corporate tax law updates Canada 2026

Canada's corporate tax environment shifted significantly through the 2025 Federal Budget and Bill C-15, which received Royal Assent on March 26, 2026. From cancelled capital gains rate increases to doubled SR&ED expenditure limits, overhauled transfer pricing rules, and a forthcoming Ontario small business rate cut, these corporate tax law updates in Canada for 2025 and 2026 demand attention from every Toronto business owner and corporation.

Here is what changed, what it means for your business, and what to do before your next fiscal year-end.

Why the 2025–2026 Corporate Tax Law Updates in Canada Matter

No single period in recent memory has brought this much legislative action to Canadian corporate tax law. Consider what happened in roughly twelve months:

The 2025 Federal Budget was tabled on November 4, 2025, introducing sweeping proposals across SR&ED, capital cost allowance, capital gains, and transfer pricing.
Bill C-15, the implementation legislation, received Royal Assent on March 26, 2026, making those proposals law.
The capital gains inclusion rate increase (long anticipated and then delayed) was definitively cancelled.
Ontario proposed its own small business rate cut for July 2026.

For Toronto-area corporations, particularly Canadian-controlled private corporations (CCPCs), these changes affect tax planning, capital investment decisions, research and development budgets, and cross-border transaction structuring. Business owners who have not reviewed their corporate structure since 2024 may be missing planning opportunities or carrying unrecognised exposure.

Federal and Ontario Corporate Tax Rates in 2026

Before diving into the changes, it helps to anchor the discussion in the current rate structure.

Federal rates (unchanged):

General federal corporate income tax rate: 15%
Federal small business rate (CCPCs, first $500,000 of active business income): 9%

Ontario rates:

Ontario general corporate income tax rate: 11.5% (unchanged)
Ontario small business rate: 3.2%, proposed to drop to 2.2% effective July 1, 2026

Combined effective rates for Ontario CCPCs:

Active business income up to $500,000: approximately 12.2% (federal 9% + Ontario 3.2%)
After July 1, 2026 (if Ontario proposal is enacted): approximately 11.2% (federal 9% + Ontario 2.2%)
Active business income above $500,000: approximately 26.5% (federal 15% + Ontario 11.5%)

The CCPC passive income phase-out rule (unchanged) reduces a corporation's small business deduction when the associated group earned more than $50,000 of passive investment income in the prior year. The deduction is fully eliminated at $150,000 of passive income. Ontario does not parallel this federal phase-out, so Ontario's small business deduction is not affected by passive income levels.

Capital Gains, The Proposed Rate Increase Is Cancelled

The proposed increase to the capital gains inclusion rate, from 50% to 66.7%, dominated tax planning conversations throughout 2024 and early 2025. The 2025 Federal Budget definitively cancelled it.

Current position as of April 2026:

One-half (50%) of most capital gains remains taxable for individuals, corporations, and most trusts.
The increase will not take effect.
The Canadian Entrepreneurs Incentive (which was linked to the inclusion rate change) was also cancelled.

Lifetime Capital Gains Exemption (LCGE) increase:

While the inclusion rate proposal was cancelled, one positive change from the capital gains package survived and took effect: the LCGE was increased to $1,250,000 (up from $1,016,836) for qualifying dispositions on or after June 25, 2024. Beginning in 2026, the LCGE will be indexed for inflation.

For business owners who hold shares of a qualifying small business corporation, this expanded exemption is a meaningful planning tool for succession and exit planning.

If you made decisions in anticipation of the rate increase:

Some business owners triggered capital gains in 2024 or early 2025 to capture gains at the 50% inclusion rate before the anticipated increase. Now that the increase is cancelled, those decisions should be reviewed with a tax lawyer to assess whether any planning adjustments are available or needed.

Bill C-15: The Three Business Changes That Matter Most

Bill C-15 (An Act to implement certain provisions of the budget tabled in Parliament on November 4, 2025) received Royal Assent on March 26, 2026. It implements three significant changes for Toronto-area businesses.

1. SR&ED Tax Credit Enhancements, Effective December 16, 2024

The Scientific Research and Experimental Development (SR&ED) program provides federal tax incentives for businesses conducting R&D in Canada. Bill C-15 substantially expanded the program:

Enhanced expenditure limit:

Previous limit: $3 million per year
New limit: $6 million per year (doubled)

Phase-out thresholds for CCPCs:

Previous range: $10M–$50M of taxable capital
New range: $15M–$75M of taxable capital (more businesses now qualify for enhanced rates)

Eligible Canadian Public Corporations (ECPCs):

ECPCs can now access the enhanced 35% refundable credit previously available only to CCPCs.

Capital expenditures and lease costs reinstated:

Bill C-15 reinstates the eligibility of certain capital expenditures and lease costs as qualifying SR&ED expenditures.
Applies to property acquired or lease expenditures incurred on or after December 16, 2024.

Effective date: Taxation years beginning on or after December 16, 2024.

For Toronto technology companies, manufacturers, and businesses conducting product development or process innovation, these changes are significant. Businesses that previously exceeded the taxable capital thresholds and could not access enhanced SR&ED credits should reassess their eligibility.

2. Capital Cost Allowance Enhancements, Accelerated Deductions

Bill C-15 introduced two notable CCA enhancements aimed at stimulating capital investment:

Immediate expensing for manufacturing and processing buildings:

A 100% CCA deduction in the first taxation year is now available for eligible manufacturing or processing buildings.
Requirement: At least 90% of the building's floor space must be used for manufacturing or processing goods for sale or lease.

"Productivity Super-Deduction":

Budget 2025 introduced an accelerated deduction for capital investments, implemented through Bill C-15.
Designed to encourage businesses to invest in productivity-enhancing capital assets.

Investment tax credit limit increased:

From $3 million to $4.5 million in 2025.

Businesses investing in capital assets, manufacturing equipment, processing facilities, eligible technology infrastructure, can now accelerate their deductions and reduce taxable income in the year of acquisition rather than spreading deductions over multiple years.

3. Transfer Pricing Rule Changes, Effective November 4, 2025

Bill C-15 fundamentally revised Canada's transfer pricing rules under section 247 of the Income Tax Act. These changes apply to tax years and fiscal periods beginning after November 4, 2025.

What changed:

The existing transfer pricing adjustment and recharacterisation rules have been replaced with a single adjustment application rule. The new rule applies when the "actual conditions" of a transaction or series of transactions differ from "arm's-length conditions."

An interpretation rule has also been added to align Canada's transfer pricing rules with the OECD Transfer Pricing Guidelines analytic framework.

Who is affected:

Any business that has transactions with non-arm's-length parties, including:

Intercompany loans or charges between related corporations
Management fees between parent and subsidiary
Cross-border transactions with affiliated entities
International businesses operating in Canada through related entities

Businesses with cross-border transactions should review their transfer pricing documentation and ensure their intercompany pricing reflects arm's-length terms under the new analytic framework.

Digital Services Tax, Enacted, Then Repealed

The Digital Services Tax (DST) had a short and turbulent history. Here is the current status:

Bill C-59 received Royal Assent on June 20, 2024, and the DST entered into force on June 28, 2024. It applied a 3% tax retroactively to in-scope revenues earned since January 1, 2022, on revenues from online marketplaces, online advertising, social media platforms, and the sale or licensing of user data.
On June 29, 2025, the Canadian government announced it would rescind the DST in the context of resuming U.S.-Canada trade negotiations.
DST payments already made to CRA will be fully refunded with interest from the date of payment.

As of April 2026, the DST is being repealed and is no longer in force going forward. This change primarily affects large technology and media companies. Most Toronto SMEs will not be directly affected, but any business involved in digital marketplace operations, user data licensing, or online advertising as a significant revenue source should confirm their position.

Administrative and Filing Changes Every Toronto Corporation Must Know

Beyond the substantive tax law changes, several administrative updates took effect in 2025 and 2026.

Online-only business registration (effective November 3, 2025): New business number or CRA program account registrations must be completed online. CRA has discontinued phone-based registrations.

Mandatory electronic filing: Starting January 2025, T3, T4, T4A, and T5 information returns must be filed electronically. Paper filing has been eliminated for most businesses.

Online mail obligation: Businesses are now required to use CRA's Online Mail system for tax correspondence.

Bare trust T3 filing:

CRA is not requiring bare trusts to file a T3 return for taxation years ending in 2025.
Bare trusts will be required to file for taxation years ending on or after December 31, 2026.

T2 corporate return filing deadline: The T2 is due 6 months after fiscal year-end. For a December 31, 2025 year-end: deadline is June 30, 2026.

What Toronto Business Owners Should Do Now

These changes are not passive, several require active decisions before your next fiscal year-end.

Review your CCPC eligibility and passive income position. If your corporation's associated group is approaching $50,000 in passive income, you may be at risk of losing access to the small business deduction.

Assess SR&ED eligibility under the new thresholds. If your business conducts R&D, product development, or technology innovation and previously did not qualify for the enhanced 35% refundable SR&ED credit due to capital thresholds, the new $15M–$75M range may now include you.

Plan capital expenditures around CCA enhancements. If you are investing in manufacturing or processing facilities in 2026, structuring the purchase to qualify for immediate expensing (100% Year 1 deduction) is a significant tax planning opportunity.

Review capital gains decisions made in 2024–2025. If you triggered capital gains in anticipation of the inclusion rate increase, a review with your tax lawyer is warranted.

Update transfer pricing documentation. If your business has intercompany transactions with non-arm's-length parties, including intercompany loans, management fees, or cross-border arrangements, review your documentation against the new OECD-aligned framework. The new rules apply to fiscal periods beginning after November 4, 2025.

Track the Ontario small business rate cut. The proposed reduction from 3.2% to 2.2%, effective July 1, 2026, is a planning opportunity if you can defer income recognition across fiscal year boundaries.

Ensure compliance with new administrative requirements. If your business has not yet set up CRA Online Mail or updated electronic filing procedures, address these before your next T2 or information return filing deadline.

Frequently Asked Questions

What is the corporate tax rate in Canada for 2026?

The federal general corporate income tax rate is 15%. For CCPCs earning active business income up to $500,000, the federal small business rate is 9%. In Ontario, the combined effective rate for CCPCs on the first $500,000 is approximately 12.2%, dropping to approximately 11.2% after July 1, 2026, if the Ontario small business rate cut is enacted.

Did the capital gains inclusion rate increase in Canada?

No. The proposed increase from 50% to 66.7% was definitively cancelled in Canada's 2025 Federal Budget. As of April 2026, one-half (50%) of most capital gains remains taxable for individuals, corporations, and most trusts.

What is Bill C-15 and how does it affect my business?

Bill C-15 implements the 2025 Federal Budget tax measures and received Royal Assent on March 26, 2026. Key business impacts include doubled SR&ED expenditure limits, enhanced CCA deductions for manufacturing buildings, accelerated capital investment deductions, and revised transfer pricing rules aligned with OECD guidelines.

What are the SR&ED tax credit changes for 2025?

The enhanced SR&ED expenditure limit doubled from $3M to $6M. Taxable capital phase-out thresholds for CCPCs increased from $10M–$50M to $15M–$75M. ECPCs can now access the enhanced 35% refundable credit. Capital expenditures and lease costs are reinstated as eligible expenditures for taxation years beginning on or after December 16, 2024.

What is the Ontario small business tax rate in 2026?

Currently 3.2%. The Ontario government has proposed reducing it to 2.2% effective July 1, 2026. For a CCPC in Ontario earning up to $500,000 of active business income, this would reduce the combined federal-provincial rate from approximately 12.2% to approximately 11.2%.

What is the CCPC passive income limit for the small business deduction?

The federal small business deduction begins phasing out when an associated group earned more than $50,000 of passive investment income in the prior taxation year, and is fully eliminated at $150,000. Ontario does not apply this phase-out to its provincial small business deduction.

What is the Lifetime Capital Gains Exemption for 2025?

The LCGE has been increased to $1,250,000 for qualifying dispositions on or after June 25, 2024. Beginning in 2026, the amount is indexed for inflation. It applies to qualifying small business corporation shares, qualified farm property, and qualified fishing property.

How do the new transfer pricing rules affect Canadian businesses?

The new rules replace the previous framework with a single adjustment rule that applies when a transaction's "actual conditions" differ from "arm's-length conditions." The rules align with OECD Transfer Pricing Guidelines and apply to fiscal periods beginning after November 4, 2025.

Do I need to file my T2 online in Canada?

As of January 2025, information returns (T3, T4, T4A, T5) must be filed electronically. New business number and CRA program account registrations must also be completed online as of November 3, 2025. The T2 return itself has supported electronic filing for years.

When is the T2 corporate tax return due in Canada?

The T2 is due 6 months after your corporation's fiscal year-end, for a December 31, 2025 year-end, the deadline is June 30, 2026. Corporate income tax owing must be paid within 2 months of year-end (or 3 months for most CCPCs claiming the small business deduction).

This article is for general informational purposes only and does not constitute legal or tax advice. Corporate tax law is complex and fact-specific. Please consult a qualified tax lawyer before making decisions based on any of the information in this article.

Sources & Official Resources

Federal Legislation

CRA Guidance

Ontario Government

Digital Services Tax

Canada Rescinds Digital Services Tax, Finance Canada

Contact Hadri Law

Navigating Canadian corporate tax law changes requires advice tailored to your specific business structure, industry, and fiscal position. The corporate tax picture in 2025 and 2026 has shifted enough that a review, even a brief one, can uncover planning opportunities or prevent costly errors.

Martina Caunedo, Hadri Law's tax lawyer, brings over 12 years of international tax experience including tax strategy for medium-sized businesses, CRA audit defence, objections, and Tax Court representation. Whether you have questions about SR&ED eligibility, passive income exposure, transfer pricing documentation, or capital gains planning, she and the Hadri Law team are here to help.

Hadri Law serves clients in English, French, Spanish, and Catalan.

Call us: (437) 974-2374

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Corporate Tax Law Updates in Canada 2026: Key Changes Toronto Businesses Must Know

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