Budget 2026: Ottawa Targets Corporate Loss and Preferred Share Tax Rules
The federal government is aiming to make Canada’s tax system less cumbersome for businesses, focusing on simplification measures while stopping short of a larger corporate tax reform effort promised last year.
Ottawa said in its 2026 budget, released on Thursday, that it plans to address several long-standing corporate tax nuisance items, including limits on the ability of companies to transfer losses between subsidiaries and rules around preferred shares that can create headaches for issuers.
This was part of a broader package the budget described as “the most ambitious effort in a generation to improve how Canadians interact with the tax system.” This included more than a dozen changes to tax rules and credits that apply to individuals, and a handful of changes aimed at businesses. The budget said a second tranche of tax simplification measures would be announced in the Spring Economic Update.
The Liberals promised an “expert review of the corporate tax system” in their 2025 election platform. So far, they’ve opted to make a series of smaller technical changes, while also announcing several large business tax incentives aimed at boosting investment.
“It’s a slow process, and it’s difficult to do a lot all at once,” said John Tobin, a tax partner at Torys LLP. “There’s lots more they could do, but these are welcome changes. You don’t complain that you get only a half a loaf when you’re looking for a loaf, but there’s still a half a loaf to be had – maybe a lot more than a half a loaf.”
The most significant business tax simplification measure proposed in the budget is around corporate loss transfers.
In many countries, companies with several wholly owned subsidiaries are able to transfer losses among the group to reduce their overall tax bill. In Canada, each subsidiary is treated as a separate entity for tax purposes, making it difficult and expensive to achieve a similar result to what you find in other jurisdictions.
Ottawa said it will hold consultations on potential changes to these rules.
The federal government has tried to tackle this issue several times before, most recently under Stephen Harper’s Conservatives. However, reform has typically foundered on the fact that provinces also collect corporate income tax, creating interprovincial challenges, said Ryan Minor, director of taxation at CPA Canada.
“Say you had a company and its loss is entirely in Ontario, and you want to move that loss to a company that only does business in Manitoba. But then Manitoba would lose money, because that would reduce Manitoba’s tax base,” Mr. Minor said.
One way forward, he said, could be a narrower rule that would allow loss sharing between subsidiaries that all operate in the same province.
The other important simplification measure has to do with preferred shares – a financial instrument that’s essentially a hybrid between debt and equity. In the 1980s, Ottawa introduced a special tax to even out the tax owed when companies issue preferred shares, so they didn’t gain a tax advantage relative to issuing traditional debt.
This move was intended to discourage companies from using preferred shares to avoid taxes, but it often catches companies unaware, and can create a lot of complex problems for accountants and tax lawyers to solve, said Rob Jeffery, national tax policy leader at Deloitte Canada.
“There’s a lot of time that gets spent trying to make sure that you don’t run afoul of these rules as part of some larger investments,” Mr. Jeffery said.
This financing structure is often used in infrastructure or venture capital investments, he said. “Preferred returns, redemption rights, put options, things like that, they’re all put in place for legitimate commercial purposes, not to try to get around a tax rule.”
The budget proposes to ease the burden by exempting Canadian-controlled private corporations from the regime, and to increase the thresholds at which the special tax kicks in, from $500,000 to $1.5-million. Ottawa will also seek feedback on potential changes to the broader preferred-share regime.
The budget outlined several other simplification measures intended to reduce the amount of paperwork companies need to file for routine transactions.
“We wanted a strategic tax review of the system to look at the bigger picture: how things compare to peer jurisdictions, the composition of our taxes,” said Mr. Minor of CPA Canada. “We didn’t get that… But we got simplification, and that’s good too. It’s second best.”
This article was first reported by The Globe and Mail
