Budget 2025 Implementation Act, No. 1 (S.C. 2026, c. 3)

• (a) no individual has prior to the disposition time sought a deduction under this section or section 110.62 in respect of a disposition of shares that, at the time of that disposition, derived their value directly or indirectly, from an active business that is also relevant to the determination of whether the disposition of the subject shares satisfies the condition set out in paragraph (a) of the definition qualifying business transfer in subsection 248(1);

• (i) the subject shares were not owned by anyone other than the individual or a person or partnership related to the individual, except that if, at any time in the 24-month period immediately preceding the disposition time, the subject shares were substituted for other shares (in this paragraph referred to as the “substituted shares”), the subject shares shall be considered to have met the requirements of this subparagraph only where the substituted shares were not owned by any person or partnership other than a person or partnership described in this subparagraph throughout the period beginning 24 months before the disposition time and ending at the time of substitution, and

• (ii) more than 50% of the fair market value of the subject shares and the substituted shares, if any, was derived, directly or indirectly, from assets which were used principally in an active business;

• (ii) throughout any 24-month period ending before the disposition time, the individual, or a spouse or common-law partner of the individual, was actively engaged on a regular, continuous and substantial basis (including within the meaning of paragraph 120.4(1.1)(a)) in the activities of the business that is relevant to the determination of whether the subject shares satisfy the condition set out in paragraph (a) of the definition qualifying business transfer in subsection 248(1), and

• (a) the amount determined by the formula

  A × B × C − D

  where

  A

  is the elected amount (within the meaning of clause (1)(e)(ii)(A)) included in the joint election referred to in paragraph (1)(e),

  B

  is

  • (i) 1, if only one individual is entitled to a deduction under this subsection in respect of the qualifying business transfer,

  • (ii) the percentage assigned to the individual in the joint election referred to in paragraph (1)(e), if a percentage is assigned to the individual in accordance with clause (1)(e)(ii)(B), and

  • (iii) in any other case, nil,

  C

  is the fraction of the taxpayer’s capital gain from the disposition of the subject shares that is a taxable capital gain under paragraph 38(a) that applies to the subject shares in the year, and

  D

  is the total of each amount claimed by the taxpayer under this subsection in a prior taxation year in respect of the disposition of the subject shares multiplied by the amount determined by the formula

  E ÷ F

  where

  E

  is the fraction of a capital gain that is a taxable capital gain under paragraph 38(a) in the current year, and

  F

  is the fraction of a capital gain that is a taxable capital gain under paragraph 38(a) in the prior year in respect of the disposition of the subject shares; and

• (b) the amount determined by the formula

  G − H

  where

  G

  is the lesser of

  • (i) the amount determined in respect of the individual for the year under paragraph 3(b) in respect of capital gains and losses (except any portion related to a deduction previously claimed by the individual in the year under this subsection), and

  • (ii) the amount that would be determined in respect of the individual for the year under paragraph 3(b) in respect of capital gains and losses if the only properties referred to in that paragraph were the subject shares, and

  H

  is the total of

  • (i) the individual’s allowable business investment losses for the year (except any portion that previously reduced the amount otherwise deductible by the individual in the year under this subsection),

  • (ii) the amount, if any, by which the individual’s investment expense for the year exceeds the individual’s investment income for the year (except any portion of the excess that previously reduced the amount otherwise deductible by the individual in the year under this subsection), and for the purposes of this subparagraph,

    • (A) investment expense of an individual for a year, has the same meaning as in subsection 110.6(1), except that the reference to “amount determined in respect of the individual for the year under paragraph (a) of the description of B in the definition annual gains limit” in paragraph (f) of that definition is to be read as “total of all amounts determined in respect of the individual for the year under subparagraph (iii) of the description of H in subsection 110.61(2) (to the extent that amount reduces the amount otherwise deductible under that subsection)”, and

    • (B) investment income of an individual for a year, has the same meaning as in subsection 110.6(1), except that the reference to “amount determined in respect of the individual for the year for A in the definition annual gains limit” in paragraph (f) of that definition is to be read as “total of all amounts determined in respect of the individual for the year for the description of G in subsection 110.61(2) (except any amount that previously reduced the amount otherwise deductible by the individual in the year under subsection 110.61(2))”, and

  • (iii) the amount, if any, by which

    • (A) the individual’s net capital losses for other taxation years deducted under paragraph 111(1)(b) in computing the individual’s taxable income for the year

    exceeds

    • (B) the amount, if any, by which the amount determined in respect of the individual for the year under paragraph 3(b) in respect of capital gains and capital losses (except any portion related to a deduction previously claimed by the individual in respect of other subject shares under this subsection) exceeds the amount determined for G.

• Marginal note:Order of application

  (2.1) If an individual claims more than one deduction under subsection (2) in a taxation year, the individual is to designate the order in which the deductions are claimed, and if the individual does not designate an order, the Minister may designate the order.

• (b) the time that is the beginning of the taxation year of a qualifying business of the trust in which less than 50% of the fair market value of the shares of the qualifying business is derived, directly or indirectly, from assets used principally in an active business carried on by one or more qualifying businesses controlled by the trust at both that time and at the beginning of the preceding taxation year of the qualifying business (unless the active business has ceased to be carried on at that time due to the disposition of all the assets that were used to carry on the business in order to satisfy debts owed to creditors of the trust or of the qualifying business).

• (b) within eight years of the day that is 24 months after the disposition time for the qualifying business transfer, in computing the income of the trust that participated in the qualifying business transfer, the trust is deemed to have a gain equal to the elected amount (within the meaning of clause (1)(e)(ii)(A)) included in the joint election referred to in paragraph (1)(e), for the year in which the disqualifying event occurs, from the disposition of a capital property.

• (b.1) a spouse or common-law partner of a particular individual includes another individual who was a spouse or common-law partner of the particular individual immediately before the death of the other individual;

Marginal note:Deduction for qualifying cooperative conversion — conditions

• 110.62 (1) Subsection (2) applies to an individual (other than a trust) if, at the time of a disposition (referred to in this section as the “disposition time”) of shares of the capital stock (referred to in this section as the “subject shares”) of a corporation (referred to in this section as the “subject corporation”) to another corporation (referred to in this section as the “purchaser corporation”) that occurred after 2023 and before 2027 under a qualifying cooperative conversion, the following conditions are met:

  • (a) no individual has prior to the disposition time sought a deduction under this section or section 110.61 in respect of a disposition of shares that, at the time of that disposition, derived their value directly or indirectly, from an active business that is also relevant to the determination of whether the disposition of the subject shares satisfies the condition set out in paragraph (a) of the definition qualifying cooperative conversion in subsection 248(1);

  • (b) throughout the 24 months immediately preceding the disposition time,

    • (i) the subject shares were not owned by anyone other than the individual or a person or partnership related to the individual, except that if, at any time in the 24-month period immediately preceding the disposition time, the subject shares were substituted for other shares (in this paragraph referred to as the “substituted shares”), the subject shares shall be considered to have met the requirements of this subparagraph only where the substituted shares were not owned by any person or partnership other than a person or partnership described in this subparagraph throughout the period beginning 24 months before the disposition time and ending at the time of substitution, and

    • (ii) more than 50% of the fair market value of the subject shares and the substituted shares, if any, was derived directly or indirectly from assets which were used principally in an active business;

  • (c) immediately before the disposition time,

    • (i) the subject corporation and each corporation affiliated with the subject corporation in which the subject corporation owns (directly or indirectly) shares is not a professional corporation, and

    • (ii) the purchaser corporation is not established for the purposes of providing employment to its members who are its employees at that time (excluding any officer or director of the purchaser corporation) or the employees of another corporation controlled by the purchaser corporation;

  • (d) at the disposition time,

    • (i) the individual is at least 18 years of age,

    • (ii) throughout any 24-month period ending before the disposition time, the individual, or a spouse or common-law partner of the individual, was actively engaged on a regular, continuous and substantial basis (including within the meaning of paragraph 120.4(1.1)(a)) in the activities of the business that is relevant to the determination of whether the subject shares satisfy the condition set out in paragraph (a) of the definition qualifying cooperative conversion in subsection 248(1), and

    • (iii) the purchaser corporation is a worker cooperative, of which at least 75% of its

      • (A) qualifying cooperative workers described in paragraph (d) of the definition worker cooperative in subsection 248(1) are resident in Canada, and

      • (B) individual employee members described in paragraph (e) of the definition worker cooperative in subsection 248(1) are resident in Canada; and

  • (e) the purchaser corporation, the individual and any other individual entitled to a deduction under subsection (2) in respect of the qualifying cooperative conversion

    • (i) jointly elect, in prescribed form, for the deduction provided under subsection (2) to apply in respect of the disposition of the subject shares,

    • (ii) include the following information in the election:

      • (A) an amount (in this paragraph referred to as the “elected amount”) equal to the total amount of capital gains that the parties agree may be eligible for a deduction under subsection (2) with respect to the qualifying cooperative conversion, not exceeding $10,000,000, and

      • (B) if more than one individual is eligible for a deduction in respect of the qualifying cooperative conversion, the percentage of the elected amount that is assigned to each eligible individual (provided that the total percentages assigned to all individuals cannot exceed 100%), and

    • (iii) file the election with the Minister on or before the earlier of the individual’s and the worker cooperative’s filing-due date for the taxation year that includes the disposition time.

• Marginal note:Capital gains deduction — qualifying cooperative conversions

  (2) If this subsection applies to an individual, in computing the taxable income for a taxation year of the individual, there may be deducted such amount as the individual may claim not exceeding the least of

  • (a) the amount determined by the formula

    A × B × C − D

    where

    A

    is the elected amount (within the meaning of clause (1)(e)(ii)(A)) included in the joint election referred to in paragraph (1)(e),

    B

    is

    • (i) 1, if only one individual is entitled to a deduction under this subsection in respect of the qualifying cooperative conversion,

    • (ii) the percentage assigned to the individual in the joint election referred to in paragraph (1)(e), if a percentage is assigned to the individual in accordance with clause (1)(e)(ii)(B), and

    • (iii) in any other case, nil,

    C

    is the fraction of the taxpayer’s capital gain from the disposition of the subject shares that is a taxable capital gain under paragraph 38(a) that applies to the subject shares in the year, and

    D

    is the total of each amount claimed by the taxpayer under this subsection in a prior taxation year in respect of the disposition of the subject shares multiplied by the amount determined by the formula

    E ÷ F

    where

    E

    is the fraction of a capital gain that is a taxable capital gain under paragraph 38(a) in the current year, and

    F

    is the fraction of a capital gain that is a taxable capital gain under paragraph 38(a) in the prior year in respect of the disposition of the subject shares; and

  • (b) the amount that would be determined in respect of the individual for the year under paragraph 3(b) (to the extent that that amount is not included in computing an amount determined under paragraph 110.6(2)(d) or (2.1)(d) for the individual) in respect of capital gains and capital losses if the only properties referred to in paragraph 3(b) were the subject shares of the individual.

• Marginal note:Disqualifying event

  (3) For the purposes of this section, a disqualifying event in respect of a qualifying cooperative conversion occurs at the earliest of

  • (a) the time when the worker cooperative that participated in the qualifying cooperative conversion ceases to be a worker cooperative, and

  • (b) the time that is the beginning of the taxation year of the worker cooperative in which less than 50% of the fair market value of the shares of the worker cooperative is derived, directly or indirectly, from assets used principally in an active business carried on by the worker cooperative (or by a qualifying cooperative business controlled by the worker cooperative) at both that time and at the beginning of the preceding taxation year of the worker cooperative (unless the active business has ceased to be carried on at that time due to the disposition of all the assets that were used to carry on the business in order to satisfy debts owed to creditors of the worker cooperative or of the qualifying cooperative business).

• Marginal note:Consequences of a disqualifying event

  (4) If a disqualifying event in respect of a qualifying cooperative conversion occurs

  • (a) within 24 months after the disposition time for the qualifying cooperative conversion, subsection (2) is deemed to have never applied in respect of the subject shares disposed of under the qualifying cooperative conversion; or

  • (b) within 8 years of the day that is 24 months after the disposition time for the qualifying cooperative conversion, in computing the income of the worker cooperative that participated in the qualifying cooperative conversion, the worker cooperative is deemed to have a gain equal to the elected amount (within the meaning of clause (1)(e)(ii)(A)) included in the joint election referred to in paragraph (1)(e), for the year in which the disqualifying event occurs, from the disposition of a capital property.

• Marginal note:Anti-avoidance

  (5) Despite any other provision in this section, subsection (2) does not apply in respect of a qualifying cooperative conversion if it is reasonable to consider that one of the purposes of any transaction (as defined in subsection 245(1)), or series of transactions, is to

  • (a) involve the subject corporation (or the purchaser corporation) in the qualifying cooperative conversion to accommodate the direct or indirect acquisition of subject shares (or the acquisition of all or substantially all of the risk of loss and opportunity for gain or profit in respect of the subject shares) by another person or partnership (other than the subject corporation or the purchaser corporation) in a manner that permits an individual to claim a deduction under subsection (2) that would otherwise not be available; or

  • (b) organize or reorganize a subject corporation or any other corporation, partnership or trust in a manner that allows a deduction to be claimed under subsection (2) in respect of more than one qualifying cooperative conversion of a business that is relevant to the determination of whether subject shares satisfied the condition set out in paragraph (a) of the definition qualifying cooperative conversion in subsection 248(1).

• Marginal note:Failure to report capital gain

  (6) Despite subsection (2), no amount may be deducted under this section in respect of a capital gain of an individual for a particular taxation year in computing the individual’s taxable income for the particular taxation year or any subsequent year, if

  • (a) the individual knowingly or under circumstances amounting to gross negligence

    • (i) fails to file the individual’s return of income for the particular taxation year within one year after the taxpayer’s filing-due date for the particular taxation year, or

    • (ii) fails to report the capital gain in the individual’s return of income for the particular taxation year; and

  • (b) the Minister establishes the facts justifying the denial of such an amount under this section.

• Marginal note:Deduction not permitted

  (7) Despite subsection (2), no amount may be deducted under this section in computing an individual’s taxable income for a taxation year in respect of a capital gain of the individual for the taxation year if the capital gain is from a disposition of property which disposition is part of a series of transactions or events

  • (a) that includes a dividend received by a corporation to which dividend subsection 55(2) does not apply but would apply if this Act were read without reference to paragraph 55(3)(b); or

  • (b) in which any property is acquired by a corporation or partnership for consideration that is significantly less than the fair market value of the property at the time of acquisition (other than an acquisition as the result of an amalgamation or merger of corporations or the winding-up of a corporation or partnership or a distribution of property of a trust in satisfaction of all or part of a corporation’s capital interest in the trust).

• Marginal note:Deduction not permitted

  (8) Despite subsection (2), if an individual has a capital gain for a taxation year from the disposition of a property and it can reasonably be concluded, having regard to all the circumstances, that a significant part of the capital gain is attributable to the fact that dividends were not paid on a share (other than a prescribed share within the meaning of subsection 110.6(8)) or that dividends paid on such a share in the taxation year or in any preceding taxation year were less than 90% of the average annual rate of return on that share for that year, no amount in respect of that capital gain shall be deducted under this section in computing the individual’s taxable income for the year.

• Marginal note:Average annual rate of return

  (9) For the purpose of subsection (8), the average annual rate of return on a share (other than a prescribed share within the meaning of subsection 110.6(8)) of a corporation for a taxation year is the annual rate of return by way of dividends that a knowledgeable and prudent investor who purchased the share on the day it was issued would expect to receive in that year, other than the first year after the issue, in respect of the share if

  • (a) there was no delay or postponement of the payment of dividends and no failure to pay dividends in respect of the share;

  • (b) there was no variation from year to year in the amount of dividends payable in respect of the share (other than where the amount of dividends payable is expressed as an invariant percentage of or by reference to an invariant difference between the dividend expressed as a rate of interest and a generally quoted market interest rate); and

  • (c) the proceeds to be received by the investor on the disposition of the share are the same amount the corporation received as consideration on the issue of the share.

• Marginal note:Deduction not permitted

  (10) If it is reasonable to consider that one of the main reasons for an individual acquiring, holding or having an interest in a partnership or trust (other than an interest in a personal trust) or for the existence of any terms, conditions, rights or other attributes of the interest is to enable the individual to receive or have allocated to the individual a percentage of any capital gain or taxable capital gain of the partnership or trust that is larger than the individual’s percentage of the income of the partnership or trust, as the case may be, despite any other provision of this Act, no amount may be deducted under subsection (2) by the individual in respect of any such gain allocated or distributed to the individual.

• Marginal note:Related persons, etc.

  (11) For the purposes of this section,

  • (a) a taxpayer is deemed to have disposed of shares that are identical properties in the order in which the taxpayer acquired them;

  • (b) a personal trust is deemed

    • (i) to be related to a person or partnership for any period throughout which the person or partnership was a beneficiary of the trust, and

    • (ii) in respect of shares of the capital stock of a corporation, to be related to the person from whom it acquired those shares if, at the time the trust disposed of the shares, all of the beneficiaries (other than registered charities) of the trust were related to that person or would have been so related if that person were living at that time;

  • (c) a spouse or common-law partner of a particular individual includes another individual who was a spouse or common-law partner of the particular individual immediately before the death of the other individual;

  • (d) a partnership is deemed to be related to a person for any period throughout which the person was a member of the partnership;

  • (e) a person who is a member of a partnership that is a member of another partnership is deemed to be a member of the other partnership;

  • (f) if a corporation acquires shares of a class of the capital stock of another corporation from any person, it is deemed in respect of those shares to be related to the person if all or substantially all the consideration received by that person from the corporation in respect of those shares was common shares of the capital stock of the corporation; and

  • (g) shares issued by a corporation to a particular person or partnership are deemed to have been owned immediately before their issue by a person who was not related to the particular person or partnership unless the shares were issued

    • (i) as consideration for other shares,

    • (ii) as part of a transaction or series of transactions in which the person or partnership disposed of property to the corporation that consisted of

      • (A) all or substantially all the assets used in an active business carried on by that person or the members of that partnership, or

      • (B) an interest in a partnership all or substantially all the assets of which were used in an active business carried on by the members of the partnership, or

    • (iii) as payment of a stock dividend.

• (b) the amount determined by the formula

  G − H

  where

  G

  is the lesser of

  • (i) the amount determined in respect of the individual for the year under paragraph 3(b) in respect of capital gains and capital losses (except any portion related to a deduction previously claimed by the individual in the year under this subsection or subsection 110.61(2)), and

  • (ii) the amount that would be determined in respect of the individual for the year under paragraph 3(b) in respect of capital gains and losses if the only properties referred to in that paragraph were the subject shares, and

  H

  is the total of

  • (i) the individual’s allowable business investment losses for the year (except any portion that previously reduced the amount otherwise deductible by the individual in the year under this subsection or subsection 110.61(2)),

  • (ii) the amount, if any, by which the individual’s investment expense for the year exceeds the individual’s investment income for the year (except any portion of the excess that previously reduced the amount otherwise deductible by the individual in the year under this subsection or subsection 110.61(2)), and for the purposes of this subparagraph,

    • (A) investment expense of an individual for a year, has the same meaning as in subsection 110.6(1) except that, the reference to “amount determined in respect of the individual for the year under paragraph (a) of the description of B in the definition annual gains limit” in paragraph (f) of that definition is to be read as “total of all amounts determined in respect of the individual for the year under subparagraph (iii) of the description of H in subsection 110.61(2) and subparagraph (iii) of the description of H in subsection 110.62(2) (to the extent that amount reduces the amount otherwise deductible under that subsection)”, and

    • (B) investment income of an individual for a year, has the same meaning as in subsection 110.6(1) except that, the reference to “amount determined in respect of the individual for the year for A in the definition annual gains limit” in paragraph (f) of that definition is to be read as “total of all amounts determined in respect of the individual for the year for the description of G in subsection 110.61(2) and the description of G in subsection 110.62(2) (except any amount that previously reduced the amount otherwise deductible by the individual in the year under subsection 110.61(2) or 110.62(2))”, and

  • (iii) the amount, if any, by which

    • (A) the individual’s net capital losses for other taxation years deducted under paragraph 111(1)(b) in computing the individual’s taxable income for the year

    exceeds

    • (B) the amount, if any, by which the amount determined in respect of the individual for the year under paragraph 3(b) in respect of capital gains and capital losses (except any portion related to a deduction previously claimed by the individual in respect of other subject shares under this subsection or subsection 110.61(2)) exceeds the amount determined for G.

• Marginal note:Order of Application

  (2.1) If an individual claims more than one deduction under subsection (2) in a taxation year, the individual is to designate the order in which the deductions are claimed, and if the individual does not designate an order, the Minister may designate the order.