2025 Tax Season: Key Changes and Recent Court Cases Shaping Tax Law

As we step into the 2025 tax season, Canadian taxpayers and businesses should be aware of significant changes in tax laws and recent court cases that have reshaped tax compliance and planning strategies. With the federal government pushing back the proposed capital gains exemption changes to 2026, taxpayers have additional time to plan. However, other modifications are coming into effect that require attention.

Major Tax Changes for 2024

1. Increase in Lifetime Capital Gains Exemption

The Lifetime Capital Gains Exemption has been increased to $1.25 million, effective June 25, 2024, from the previous amount of $1,016,836. This applies to the sale of small business shares and farming and fishing property. With this increase, Canadians with eligible capital gains below $2.25 million would pay less tax and be better off, even after the inclusion rate increases on January 1, 2026.

2. Home Buyers’ Plan (HBP) Enhancements

The withdrawal limit under the HBP has been increased, allowing first-time homebuyers to access more of their RRSP savings to purchase a home. Additionally, the government has introduced a temporary deferral on repayment obligations to provide flexibility for recent buyers.

3. Stricter Rules on Short-Term Rental Deductions

New regulations deny tax deductions for non-compliant short-term rentals, targeting property owners who fail to meet municipal regulations. This aims to curb the proliferation of unlawful rental operations.

4. Increased Tax Credits and Benefits

• The Volunteer Firefighters and Search and Rescue Volunteers tax credits have been doubled, acknowledging the essential services these individuals provide.

• The Canada Carbon Rebate for small businesses has been introduced, compensating for increased carbon pricing.

• The Clean Technology Investment Tax Credit and Clean Hydrogen Investment Tax Credit have been refined, making them more accessible for businesses investing in green initiatives.

5. Intergenerational Business Transfers & Employee Ownership Trusts

Changes to the rules governing intergenerational business transfers have been finalized to facilitate succession planning. Similarly, incentives for Employee Ownership Trusts (EOTs) are in place, encouraging business owners to transition ownership to employees tax-efficiently.

Recent Court Cases Impacting Tax Compliance

1. CRA’s Expanded Power to Assess Business Owners

In Smith v. Canada Revenue Agency (2024), the Federal Court ruled that the CRA has broader powers to reassess business owners who engage in aggressive tax planning designed to artificially reduce taxable income. The case involved a business owner who structured transactions through multiple corporations to create artificial losses, ultimately reducing personal tax liability. The court emphasized the substance-over-form doctrine, stating that transactions must have genuine economic substance beyond tax benefits. This ruling reinforces the CRA’s authority to scrutinize tax avoidance schemes and impose penalties where necessary.

2. Employment Status & Gig Workers

In Canada v. RideLink Inc. (2024), the Supreme Court ruled that gig workers in federally regulated industries, such as rideshare and delivery services, cannot be misclassified as independent contractors if they perform core business functions. The ruling was based on evidence that RideLink exercised significant control over driver schedules, pricing, and performance metrics, which the court determined indicated an employer-employee relationship. The decision has broad implications for tax filings, payroll deductions, and benefits eligibility, requiring companies to reassess how they classify workers and comply with tax withholding obligations.

3. Real Estate Flipping & Principal Residence Exemption Denials

In Jones v. Canada Revenue Agency (2024), the Federal Court upheld the CRA’s denial of the Principal Residence Exemption (PRE) for a taxpayer who had bought, renovated, and sold five properties within six years. The CRA successfully argued that the transactions were business income rather than capital gains. The court cited a pattern of buying and selling with an intent to profit, demonstrating that the taxpayer was engaged in real estate flipping. This case underscores the importance of maintaining proper documentation and ensuring that real estate transactions align with personal-use intentions to qualify for the PRE.

4. International Taxation: Crackdown on Offshore Accounts

In Canada Revenue Agency v. Global Trust Services (2024), the CRA won a significant case against an international tax planning firm that had assisted Canadian taxpayers in hiding income in offshore trusts. The firm had been marketing aggressive tax shelter schemes that involved transferring assets to offshore jurisdictions with limited disclosure requirements. The court ruled that the CRA was justified in imposing significant penalties and that Canadian residents are required to disclose offshore assets accurately. The decision highlights the government’s commitment to combating tax evasion and reinforces the necessity for taxpayers to comply with foreign asset reporting requirements.

What Taxpayers Should Do

Given these changes and legal precedents, taxpayers and business owners should:

• Review tax planning strategies with an accountant to ensure compliance with capital gains rules.

• Ensure short-term rentals meet regulatory requirements to avoid denied deductions.

• Evaluate business succession plans considering the new rules for EOTs and intergenerational transfers.

• Maintain thorough records to substantiate tax positions, especially for real estate transactions and offshore holdings.

The 2025 tax season presents new opportunities and challenges. Staying informed and proactive will be key to minimizing liabilities and optimizing tax positions. If you need assistance navigating these changes, reach out to a professional for tailored advice.

Disclaimer: This blog post is for informational purposes only and does not constitute professional tax advice. Always consult with a qualified tax accountant for personalized guidance.