The upcoming federal budget of Canada faces significant constraints regarding tax policy. Scheduled for release on November 4, Prime Minister Mark Carney’s government must navigate a challenging landscape, according to tax experts. The government’s capacity to raise taxes is limited as doing so could jeopardize Canada’s economic competitiveness. At the same time, cutting taxes while maintaining necessary spending presents a difficult balancing act.
Current Fiscal Landscape and Deficit Projections
Brian Ernewein, a senior advisor at KPMG LLP, highlights the tension between government spending and revenue. He notes that if spending continues to increase without raising taxes, the national debt will escalate. The fiscal priorities have shifted significantly from last December’s estimates when the deficit was projected at $42.2 billion for the 2025-26 fiscal year. Following recent economic developments, the Parliamentary Budget Office has revised this estimate to $68.5 billion, while the C.D. Howe Institute is forecasting a staggering $92.2 billion deficit for the current year.
Key Tax Proposals on the Agenda
Among the tax changes that have been implemented is a decrease in the lowest tax bracket from 15% to 14%. This change took effect on July 1, with an estimated financial impact of $4.2 billion in 2025-26 and $22 billion over four years. Additional tax measures are included in Bill C-4, currently under discussion in the House of Commons.
- GST Cuts for Home Buyers: A proposed reduction in the Goods and Services Tax (GST) for first-time home purchasers of new homes valued up to $1 million, with an expected cost of $383 million this year and $1.6 billion over four years.
- RRIF Withdrawal Changes: The government has not yet enacted plans to reduce the minimum withdrawal from registered retirement income funds (RRIF) by 25% for one year, which would cost approximately $600 million.
Corporate Tax Review and System Simplification
The Liberal government plans to review corporate taxation, aiming to simplify the tax framework. This simplification could help broaden the tax base while potentially lowering rates, fostering increased productivity without a significant reduction in revenue.
Impact of Tariffs and Trade Negotiations
The government’s fiscal strategy is further complicated by recent trade negotiations with the United States. By reversing certain tax measures, such as the digital services tax, and dropping retaliatory tariffs on U.S. goods, the government may be forgoing billions in projected revenue. This could explain the late release of this year’s budget.
Addressing Lagging Productivity
Tax leaders are urging the government to consider measures that could boost productivity. Fred O’Riordan of EY Canada suggests reducing personal income taxes to ease the burden on Canadians, as many provinces have top marginal rates exceeding 50%. He also advocates for the potential consideration of raising consumption taxes instead of income taxes if revenue generation becomes essential.
Overall, as the November 4 budget date approaches, stakeholders will closely monitor the government’s decisions regarding tax policy. The balancing act between maintaining competitiveness, funding needed services, and delivering on electoral promises remains a pressing challenge for Prime Minister Carney’s administration.
