missed deadline would generally not be remediable by an application for extension under the proposed rules. Diarize carefully.

Filing Deadline for Individuals

The filing and balance-due dates for individuals would both move to May 15, beginning with the 2027 taxation year. This includes self-employed individuals and their spouses or common-law partners, who currently have until June 15 to file but must pay by April 30. Self-employed individuals would lose a month to file but gain approximately two weeks to pay.

Foreign Income Verification (Form T1135)

The threshold for filing Form T1135 would increase from $100,000 to $200,000 of specified foreign property, and the simplified reporting method would be available up to $500,000 (from $250,000), for taxation years ending after 2026.

Administrative Penalties

Following a review announced in Budget 2025, most fixed-dollar penalties under the Act would be increased by a factor of two or three and indexed every five years. Certain penalties for failing to file forms or provide information would be three times the base amount for medium-sized corporations and partnerships, and eight times for large ones. New penalties would apply for repeated failures. These changes would apply to taxation years ending after 2027.

In other words, if a client has been ignoring information returns because the penalty was small, that is about to change.

Section 85 Rollovers by Non-Residents

When a non-resident disposes of taxable Canadian property (“TCP”), the purchaser may be required to withhold and remit tax (generally 25% of the purchase price for most capital property and 50% for other TCP) unless the vendor obtains a certificate under section 116 or another exception applies. This can also affect property transferred to a corporation under section 85 on a fully tax-deferred basis and can delay those transactions.

Budget 2026 proposes to exempt fully tax-deferred Section 85 transfers of TCP from the withholding and remittance requirements, provided that both the section 85 election form is filed and the purchaser supplies the required notice to the CRA within 30 days after disposition. Separately, for dispositions by non-resident corporate vendors, the proposed general section 116 withholding and remittance rates would fall from 25% and 50% to 15% and 30%, respectively; the reduced rates are not proposed generally for non-resident individuals or trusts. At the same time, the anti-avoidance rule that applies to subsequent dispositions would be extended from three years to five. These changes would apply to dispositions occurring after 2026.

For non-resident clients reorganizing their Canadian holdings, this proposal could remove a significant administrative delay.

Individuals

Canada Groceries and Essentials Benefit Supplement

The Canada Groceries and Essentials Benefit (formerly the GST Credit) is a non-taxable, income-tested benefit paid quarterly. For the 2026-27 benefit year, the maximum amounts are $445 per adult, $234 per child and $234 for the single supplement.

Budget 2026 proposes a one-time supplement, to be paid in early 2027, equal to half of those maximum amounts:

• $223 per adult;

• $117 per child; and

• $117 for the single supplement.

For the supplement only, the phase-in and phase-out rates would be adjusted so that it is fully phased in and phased out at the same income levels as the regular benefit.

As with the Grocery Rebate in 2023, this one-time payment, while welcome, will do little to help lower-income Canadians with their ongoing costs for food, fuel and housing.

Optional Flat Amounts for Deductions and Credits

To reduce the need to keep receipts and itemize expenses, Budget 2026 proposes optional flat amounts that may be claimed instead of actual expenses. Individuals would still have to establish that they are eligible for the deduction or credit. The proposed flat amounts are:

• Moving Expense Deduction: $1,000 per eligible relocation, still limited to income earned at the new location (or, for students, to taxable scholarship and research grant income); if one spouse claims the flat amount, the other cannot claim for the same relocation;

• Clergy Residence Deduction: $1,000 per month of eligibility, to a maximum of $12,000 a year, still limited to remuneration from the office or employment;

• Labour Mobility Deduction for Tradespeople: $1,500 per year;

• Home Accessibility Tax Credit: a one-time flat expense amount of $1,000, which may be claimed only once in an individual’s lifetime and by only one taxpayer per dwelling for the year;

• Adoption Expense Tax Credit: $1,200 per adopted child in the year the adoption is completed; and

• Medical Expense Tax Credit: $1,000 a year for incremental gluten-free food costs for an individual with celiac disease (from 2026), $500 a year for incontinence products (from 2027), and $2,000 a year for service dog expenses (from 2027), with the cost of acquiring the dog claimable separately.

Budget 2026 would also remove prescription requirements for certain medical items (including insulin and qualifying CPAP equipment), while for other specified items substituting certification of the relevant medical condition, from the 2026 taxation year. This simplification of the Medical Expense Tax Credit is long overdue.

Unless otherwise noted, these measures would apply to the 2027 and subsequent taxation years.

In many cases the flat amount will be less than the actual expenses, so taxpayers with significant costs should continue to keep their receipts. For smaller claims, the convenience may be worth more than the difference.

A few of us—and fewer every year—can remember when a similar provision allowed taxpayers to deduct a flat $100 instead of itemizing charitable donations and medical expenses. An overwhelming number of taxpayers claimed the flat $100. As my tax professor, Arthur Drache, pointed out, this suggested that many taxpayers were not making charitable donations of more than $100, or they would have claimed the actual amounts. That provision was eliminated for the 1984 taxation year.

Other Personal Measures

Budget 2026 also proposes a number of smaller changes, generally applicable to the 2027 and subsequent taxation years:

• commission employees would be able to deduct travel and motor vehicle expenses under the general employee rules and also claim other employment expenses as a commission employee, up to their commission income;

• the cap on expenses deductible by employed artists (the lesser of $1,000 and 20% of artistic employment income) would be replaced by a limit equal to their employment income from artistic activities;

• the Volunteer Firefighters Tax Credit and the Search and Rescue Volunteers Tax Credit would be combined into a single credit, with both types of service counting toward the 200-hour requirement;

• receiving financial assistance from an employer or another arm’s length person for an educational program would no longer prevent a student from claiming the exemption for scholarship, fellowship and bursary income;

• the Northern Residents Deductions would be expanded by removing the reduction for employer-provided board and lodging, the 20% of net income cap on the residency deduction, and the travel deduction limit based on employer-provided travel benefits;

• apprentice vehicle mechanics would be able to deduct the full cost of eligible new tools, less the Canada Employment Credit amount, under a single deduction; and

• the thresholds below which the Canada Child Benefit, the Canada Groceries and Essentials Benefit and the Advance Canada Workers Benefit are paid as an annual lump sum would be increased, for benefits paid after June 2027, with indexing of the child-benefit and grocery-benefit lump-sum thresholds beginning in July 2028; the Advance Canada Workers Benefit threshold is transitional for 2027.



Conclusion

I have attempted to highlight the changes that affect most of my readers, so many Budget measures have not been discussed. Some I will discuss in due course; others I will address only as the need arises in a particular circumstance.

The Budget presents itself as the first stage of a multi-stage reform aimed at simplifying the tax system, describing its measures as a “substantial first package of reforms.” The flat amounts, longer objection periods and elimination of the requirement for certified resolutions all fit that description. Whether later stages deliver meaningful changes for owner-managers remains to be seen.

The big item for my clients is the Canada Growth Incentive. A $15 million exemption is generous, but it is aimed at new investment in a narrow range of businesses, and it will be years before anyone benefits. The family business owner who was hoping for a lower small business rate, or a larger small business limit, will find little in this Budget. The changes to trust distributions to non-residents, on the other hand, take effect today and require immediate attention.

The Government continues to run large deficits and is limited in what it can do.

I would be pleased to discuss the Budget provisions with you and your advisors.

Note: This memo describes measures proposed in Budget 2026 as of November 5, 2026. Unless otherwise indicated, proposals are not yet enacted. Some measures are consultations, and further legislative details may be released. Specific planning should be reviewed against enacted law and subsequent Finance releases.