LN TAX AND TRADE NEWSLETTER |November 2026

A NOTE FROM THE EDITOR, SUNITA DOOBAY:

Loopstra Nixon LLP is pleased to share highlights of the Federal Budget released on November 5, 2026. This ambitious budget aims, in the words of Prime Minister Mark Carney and Finance Minister François-Philippe Champagne, to shape our future by reinforcing “Canadian sovereignty through tough, prudent decisions to manage government spending, through ambitious measures to drive an investment super-cycle that builds Canada strong, and through bold measures to diversify our trade and technologies, so no one can dictate our choices.”

The budget demonstrates that the Department of Finance has been listening to taxpayers. For example, Allan Ritchie, a corporate and tax partner at Loopstra Nixon LLP, wrote:

Ottawa doesn't need to invent something new here. It needs to widen a door that is already half open. Expand section 44.1 so the reinvestment can take the form of acquiring an existing private business, particularly where the individual is taking control of it, not just subscribing for new stock in a startup. Give it a real window, two years is reasonable. And stop treating the lifetime exemption as the only lever in the toolkit.

Ottawa has responded. Below, we discuss the proposed expansion of the section 44.1 rollover for which Allan advocated.

I was particularly pleased to see Ottawa recognize the need for a more efficient way for related companies to use operating losses. Unlike the United States, Canada does not allow consolidated filing. Instead, we have typically had to resort to costly reorganizations, such as amalgamation or wind-ups.

The Department of Finance proposes reviewing corporate refunds before they are issued—a welcome step following reports of fraudulent income tax refunds paid by the Canada Revenue Agency. Read this article about a fraudulent $5 million income tax refund payout.

The Budget also proposes $116.5 million for the Canada Revenue Agency over four years, starting in 2027–28. This funding would support more checks on corporate income tax returns before assessment, strengthen the trust filers verification program, and expand compliance work involving individual and business tax filers.

The articles below examine these and other key budget measures in detail, outlining the proposed changes and what they could mean for you and your business.

I. MORE TIME TO REINVEST IN SMALL BUSINESS SHARES TAX-FREE

Proposed changes to the rollover that lets individuals defer tax on gains from eligible small business corporation shares when they reinvest the proceeds

At a glance

•  The existing rollover lets you defer capital gains tax when you sell eligible small business corporation shares and reinvest the proceeds in new eligible shares.

•  The reinvestment window would grow from about two years to four. You would have the year of sale plus the next three calendar years, using a yearly reserve to defer the gain.

•  SAFE investments would get up to two extra years. If you sign a SAFE or similar future-equity agreement within the window, you would have up to five years in total.

•  Interest would apply to amounts never reinvested, calculated from the original tax due date.

•  The asset test while you hold the shares would be relaxed, but the Canadian-activity test would be tightened.

•  The changes would apply to sales on or after January 1, 2027. No draft legislation has been released yet.

How the rollover works today

Section 44.1 of the Income Tax Act lets an individual defer tax on a capital gain from a “qualifying disposition” of eligible small business corporation shares, to the extent that the proceeds are reinvested in replacement shares. Trusts cannot use it.

In broad terms, under the current rules:

• the shares sold must have been issued to you by the company (not bought from another shareholder), and you must have held them for at least 185 days before the sale;
• when the shares were issued, the company must have been a Canadian-controlled private corporation with substantially all of its assets used in an active business carried on mainly in Canada, and the company and related companies must have had assets of $100 million or less;
• throughout the time you held the shares, all or substantially all (generally about 90%) of the company’s assets must have been used mainly in an active business;
• the business must have been carried on mainly in Canada for at least 730 days of your holding period (or throughout, if you held the shares for less than 730 days); and
• you must buy the replacement shares in the year of sale or the following calendar year and designate them in your tax return for the year of sale.

The replacement window and the $100 million asset limit were expanded by Bill C-15, which received royal assent on March 26, 2026, and applies to dispositions on or after January 1, 2025. Before that, the window ended 120 days after the year of sale and the asset limit was $50 million.

How much is deferred. The deferral is proportional. If you reinvest only part of your proceeds, only the corresponding portion of the gain is deferred. The deferred gain then reduces the tax cost of your replacement shares, so it is taxed when you later sell them.

Example

•  You sell qualifying shares for $1,000,000 and realize a $600,000 capital gain.

•  You reinvest $500,000, half of the proceeds, in replacement shares within the window.

•  Half of the gain, $300,000, is deferred. The other $300,000 is taxed in the year of sale.

•  The tax cost of your replacement shares is reduced by $300,000, from $500,000 to $200,000.

What Budget 2026 proposes

The budget estimates that these changes will cost about $150 million over five years.

What a SAFE is

A SAFE (simple agreement for future equity) is a short contract under which an investor pays a company now in exchange for the right to receive shares later, usually when the company raises a priced funding round. A SAFE is neither a share nor a loan: it carries no interest and no repayment date. The budget describes the qualifying arrangement as one under which the investor “provides upfront capital in return for shares to be issued at a future date” and gives a SAFE only as an example.

Who benefits and who may lose out

• Angel investors and serial founders who sell one company and need more time to find the next investment would benefit most from the longer window and reserve.
• Early-stage investors who often invest through SAFEs would be able to use the rollover for those investments, provided shares are issued within five years.
• Companies with significant non-business assets, such as cash from a funding round awaiting use, would find the relaxed “primarily” test easier to meet while the shares are held. The stricter test would still apply at issuance and at sale.
• Companies that moved into Canada after issuance may lose out. Today, any 730 days of mainly Canadian operations count. Under the proposal, the two-year period must run continuously from issuance.

Open questions

Until draft legislation is released, several points remain unclear:

• whether sales in 2025 and 2026 will get any of the new relief (the budget says the changes apply to sales on or after January 1, 2027);
• how the reserve will be calculated each year, and how later reinvestments will reduce the tax cost of replacement shares;
• whether convertible notes, which are debt, would qualify like SAFEs, and when the company must qualify under a SAFE (at signing, at issuance, or both);
• how the stricter Canadian-activity test will work with the existing rule for share-for-share exchanges; and
• whether replacement shares could also qualify for the new $15 million Canada Growth Incentive capital gains exemption, and how the two measures would interact.

The budget’s draft legislation contains no text for this measure. It states only that the Income Tax Act is to be modified to give effect to the proposal.

When it applies

The proposed changes would apply to qualifying dispositions on or after January 1, 2027. Sales in 2025 and 2026 remain subject to the current rules, so replacement shares must be acquired by the end of the calendar year following the sale. These are budget proposals and are not yet law.

What you should do now

☐  If you sold qualifying shares in 2025 or 2026, do not rely on the longer window. Plan to reinvest by December 31 of the year after the sale and designate the replacement shares in your return.

☐  If you are planning a sale, consider whether timing it on or after January 1, 2027 would give you more flexibility, taking into account that the rules are not yet law.

☐  Confirm that your shares qualify. Check that they were issued to you directly, that you have held them for at least 185 days, and that the company has met the asset and Canadian-activity tests throughout.

☐  Keep records. Retain evidence of the company’s asset mix and where it operates, from issuance onward, along with share issue dates and proceeds.

☐  Track reinvestments and SAFEs. Record the date and amount of each reinvestment and each future-equity agreement, and when shares are actually issued.

☐  Plan for the interest charge. If you may not reinvest all of your proceeds, set aside funds for the deferred tax plus interest.

☐  Talk to us before investing. We will review new investments against the rules and update you when draft legislation is released.

II. THE NEW $15 MILLION CANADA GROWTH INCENTIVE EXEMPTION

A proposed tax exemption for founders, employees and investors who buy new shares in growing Canadian companies

At a glance

•  Up to $15 million of capital gains could be tax-free when you sell qualifying shares. The limit applies separately to each person, for each business.

•  Only new shares count. The shares must be issued to you directly by the company on or after Budget Day (November 5, 2026) and before 2037. Shares you already own, or shares bought from another shareholder, do not qualify.

•  You must hold the shares for at least 36 months before selling, so the earliest tax-free sales would be in late 2029.

•  The company must be a Canadian-controlled private corporation with $100 million or less in assets (including related companies) when the shares are issued.

•  Many industries are excluded, including consulting, professional practices, real estate, finance, mining, agriculture, hospitality, arts and entertainment, and franchises.

•  This is a proposal only. No draft legislation has been released, and important anti-avoidance rules are still to come.

What is being proposed

Budget 2026 proposes a new Canada Growth Incentive (CGI) capital gains exemption. A Canadian-resident individual could claim an exemption on capital gains from selling qualifying shares of a qualifying corporation, up to $15 million. The $15 million limit applies separately to each qualifying individual for each business.

Unlike the existing lifetime capital gains exemption, the CGI limit is not a single lifetime amount. A founder who builds and sells more than one qualifying business could in principle claim up to $15 million for each one, subject to the anti-avoidance rules still to be released.

The government estimates that, for an Ontario founder with a $15 million gain, the share of the gain kept after tax would rise from about 71% to about 96%.

The budget describes the CGI as one of two parts of the Canada Growth Incentive. The other is a separate expansion of the existing small business investment rollover, which is not covered in this alert.

Who can claim it

To claim the exemption, you must:

• be an individual (trusts cannot claim it);
• have been at least 18 years old when you acquired the share; and
• be resident in Canada for the whole year in which you claim the exemption. The claim can relate to a gain from that year or an earlier year.

The shares must be issued by the company to you, or to a partnership of which you are a member, and owned directly by you or that partnership. If a partnership acquires the shares, you must already be a partner, and at least 18, at that time.

Holding companies and family trusts. Because the shares must be owned directly by the individual or a partnership, shares held through a personal holding company or a family trust would not appear to qualify, based on the budget description. This is a significant difference from common founder structures, and should be considered before any new shares are issued.

Which shares qualify

A share would qualify only if it meets all of the following tests.

Two points stand out. First, the company can grow beyond $100 million and can go public on a Canadian exchange after the shares are issued without losing eligibility. Second, a listing only on a foreign exchange, or a move of the company outside Canada, would appear to disqualify the shares at the time of sale.

Excluded businesses

A qualifying business is an active business other than:

• consulting businesses, and professional practices of accountants, lawyers, notaries, physicians, other health care practitioners, engineers and architects;
• any business whose main asset is the reputation or skill of one or more employees;
• businesses in the agricultural, fishing, forestry, mining, financial, insurance, utilities, real estate, food and accommodation, arts, recreation or entertainment sectors; and
• businesses operating under a licensing or franchising agreement.

The sector exclusions are broad, and the budget does not yet specify how they will be defined. Companies in areas such as fintech, insurtech, agri-tech, media or licensing-based software should not assume they qualify until the legislation is released.

How it fits with other exemptions

Alternative Minimum Tax. Gains exempted under the CGI would still be partially included for purposes of the Alternative Minimum Tax (AMT), using a 30% inclusion rate, the same treatment as LCGE gains. A large exempt gain could therefore still trigger AMT in the year of sale. AMT paid can generally be recovered against regular tax over the following seven years.

Rules still to come

The government will propose additional rules to prevent use of the exemption in ways inconsistent with its purpose, including multiplying the $15 million limit by using several corporations that carry on the same underlying business. Details will be released later.

The budget’s draft legislation does not contain any text for this measure. It states only that the Income Tax Act is to be modified to give effect to the proposal.

Questions that remain open include:

• whether shares issued on the exercise of employee stock options, or on conversion of a SAFE or convertible note, are treated as issued for cash or for employment services;
• how “all or substantially all” and “primarily in Canada” will be measured, and how the sector exclusions will be defined;
• how the continuity rules for share exchanges and reorganizations will work; and
• how the 36-month holding period applies to sales that close in stages or with earn-outs.

When it applies

The exemption would apply to qualifying shares issued on or after Budget Day, November 5, 2026, and before 2037. Because of the 36-month holding period, the government does not expect the first claims until the 2029-30 fiscal year. It estimates the cost at $80 million in 2029-30 and $485 million in 2030-31.

What you should do now

☐  Check whether your company could qualify. Confirm CCPC status, the combined asset value of related companies, and whether the business falls into an excluded sector.

☐  Plan new share issuances carefully. Only shares issued from treasury on or after November 5, 2026, for cash or employment services, can qualify. Talk to us before a financing round, founder share issuance or employee share grant.

☐  Review who will hold the shares. Shares held through a holding company or family trust would not appear to qualify. The trade-offs with LCGE planning, family income splitting and estate planning need to be weighed.

☐  Do not restructure existing shares yet. Existing shares do not qualify, and the anti-avoidance and reorganization rules have not been released. Reorganizing now to create new shares carries risk.

☐  Track the 36-month and 24-month clocks. Keep records of issue dates, prices paid, and where the business operates.

☐  Plan for AMT. If you expect a large sale, ask us to model the AMT that could still apply.

☐  Stay in touch for updates. We will let you know when draft legislation is released.

III. CRA PENALTIES ARE GOING UP

Higher fixed penalties, bigger amounts for larger businesses, new penalties for repeat non-compliance, and reporting of large tax debts to credit bureaus

At a glance

•  Many fixed CRA penalties would double or triple. For example, the maximum penalty for a late section 85 rollover election would rise from $8,000 to $24,000.

•  Medium and large businesses would pay three to eight times more for the same filing failures.

•  New penalties would apply to repeat failures and to any tax obligation that currently has no specific penalty.

•  Penalties would rise with inflation every five years, starting in 2033.

•  Unpaid tax debts over $50,000 could be reported to credit bureaus once all objection and appeal rights are used up, after 30 days’ written notice.

•  Most penalty changes take effect after 2027, so there is time to review your filing processes now. The credit bureau measure would apply as soon as the legislation is passed.

What is changing

Many of the CRA’s fixed-dollar penalties have not changed since the 1980s or 1990s, and one dates from 1927. The government says inflation has eroded their value as a deterrent. Budget 2026 proposes to raise most fixed-dollar penalties under the Income Tax Act to reflect inflation since they were enacted. Older penalties would generally increase by two or three times, and the most recent penalties would stay the same. The same approach would apply to GST/HST, excise and other federal tax penalties.

Penalties calculated as a percentage of unpaid tax, such as the regular late-filing penalty on a tax return, are not part of this change.

The table below compares current amounts with those in the government’s draft legislation. Amounts shown are for individuals, trusts and smaller businesses.

Larger businesses would pay more

A $100 penalty may matter to an individual but not to a large corporation. For failing to provide information on a form, filing information returns late, and the new catch-all penalty described below, the budget would apply a multiplier to the base amount based on the size of the business.

For a large corporation, the penalty for a late information return would be the greater of $800 and $200 per day, up to a maximum of $20,000. For this purpose, a Canadian-controlled private corporation is treated as related to another corporation only if the two are also associated.

New penalties

• A catch-all penalty. Failing to comply with any duty or obligation under the Income Tax Act or its regulations for which no specific penalty applies would attract a penalty of the greater of $100 and $25 per day (up to 100 days), scaled by size.
• Repeat failures. The penalty would generally double for a second failure of the same type. This would apply only if you were penalized for the same type of failure in any of the three previous years and you did not remedy the failure after the CRA sent you a notice or demand.
• Non-resident trust distributions and loans. A new extended penalty would apply to long-running failures to file the T1142. It would equal 5% of distributions received from the trust plus the highest unpaid balance of any debt owed to the trust.
• International reporting regimes. Penalties would expressly apply to financial institutions and others that fail to obtain or validate self-certifications, carry out due diligence, or keep records under the Common Reporting Standard, the digital platform rules and the crypto-asset rules. The penalty for not giving a tax identification number under these regimes would rise to $1,000.

Large tax debts could be reported to credit bureaus

Today, the CRA cannot report unpaid taxes to credit bureaus as other creditors can, because the Income Tax Act strictly limits what taxpayer information it may disclose. It relies instead on tools such as offsetting refunds and other government payments, garnishing wages and other income, and seizing and selling assets. Budget 2026 proposes to allow the CRA to disclose a taxpayer’s tax debt to credit bureaus.

The CRA could report a tax debt only if all of the following conditions were met:

• the outstanding tax debt is more than $50,000;
• the assessments that created the debt are not under objection or appeal, and all objection and appeal rights have expired or been exhausted;
• the CRA has told the taxpayer in writing, at least 30 days in advance, that it intends to report the debt; and
• the CRA has first taken reasonable steps to collect the debt and given the taxpayer a chance to make reasonable repayment arrangements.

The same rules would apply to unpaid GST/HST. This measure would take effect as soon as the legislation receives royal assent, rather than after 2027. The budget does not yet include draft legislation for it. Details still to be determined include whether income tax and GST/HST debts would be added together for the $50,000 threshold, what information would be shared, and how long it would remain on a credit file.

A credit report entry could affect your ability to borrow, renew a mortgage or line of credit, or obtain credit on good terms.

Inflation indexing

Starting January 1, 2033, and every five years after that, the listed penalty amounts would rise with the Consumer Price Index. Adjusted amounts would be rounded to the nearest $5, or the nearest $500 for amounts of $5,000 or more.

When the changes apply

Most Income Tax Act changes would apply to taxation years or fiscal periods ending after 2027, or to failures, elections and statements made after 2027. The changes for the Common Reporting Standard and other international regimes would apply beginning with the 2028 calendar year.

These are budget proposals and are not yet law. The government has released draft legislation, but the amounts and rules could change before they are enacted.

What you should do now

☐  File elections on time. If a section 85 rollover or similar election is planned, make sure it is filed by the due date. Late elections after 2027 will cost three times as much.

☐  Check your foreign reporting. If you own foreign property costing more than $100,000, own foreign companies, or have dealings with non-resident trusts, confirm that your T1135, T1134, T1141 and T1142 filings are up to date. Addressing gaps before the higher amounts apply may reduce your exposure.

☐  Respond quickly to CRA letters. The new repeat-failure penalties apply only after a CRA notice or demand is ignored. Send us any CRA correspondence as soon as you receive it.

☐  Deal with large tax balances early. If you owe, or expect to owe, the CRA more than $50,000, talk to us about objection deadlines and payment arrangements. A 30-day notice of intent to report should be treated as urgent.

☐  Know your size category. If your corporate group has more than $10 million of taxable capital, or your partnership has more than $2 million of gross revenue, routine filing failures could cost three to eight times more.

☐  Keep identification numbers ready. Provide your SIN, business number or trust number promptly when a bank, trust or partnership asks for it.

☐  Review compliance calendars. Businesses that file slips, partnership returns or other information returns should confirm that deadlines and electronic-filing requirements are tracked.

IV. CHANGES AFFECTING SECTION 85 ROLLOVERS

Relief from withholding for non-resident vendors, a tougher anti-avoidance rule, and higher penalties for late elections

At a glance

•  Non-resident vendors: purchasers would no longer need to withhold tax on a fully tax-deferred section 85 rollover of taxable Canadian property, if the election is filed and the CRA is notified within 30 days.

•  Anti-avoidance: for non-residents rolling over taxable Canadian property, the anti-avoidance rule’s look-forward period would rise from three to five years and would cover sales of property that gets most of its value from the transferred property.

•  Late elections: the maximum penalty for a late or amended section 85 election would triple, from $100 to $300 per month and from $8,000 to $24,000, for elections made after 2027.

•  Passenger vehicles: a technical change would let the Minister of Finance set the vehicle cost limit used in section 85 transfers without a regulation.

•  Draft legislation has been released for all of these changes, but they are not yet law.

Background: what section 85 does

Subsection 85(1) lets a person transfer property to a taxable Canadian corporation in exchange for consideration that includes shares, and jointly elect with the corporation an amount to be treated as the sale price for tax purposes. By electing an amount below fair market value, often the property’s tax cost, the transferor can defer all or part of the gain. Subsection 85(2) provides a similar rollover for partnerships.

The election must be filed by the earliest tax return due date of any of the parties for the year of the transfer. A late election can be accepted within three years if a penalty is paid, and thereafter only with the CRA’s permission.

1. Non-resident vendors: no withholding on full rollovers

When a non-resident sells “taxable Canadian property” (such as Canadian real estate, or shares that get most of their value from Canadian real estate or resource property), the buyer generally must withhold part of the price unless the seller obtains a clearance certificate from the CRA. This requirement applies even to a section 85 rollover on which no tax is payable. The CRA may issue a certificate without a tax payment, but buyers often hold back funds until it arrives, creating cost and delay.

Under the proposal, the buyer (the corporation receiving the property) would not have to withhold, and would not be liable for the seller’s tax, if all of the following conditions are met within 30 days after the transfer:

• the section 85 election (under subsection 85(1) or 85(2)) is filed;
• the buyer concludes, after reasonable inquiry, that, because of the rollover, no amount from the sale will be included in the seller’s taxable income earned in Canada; and
• the buyer sends the CRA a notice with information about the transaction and the seller.

The draft legislation does not appear to remove the seller’s separate obligation to notify the CRA within 10 days after the sale under subsection 116(3), so sellers should continue to plan for that notice.

If the election is later amended. If an amended election causes some gain to become taxable, the relief would be lost. The normal notice and withholding deadlines would then run from the month in which the CRA sends the notice of assessment for the late-filing penalty.

Note the shorter deadline. The 30-day window is much shorter than the normal deadline for a section 85 election, which can be many months after the transfer. To obtain this relief, the election must be prepared and filed almost immediately.

Separately, the budget would lower withholding and remittance rates where the non-resident seller is a corporation: from 25% to 15% for most capital property, and from 50% to 30% for “specified” property such as depreciable property and real estate inventory.

2. Tougher anti-avoidance rule for non-residents

Subsection 69(11) can cancel a rollover and deem the property to have been sold at fair market value. It applies where, as part of a series of transactions, property is transferred for less than its value and one of the main purposes is to benefit from a tax exemption (for example, under a tax treaty) on a later sale that occurs, or is arranged, within three years.

For non-residents transferring taxable Canadian property, the budget would:

• extend the three-year period to five years; and
• extend the rule to a later sale of any property that, at any time in the 60 months after the transfer, derives more than 50% of its value directly or indirectly from the transferred property (or property substituted for it). This would cover, for example, a later sale of shares of a holding company that owns the transferred shares.

This matters for non-residents who transfer shares or real estate on a rollover basis into a Canadian or foreign holding structure before a sale, and for corporate groups planning a reorganization ahead of an exit.

3. Higher penalties for late or amended elections

The penalty for a late-filed or amended section 85 election is the lesser of 1/4 of 1% per month of the amount by which the property’s value exceeds the elected amount, and $100 per month up to $8,000. The budget would raise the second amount to $300 per month, up to $24,000, for elections and amended elections made after 2027. The same increase would apply to similar elections for foreign affiliate shares and partnerships.

From January 1, 2033, and every five years after that, these amounts would also rise with inflation.

4. Passenger vehicle limit

When a passenger vehicle costing more than $20,000 is rolled into a corporation by a non-arm’s-length person, the elected amount is fixed at the undepreciated capital cost of the class. Today, a different limit can be set only by regulation. The budget would allow the Minister of Finance to designate the amount instead, for 2026 and later years. This is an administrative change and does not itself change the amount.

Related change: filing deadlines

The budget would move the T1 filing and payment date to May 15 for all individuals, including self-employed individuals, starting with the 2027 tax year. Because the section 85 election is due by the earliest return due date of the parties, this change could affect the election deadline where an individual is a transferor. Self-employed individuals would have less time than they do now (May 15 instead of June 15), and other individuals would have slightly more time (May 15 instead of April 30). The corporation’s own due date still applies if it is earlier.

When the changes apply

What you should do now

☐  File section 85 elections on time. Track the deadline for every rollover, especially after 2027, when late elections will cost up to three times more.

☐  Non-resident sellers and their buyers: plan for the 30-day window. For rollovers after 2026, file the election and CRA notice and complete the buyer’s review within 30 days of closing.

☐  Review cross-border restructurings. If a non-resident plans to roll Canadian property into a holding company before a sale, check whether a sale within five years, including a sale of shares higher up the chain, could cancel the rollover.

☐  Avoid amended elections where possible. An amended election can trigger penalties and, for non-residents, reopen withholding obligations.

☐  Update your deadline calendar for 2027. Check how the new May 15 T1 date affects elections where an individual is transferring property.

☐  Talk to us before closing. We can confirm whether a planned transfer qualifies and what must be filed and when.

V. RELIEF FROM PART VI.1 TAX ON PREFERRED SHARE DIVIDENDS

Canadian-controlled private corporations would no longer pay the special tax, and other corporations would get a larger tax-free allowance

At a glance

Part VI.1 tax is a special corporate tax on dividends paid on “taxable preferred shares”, which are shares with debt-like features such as a fixed dividend or a fixed redemption amount.

Canadian-controlled private corporations (CCPCs) would be fully exempt for dividends paid on or after Budget Day, November 5, 2026.

Other corporations would get a bigger allowance. The amount of dividends that can be paid each year before the tax applies would triple, from $500,000 to $1.5 million, for taxation years ending after 2026.

Draft legislation has been released, but these are still proposals and are not yet law.

The government is consulting on further changes to the preferred share rules. Comments are due by January 8, 2027.

Part VI.1 tax

A company can raise money by borrowing or by issuing shares. Interest on a loan is deductible to the company and taxable to the lender. Dividends are not deductible to the company, but a Canadian corporation that receives them can usually receive them tax-free. A company that pays little or no tax, for example, because it has losses, gets no benefit from an interest deduction. It may therefore prefer to issue preferred shares that work like a loan, allowing the investor to receive tax-free dividends instead of taxable interest. The government says this “after-tax financing” erodes corporate tax revenue.

Part VI.1 of the Income Tax Act responds by taxing the company that pays dividends on taxable preferred shares. The tax is generally 40% for short-term preferred shares (those that can be redeemed or converted within five years) and 25% or 40% for other taxable preferred shares, depending on whether the company has made a special election.

A company that pays regular income tax can generally offset Part VI.1 tax through a deduction equal to 3.5 times the Part VI.1 tax, so the tax mainly falls on companies that are not paying regular tax. The tax applies only to dividends above an annual allowance of $500,000. That allowance is reduced when dividends in the previous calendar year exceeded $1 million, and associated companies share a single allowance.

Which shares are affected

Taxable preferred shares are broadly defined. A share can fall within the definition if, for example:

• its dividends are fixed, capped or guaranteed a minimum and have a preference over other shares;
• the amount paid on redemption, wind-up or purchase is fixed, capped or guaranteed a minimum;
• it can be converted into other shares that would themselves fall within the definition; or
• someone other than the company guarantees it or agrees to buy it back.

This covers many fixed-value shares used by private companies, including many estate-freeze shares and retractable preferred shares.

Many dividends are already excluded. The main exclusion is for dividends paid to a shareholder with a “substantial interest” in the company. Broadly, this means a shareholder who is related to the company, or who (with related persons) owns at least 25% of the votes and 25% of the value of the company’s shares. Today, Part VI.1 tax most often affects private companies that pay preferred dividends to shareholders who are not related to the company, such as:

• arm’s-length investors who hold preferred shares;
• employees or key managers who hold preferred shares; and
• family members who are not “related” for tax purposes, such as nieces, nephews, cousins, aunts and uncles.

What is changing

The CCPC exemption would add CCPCs to the existing list of corporations whose dividends are excluded, which already includes financial intermediary corporations and private holding corporations. The budget says the purpose is to reduce the administrative and compliance burden of the regime.

Under the higher thresholds, a corporation that is not a CCPC would keep its full $1.5 million allowance unless its taxable preferred share dividends in the previous calendar year exceeded $3 million. Above that threshold, the allowance would shrink dollar for dollar and disappear at $4.5 million. Associated corporations would continue to share one allowance.

The government estimates that these changes will cost about $91 million over five years.

Points to watch

• CCPC status is tested when each dividend is paid. A company that stops being a CCPC, for example because a non-resident or a public company acquires control or because its shares are listed, would lose the exemption for dividends paid after that point.
• Timing wording. The detailed tax measures and the draft legislation say the CCPC exemption applies to dividends paid “on or after” Budget Day, while the summary in Chapter 6 of the Budget says “after” Budget Day. The draft legislation controls, but dividends paid on November 5, 2026, itself should be confirmed once the legislation is final.
• Part IV.1 tax on corporate shareholders is not being changed. A separate 10% tax under Part IV.1 can apply to a corporation that receives dividends on taxable preferred shares. It generally does not apply if the recipient is a private corporation or has a substantial interest in the payer. One of its exceptions, for short-term preferred shares, refers to the same list of excluded dividends that the budget is expanding. Public corporations and other non-private corporations that hold preferred shares of a CCPC should review the effect on their Part IV.1 position.
• Elections and agreements already made. CCPCs that have made the special Part VI.1 election, or associated groups that file agreements to share the dividend allowance, should review whether these are still needed once the changes are law.

Consultation on the broader rules

The government is also reviewing the broader preferred share regime and invites comments on how the rules work and how they could be improved. Written submissions may be sent by January 8, 2027, to the Tax Policy Branch, Department of Finance Canada, at consultation-legislation@fin.gc.ca.

What you should do now

☐  Identify preferred shares. List any preferred, freeze or retractable shares your company has issued and identify who holds them.

☐  Check who receives dividends. Note any dividends paid to shareholders who are not related to the company and own less than 25% of it.

☐  Confirm CCPC status. If you are a CCPC, confirm that status will continue on each dividend date, especially if a sale, financing or listing is planned.

☐  Review planned dividends. For CCPCs, preferred share dividends to unrelated holders paid on or after November 5, 2026 would no longer attract Part VI.1 tax under the proposal. Consider whether planned dividends should be timed accordingly, keeping in mind that the rules are not yet law.

☐  Non-CCPCs: recalculate your allowance. Public companies and foreign-controlled private companies should update their Part VI.1 estimates for taxation years ending after 2026 using the $1.5 million allowance and $3 million threshold.

☐  Corporate investors: check Part IV.1. If your corporation is not private and holds preferred shares of a CCPC, ask us to review whether Part IV.1 tax could now apply.

☐  Consider making a submission. If the preferred share rules create problems for your business, let us know before the January 8, 2027 consultation deadline.

VI. A SIMPLER WAY TO USE LOSSES WITHIN A CORPORATE GROUP

The government is consulting on a new rule that would let wholly owned corporate groups transfer current-year losses by joint election

At a glance

•  Today, each corporation is taxed on its own. A loss in one company cannot directly reduce the taxable income of another company in the same group.

•  Groups now rely on “loss consolidation” transactions, such as intra-group loans, amalgamations or wind-ups, which can be complex and costly.

•  Budget 2026 proposes a simpler loss transfer rule. A parent and its wholly owned subsidiaries, or two wholly owned sister subsidiaries, could jointly elect to transfer a current-year non-capital loss.

•  The proposed rule is narrow. It would cover only current-year business losses, and only where both companies have a permanent establishment in the same single province or territory.

•  This is a consultation, not a law. Comments are due by January 8, 2027. No draft legislation or start date has been announced.

The current position

Canadian corporations are taxed on a stand-alone basis. A corporation can use its own non-capital losses against its own income but cannot directly deduct a loss incurred by another corporation. As a result, a group can pay more tax overall if its businesses are carried on through several corporations rather than one.

Groups can achieve a similar result through amalgamations, wind-ups or intra-group financing. However, these can be complex, costly or unsuitable where separate companies must be kept for commercial, financing, regulatory or liability reasons.

How a typical loss consolidation works. The company with losses lends money at interest to the profitable company. The profitable company uses the money to buy preferred shares of the loss company. The profitable company deducts the interest and receives tax-free intercorporate dividends on the shares. The loss company receives interest income, which it shelters with its losses.

The CRA generally accepts these arrangements between corporations that are related, affiliated or both, if the transactions are legally effective, not blatantly artificial, and comply with the Act. For the interest to be deductible, the CRA expects the dividend rate on the preferred shares to be higher than the interest rate on the loan. The CRA has long said that these transactions within an affiliated group would not ordinarily be challenged under the general anti-avoidance rule.

What Budget 2026 proposes

The government is seeking comments on a corporate loss transfer rule with the following proposed design.

Tax integrity concerns

The budget notes that a loss transfer rule could produce unintended benefits when applied to companies that are otherwise taxed separately. It gives this example:

Budget example

•  Parentco invests $100 in shares of Subco.

•  Subco spends the $100 on a failed business venture, incurs a $100 non-capital loss, and transfers that loss to Parentco.

•  Result: Parentco has $200 of tax attributes (a $100 tax cost in the Subco shares and a $100 loss) even though it spent only $100.

Other countries address this through rules that adjust the tax cost of a group member’s shares or assets, or recalculate tax attributes when a company joins or leaves the group. The government is seeking views on which approach Canada should take.

How it compares with current planning

As proposed, the new rule would add an option rather than replace current planning. The budget does not say that existing loss consolidation arrangements would be restricted.

Who could benefit and who would not

• Likely to benefit: single-province groups with a holding company and wholly owned operating companies, where one company has a start-up or one-time loss and another is profitable in the same year.
• Would not qualify as proposed: groups with operations in more than one province, groups with minority shareholders in a subsidiary, and sister companies owned directly by an individual or a family trust rather than by a common parent corporation.
• Would still need other planning: groups wanting to use losses carried forward from earlier years.

The last two groups reflect our reading of the proposed parameters. Common owner-manager structures in which individuals or a family trust own each company directly would appear to fall outside the rule unless they are held under a common holding company.

Consultation

This loss transfer proposal follows earlier federal consultations on taxing corporate groups in 1985 and 2010. Those consultations identified two main concerns: the effect on provincial and territorial tax bases, and tax integrity. The government is asking for views on the proposed conditions, how the rule would work in practice, whether the parameters should change and, in particular:

• whether and how the rule could be extended to groups operating in more than one province or territory; and
• how integrity concerns should be addressed.

Written submissions may be sent to the Department of Finance at clt-consultation-tpes@fin.gc.ca by January 8, 2027. The budget does not provide a revenue estimate or a start date for this measure.

Points our clients may wish to raise include:

• allowing groups owned by individuals or a family trust, rather than a parent corporation, to qualify;
• allowing transfers within groups that are less than 100% owned, such as where employees hold minority shares;
• allowing transfers of losses carried forward from earlier years, or allowing unused transferred amounts to be carried forward; and
• allowing transfers within multi-province groups using the existing provincial allocation formula.

What you should do now

☐  Keep current planning in place. Nothing has changed yet.

☐  Map your group. Note which companies are wholly owned by a parent corporation and in which provinces each has a permanent establishment.

☐  Identify trapped losses. List companies that regularly generate losses while other group companies pay tax.

☐  Consider your ownership structure. If your companies are owned directly by individuals or a trust, ask us whether a holding company structure would make sense if the rule is enacted. Do not reorganize until the rules are final.

☐  Make your views known. If the proposed limits would exclude your group, consider a submission by January 8, 2027. We can help you prepare one.

VII. CLOSER CRA REVIEW OF CORPORATE TAX REFUNDS

New funding for checks on corporate returns before refunds are paid, and what corporations can do to avoid delays

At a glance

•  The CRA will receive new funding to strengthen “pre-assessment validation” of corporate income tax returns, so that it can stop unwarranted refunds before they are paid.

•  This is part of a $116.5 million, four-year compliance package starting in 2027-28, which the government expects to raise more than $1.2 billion.

•  No change to the law is proposed. The rules on when corporations are entitled to refunds, and on interest, stay the same.

•  In practice, more corporate refund claims may be reviewed before assessment. Corporations should expect more requests for documents and possible delays.

•  Accurate, well-documented returns are the best protection against delays and penalties.

What Budget 2026 proposes

Starting in 2027-28, Budget 2026 proposes $116.5 million over four years for the CRA to:

• expand compliance activities for individuals and businesses that do not file income tax returns;
• enhance the Trust Filers Verification Program to improve compliance among trust filers; and
• strengthen pre-assessment validation activities for corporate income tax returns, to help prevent unwarranted refunds.

The government expects these measures to raise more than $1.2 billion in additional revenue over four years, starting in 2027-28. The budget does not say how much of the funding or revenue relates to corporate refunds specifically.

“Pre-assessment validation” means reviewing a return after it is filed but before the CRA issues the notice of assessment and pays any refund. Stopping an incorrect refund before it is paid is generally easier and cheaper than recovering it later through an audit.

What this could mean for your corporation

The budget does not specify which returns will be targeted or how the reviews will work. Based on how pre-assessment reviews generally operate, corporations could see:

• more refund claims held until a CRA officer reviews them;
• requests for supporting documents, such as instalment records, invoices or calculations for refundable credits and loss carrybacks; and
• refunds taking longer than the CRA’s normal service standards when a return is selected for review.

The CRA’s current goal is to issue a notice of assessment within eight weeks of receiving a digitally filed corporate return, 90% of the time. Returns selected for review can take longer.

How corporate refunds work today

Refunds follow assessment. A corporation that has overpaid tax is generally entitled to a refund after its return is assessed, provided it applies for the refund—usually by filing its return—within three years after the end of the taxation year.

Refunds can be applied to other debts. The CRA can apply all or part of a refund to other amounts the corporation owes, such as payroll or GST/HST debts, instead of paying it out.

Interest on corporate refunds starts late and is paid at a lower rate. For a corporation, refund interest generally begins only on the latest of the following dates: 120 days after the end of the taxation year; 30 days after the return was filed, if it was filed late; and the date the tax was overpaid. The refund interest rate is also lower than the rate the CRA charges on amounts owing. For October to December 2026, corporations receive 3% on overpayments, compared with 7% charged on amounts owing.

Wrongly paid refunds must be repaid with interest. If refund interest was paid and the refund is later reduced on reassessment, the corporation must repay that interest.

Penalties for false refund claims will rise. Under separate Budget 2026 proposals, the minimum penalty for knowingly or grossly negligently making a false statement in a return would rise from $100 to $300, for the 2028 and later taxation years.

When it applies

The new funding starts in 2027-28, the federal fiscal year beginning April 1, 2027. No legislation is needed for this measure, as it expands the CRA’s existing review activities rather than changing the rules.

What you should do now

☐  File digitally and on time. Digitally filed returns are processed faster, and late filing can delay when refund interest starts.

☐  Document refund claims. Keep instalment records, refundable credit calculations (such as SR&ED), loss carryback schedules and supporting invoices ready to send.

☐  Respond quickly to CRA requests. A review usually cannot be completed until the CRA has the requested documents. Tell us as soon as a letter arrives.

☐  Check for other debts. Clear or arrange payment of any payroll, GST/HST or other balances, so the refund is not withheld to cover those debts.

☐  Do not depend on a refund for cash flow. Budget for possible delays, especially for large or unusual refunds.

☐  Keep your account details current. Make sure direct deposit and contact information in My Business Account are correct.

☐  Review your notice of assessment. If a refund is reduced or denied, an objection must generally be filed within 90 days of the notice of assessment.