A year and a half after the 2024 federal budget, tax experts expect a continuation of Liberal policies with priorities in housing construction and boosting domestic productivity.
Since April 2024, Canada’s economy has suffered from the pointy end of a trade war and seen the resignation of a finance minister and a prime minister.
“The circumstances have changed so drastically since the last budget,” said Fred O’Riordan, tax policy leader at EY Canada. “It’ll be a good litmus test and a good confirmation of exactly where this government’s going and what it stands for.”
The fact that Prime Minister Mark Carney was the governor of two central banks likely changed the government’s approach to the budget, said Greg London, partner and domestic tax consulting leader at accounting and consulting firm BDO Canada in St. John’s, N.L. A fall budget will coincide with the beginning of next year’s construction cycle.
London said that the fall scheduling represents “a whole different level of thinking about how policy actually hits the street. …That’s thinking, ‘If we do something here, how fast can this turn into actionable items?’”
Carney has also separated capital spending from operational spending, promising to balance the latter.
“In order to get out of their pickle, they can either reduce expenditures, increase taxes or do a little bit of both,” O’Riordan said. While increasing tax is politically unpopular, just relying on spending reductions won’t be enough to close the fiscal gap.
“There’s more potential to cut back in certain areas and reallocate resources to where they want to grow, like defence, than there is to try to fill the gap with tax revenue,” O’Riordan added.
Middle-class tax cut
If the Liberal Party is looking for votes, the middle class is a good place to go, London said. Taxes will likely come down for the middle class, as was promised in the Liberal election platform last spring and the throne speech in May. The Liberals say this will save 22 million Canadian families up to $840.
But there isn’t a lot of room left to push the rate up for top earners to make up the difference, said Ryan Minor, director of tax for CPA Canada in Sudbury, Ont. For example, the top marginal tax rate in Ontario is already 53%.
If we want to attract multinational companies to invest in Canada, they will be staffed by employees earning fairly high income, and a high income tax will discourage them from coming, O’Riordan said. The government could either lower the top rates or increase the income threshold, but both options would be unpopular with voters.
A wealth or estate tax is unlikely judging by how unpopular the capital gains inclusion rate was and how it could have unintentionally affected a lot of people who may have sold a cottage or died, leading to high capital gains for one specific year, London said. “You would nail some of the people you were after, but there’s going to be a lot of shrapnel.”
Housing is a “pain point”
During the election, the Liberals said they would eliminate the GST on homes up to $1 million for first-time homebuyers and offer first-time buyers of homes priced between $1 million and $1.5 million a smaller GST break.
In addition to tax breaks to lower costs on the buy side, experts believe the government may also provide incentives to build more multi-unit residential buildings (MURB).
“Housing is clearly one of their pain points,” Minor said. “There’s a perception on the government’s part that there are not enough [MURBs] being built.”
Last year’s budget temporarily increased the capital cost allowance (CCA) rate for new rental projects from 4% to 10%. That applies to projects beginning construction before the end of 2030 and available for move-in by the end of 2035.
Normally, an investor wouldn’t be able to claim CCA if it results in a loss, but a further MURB program could suspend that rule and allow investors to create a loss using CCA, Minor said. The government could also allow builders to deduct soft costs like insurance, permit fees and financing costs after the construction period.
Boosting domestic investment
The Canadian economy’s weak productivity is another pain point for the government, Minor said. Innovation, Science and Economic Development Canada launched the AI Compute Access Fund this summer.
There is already draft legislation for increasing the maximum refundable SRED tax credits from $1.05 million to $1.575 million for Canadian controlled private corporations by raising the expenditure limit from $3 million to $4.5 million.
In addition, the government could allow flow-through shares to encourage research and development in additional sectors like AI, quantum computing and advanced manufacturing, as proposed in the Liberal election platform, Minor said.
Small public companies may receive more SRED credits, which will be more impactful in Canada as there are many smaller manufacturing and resource firms in the country, London said. “[Carney] is trying to build a bulwark and keep more investment in Canada to protect us from leakage going across borders,” London said.
The U.S.’s “one big beautiful bill” is a competitive disadvantage for Canada as we can’t go toe to toe with the Americans on tax incentives, O’Riordan said. To make up for it, Canada might offer more investment tax credits or expand immediate expensing for Canadian capital.
Don’t expect GST changes
When it was introduced in 1991, GST was set at 7%. Although there is room to raise it back to its original rate after being lowered to the current 5% in 2008, a GST tax hike is unlikely, Minor said.
If the Liberal Party doesn’t want to hit the middle class, it won’t increase the GST, London said. Even if the government offered a larger GST tax credit that offset families’ GST costs, most voters won’t be able to see the whole picture on an annual basis and the measure would remain unpopular.
Expanding automatic tax filing
Although the federal government has asked each ministry to find ways to cut operational spending, the CRA will likely get more funding to expand automatic tax filing eligibility.
“This is the oldest new idea,” said O’Riordan, who recalled hearing about it when he was an assistant commissioner of the CRA more than two decades ago. “If there are entitlements that people are not getting because they’re not filing, then that’s just wrong.”
However, there are some complications the CRA will need to work out. For example, married couples can claim tax credits on either return and would need to go through a tax optimization exercise, Minor said. In addition, provincial credits like the Ontario Trillium Benefit requires inputting property tax and rent payment information.
“Rolling out more automatic filing; it makes sense,” Minor said. “[But] there are some challenges.”