Still-roaring inflation and a chilly housing market may have changed the dynamics of Canadians’ household finances, but don’t be surprised if the environment takes centre stage in this year’s Federal Budget.
While Ottawa’s commitment to reduce carbon emissions is well known, new competitive pressures from our neighbour to the south to accelerate the transition to electric vehicles could spur the government to use this year’s budget to keep from falling behind.
Overall, though, there is a sense that Finance Minister Chrystia Freeland will table what many think will be a “stand-pat” budget this spring. “To some extent, they’re constrained by the inflation dynamic,” explains Douglas Porter, Chief Economist of BMO Financial Group. “They certainly don’t want to make a tough situation worse.”
Add increased market uncertainly to the equation, and John Waters, Vice President and Director of Tax Consulting Services, BMO Private Wealth shares the same sentiment. “They’re not going to try and rock the boat too much,” he says.
Saying that, the budget almost always contains a few surprises that will impact Canadians. Here are five areas that could yield some announcements.
Energy transition
“I wouldn’t be at all surprised if the green energy file is the theme of this budget,” Porter says. Not only is it, along with health care, a consistent talking point of Finance Minister Chrystia Freeland, but incentives brought in by the U.S. Federal government last year, including a US$7,500 federal tax credit for electric vehicles (EVs), have many saying Canada must now play catch-up when it comes to EVs.
Ottawa may also be ready to introduce new investment tax credits for clean tech and clean hydrogen, adds Waters, following the investment tax credits introduced in last year’s budget for carbon capture, utilization and storage (CCUs). He notes that the government has also previously mentioned a possible tax credit for repairs that extend the life of home appliances.
Given some of the green themes that are likely to emerge in the budget, Canadian drivers shouldn’t hold out hope for any breaks on Federal gasoline taxes, notes Porter.
Inflation
While inflation has come down somewhat – to 5.9% year-over-year in January – consumer prices are still markedly above where they’ve been over most of the past 30 years. Despite prices remaining “uncomfortably high,” says Porter, short of raising taxes or cutting spending to slow the economy – there is not a lot the government can do in the budget to address increasing costs.
Porter predicts the Bank of Canada’s (BoC) tightening policy will drive this year’s inflation rate down to 4%, and between 2% and 3% in 2024. “We’re looking at a much slower economic environment over the next year or two in any event,” he says.
With the BoC doing the heavy lifting, Waters believes that any moves to make life more affordable will be targeted at groups like seniors and individuals in lower tax brackets who are feeling the effects of inflation and interest rates.
Tax Benefits
Considering the Federal government’s election platform and the Finance Minister’s 2021 Mandate letter, Waters says a career extension tax credit is one possible tax benefit that’s been mentioned previously, but not yet proposed, that could help seniors who want to stay in the workforce longer. Other possible tax relief measures promised include raising the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) survivor’s benefit by 25% and converting the Canada Caregiver Credit into a refundable tax-free benefit. The Federal government has also recently undertaken public consultations with a view to modernize the Employment Insurance (EI) system to make it stronger and more inclusive to address some of the gaps that became obvious during COVID-19, for instance, helping to protect people who work in the gig economy.
Housing
Two major housing policies were set in motion last year: the Tax-Free First Home Savings Account (FHSA), which becomes available in April, and anti-flipping (“Residential Property Flipping”) rules, which are already in effect. Moreover, the housing market is in free fall due to mortgage rate increases, with prices down 30% in some markets and sales volume cut in half. Still, memories of the 50% jump in house prices in the first two years of the pandemic are fresh. “Anything they do to support demand can be counterproductive,” Porter explains. “The last thing they want to do is reignite the housing market.”
Ottawa will be careful not to incentivize home ownership, in light of some housing measures introduced following last year’s budget, such as the recent top-up of the Canada housing benefit for low-income renters, says Waters. “There has been some talk of a surtax on landlords for excessive rent after renovations or the so-called “renovictions”,” he says. Reviewing the tax treatment of Real Estate Investment Trusts (“REITs”) and policies focused on large corporate owners of residential properties has also been talked about, notes Waters. However, he adds, it’s hard to know if this will be the year they move on those files.
Tax Increases
The good news is that Ottawa isn’t under any pressure to raise more revenues. Government finances are an underappreciated success story, Porter says, which lessens the need for tax hikes. “It’s remarkable how quickly government finances have been repaired after the disruption of COVID-19,” he notes.
The Federal deficit for 2022-23 should come in around $30 billion, roughly the same as before the pandemic, he says. “Revenues came shooting back almost immediately because incomes have been strong, corporate incomes have been strong and people have been willing to spend.”
Although broad-based tax increases are unexpected, the Federal government remains committed to increasing the certainty and integrity of the tax system and addressing any perceived “loopholes” available to higher-income households following recent public consultations on modernizing and strengthening the General Anti-Avoidance Rules (GAAR). In that regard, Waters notes that, “Almost certainly there will be something on the Alternative Minimum Tax (AMT).”
The AMT is intended to ensure that high-income Canadians cannot disproportionately lower their tax bill through advantages in the tax system, but it has not been substantially reviewed since its introduction in 1986. “That’s something that was mentioned as part of their election mandate,” says Waters. And the recent 2022 Fall Economic Statement reaffirmed the government’s intent to provide a detailed (AMT) proposal and path for implementation in the upcoming Federal Budget.
As for other possible tax changes, Waters expects details on the proposed 2% tax on share buybacks for public corporations and is hopeful for an update on the government’s plans to create a new, dedicated “Employee Ownership Trust” vehicle in the tax legislation to support employee ownership and/or the transition of privately-owned businesses to employees, as well as further guidance on recently enacted tax legislation facilitating “genuine” inter-generational transfers of family businesses.
While there is a lot Ottawa can do with the budget, with revenues higher than where they were before the pandemic, there is less pressure on the government to take any aggressive actions, explains Porter. Still, he adds, businesses have released some strong profit figures over the past year. With inflation surging, there may be a temptation to try and recoup some of that. “We have to be very careful about making Canada less competitive,” he says.
As hard as it is to predict what Ottawa will include in the next budget, the one thing we do know is that Canadians won’t have to wait long to find out.
BMO Private Wealth provides this publication for informational purposes only and it is not and should not be construed as professional advice to any individual. The information contained in this publication is based on material believed to be reliable at the time of publication, but BMO Private Wealth cannot guarantee the information is accurate or complete. Individuals should contact their BMO representative for professional advice regarding their personal circumstances and/or financial position. The comments included in this publication are not intended to be a definitive analysis of tax applicability or trust and estates law. The comments are general in nature and professional advice regarding an individual’s particular tax position should be obtained in respect of any person’s specific circumstances.
BMO Private Wealth is a brand name for a business group consisting of Bank of Montreal and certain of its affiliates in providing private wealth management products and services. Not all products and services are offered by all legal entities within BMO Private Wealth. Banking services are offered through Bank of Montreal. Investment management, wealth planning, tax planning, and philanthropy planning services are offered through BMO Nesbitt Burns Inc. and BMO Private Investment Counsel Inc. Estate, trust, and custodial services are offered through BMO Trust Company. Insurance services and products are offered through BMO Estate Insurance Advisory Services Inc., a wholly-owned subsidiary of BMO Nesbitt Burns Inc. BMO Private Wealth legal entities do not offer tax advice. BMO Trust Company and BMO Bank of Montreal are Members of CDIC.
® Registered trademark of Bank of Montreal, used under license. All rights are reserved. No part of this publication may be reproduced in any form, or referred to in any other publication, without the express written permission of BMO Private Wealth.
