Limited Options for Ottawa’s Tax Policy in Upcoming Budget
Canadian Government Faces Economic Challenges with Upcoming Budget Announcement
Navigating Fiscal Pressures in Canada’s Upcoming Federal Budget
As Canada braces for its federal budget announcement on November 4, Prime Minister Mark Carney’s government is expected to tread carefully amid fiscal constraints. Tax experts assert that raising taxes could compromised economic competitiveness, while trimming taxes might jeopardize essential funding.
Brian Ernewein, a senior advisor on national tax at KPMG LLP in Ottawa, notes the delicate balance the government faces: “If you’re going to spend as much as you are, you’re either increasing your debt or you have to increase taxes.” However, he anticipates limited scope for significant tax hikes on both corporate and personal fronts.
Fiscal Shifts and Deficit Challenges
Canada’s fiscal landscape has shifted since the 2024 fall economic statement. The deficit projection for 2025-26 has been altered by global events, including tariffs imposed by U.S. President Donald Trump. The Parliamentary Budget Office estimates the deficit at $68.5 billion, while the C.D. Howe Institute forecasts a $92.2 billion shortfall, factoring in defense spending and election commitments.
Key Initiatives in the Liberal Budget
Central to the Liberal government’s election promises is a reduction in the lowest tax bracket from 15% to 14%, effective July 1. This change is expected to cost $4.2 billion in 2025-26 and $22 billion over four years, as outlined in Bill C-4, which is currently under consideration in the House of Commons. Additionally, Bill C-4 includes a GST reduction for first-time homebuyers of new homes up to $1 million, aimed at costing $383 million this year and $1.6 billion over four years.
The government has yet to implement other election promises, such as reducing mandatory withdrawals from registered retirement income funds (RRIF). With equity markets recovering since the RRIF promise was made, experts like Ernewein suggest the need for such relief may have diminished.
Corporate Tax Review and Economic Competitiveness
The Liberal government has also pledged to review corporate taxation, potentially broadening the tax base while lowering rates. Trevor Tombe, an economics professor at the University of Calgary, highlights that simplifying the tax system could boost productivity without substantial revenue loss.
The Impact of U.S. Tariffs and Trade Negotiations
Canada’s fiscal planning has been impacted by trade negotiations with the U.S., leading to the reversal of certain tax measures and dropping retaliatory tariffs on American goods. This has resulted in a loss of projected revenue and potentially delayed the budget’s release, according to Ron Nobrega, a tax partner at Fasken Martineau DuMoulin LLP in Toronto.
Fred O’Riordan, a national leader of tax policy with EY Canada, suggests that addressing lagging productivity could involve reducing personal income taxes. In many provinces, the top marginal tax rate exceeds 50%, with income thresholds relatively low by international standards. To increase revenue, he proposes raising consumption taxes.
Prospects for Tax Incentives and Industry Competitiveness
Observers await the government’s decisions on tax incentives like faster write-offs for depreciable property and immediate expensing for certain manufacturing and clean technology assets. These measures are crucial to maintaining Canada’s competitive edge, especially in response to the U.S. tax incentives under the One Big Beautiful Bill Act.
As Canada prepares for its budget release, strategic fiscal decisions are necessary to balance economic competitiveness and governmental obligations effectively. Emegypt will continue to provide updates and analyses as these developments unfold.
