Few new major measures, but plenty of meaningful steps. That was the main message from BMO’s First Look at the 2026 Federal Budget digital event featuring Doug Porter, Chief Economist and Managing Director at BMO and Dante Rossi, Director of Tax Planning at BMO Private Wealth.
Moderated by June Zimmer, Regional President, Prairies, BMO Private Wealth, the discussion examined the fiscal outlook and prospects for economic growth, while also exploring new business incentives, wealth transfer strategies and changes to personal tax filing rules.
The fiscal outlook
Ottawa’s latest budget pegs the budget deficit at just above $60 billion over the next two years, with government debt holding steady at about 40% of GDP. Despite increased spending and new tax incentives, many of which had already been announced, Porter noted the fiscal projections were broadly in line with expectations heading into the budget. “It didn’t really move the dial from the broad fiscal landscape,” he said. “The surprise is just how much stronger revenues were heading into this budget.”
A big windfall from higher energy revenues helped keep the deficit in check. A year ago, Ottawa projected last year’s deficit would widen to $78 billion. “The actual number came in half the size of where they were budgeting for a year ago,” said Porter, adding that should provide some reason for optimism heading into next year. “The economy’s done better than expected and the budget deficit could again come in lower-than-expected next year.”
The deficit may seem large, but Porter said Canada has the lowest level of debt of all the major economies. “Canada ultimately does still have some room to maneuver,” he said. “I would not want to push it too far, but I would not be overly concerned about Canada’s fiscal situation.”
While the budget had few big headline measures, Porter said that doesn’t mean there weren’t any noteworthy changes. The biggest initiative in the budget was a proposal to top-up the Canada Groceries and Essentials Benefit (formerly the GST/HST tax credit) with a one-time 50% increase for the 2026-27 benefit year. Delivered in early 2027, families that qualify would get up to $339 more than they do today for a single person without children and up to $679 more for a couple with two children. That program will account for $4 billion of the $15 billion in new spending planned for 2026/27.
Porter notes that trade uncertainty and inflation have made for a challenging year, but he’s more optimistic about 2027, because of some of the new budget initiatives. Besides the grocery top-up, major infrastructure projects and investment in housing and defence spending could coalesce to drive above-average growth, he said.
Inflation and rate outlook
The affordability measures announced in the budget shouldn’t have a significant effect on the inflation outlook, said Porter, as the main factor pushing prices higher remains high energy costs. Although Porter expects energy prices to moderate in 2027, he remains cautious about what it will mean for inflation. “We think inflation will be a bit uncomfortably high next year, but at 2.5% on average in 2027, that’s an improvement from the 3% reading that we’re at this point,” he said.
Responding to a viewer question about whether the budget conflicts with monetary policy, Porter acknowledged that’s a reasonable observation. Ottawa is trying to support growth as much as they can, while the Bank of Canada is trying to take some steam out of the economy.
“There is a little bit of tension here between what the Bank of Canada is doing in raising interest rates and what the federal government is doing in really trying to support growth,” he said. “It’s not that serious yet.”
Even so, recent job losses and a rise in unemployment could lead the Bank of Canada to hold rates steady at its December meeting. Currently, BMO forecasts one more rate hike, but that will likely not happen until early 2027.
Canada Growth Incentive
From a tax perspective, there seemed to be something for everyone. For businesses, the theme is investment, productivity, and competitiveness, while for individuals the theme is largely simplification and some integrity measures, said Dante Rossi.
If there was one flagship tax measure introduced in the budget, Rossi said it would be the new Canada Growth Incentive (CGI). The measure has two key elements: The first includes a new capital gains exemption that could shelter up to $15 million in gains realized per individual, per business on the sale of qualifying shares.
To put that into context, individuals who qualify will keep nearly 96% of their gains, rather than 71% today. “That’s a significant difference,” said Rossi. “The new exemption applies to each business separately. So that means if you’re a serial entrepreneur, a founder, an angel investor, you could, in principle, use it more than once for multiple different businesses.”
There are some important caveats, which among other conditions, include:
• Shares must be newly issued shares on or after the budget date and before 2037.
• They must be issued for cash or for employment services and held for at least three years.
• The company must be a Canadian-controlled private company with no more than $100 million in assets when the shares are issued.
• Several sectors are excluded, including professional practices and other specifically identified business industry sectors.
Rossi also noted that you can’t claim both the new CGI and the existing $1.275 million lifetime capital gains exemption on shares of the same company. “It’s really leaning into that growth initiative for Canadian startups,” he said. “Interestingly, the budget notes that you can double up this new CGI exemption with the new $10 million exemption on sales to an employee ownership trust. So that’s a total of a $25 million exemption, which is quite a powerful tax break for those that qualify.”
The second element of the CGI is that it enhances the small business tax-deferred rollover of investments. While the tax system already allows business owners to defer the capital gain realized on the sale of eligible small business corporation shares if they reinvest it in another business the following calendar year, the budget proposes giving owners up to three more years (and in some instances up to five) to reinvest those proceeds.
Some other measures worth noting for business owners:
The productivity mega deduction: Announced in early September, the initiative will allow a business to write off 100% of the cost of a broad range of depreciable property in the first year it’s put into use. About two-thirds of business capital may now qualify, up from roughly 15% from previous measures. “The practical key takeaway here is, if you’re planning capital purchases, you want to talk to your tax professionals about timing here, because the after-tax cost, what’s commonly referred to as the marginal effective tax rate of investing in capital, just came down,” said Rossi.
Transfer of losses: The government is conducting consultations on allowing current-year losses to be transferred between a parent and a wholly owned subsidiary within the same province. The proposal could provide greater flexibility for corporate groups to manage taxable income and losses across related entities.
Simplifying the tax code
One change individuals will notice in this year’s budget is Ottawa’s effort to simplify the tax code, including what Rossi describes as “some genuinely useful changes.”
The Canada Caregiver credit: The budget proposes to make this a refundable credit in 2027. For those who take time caring for a loved one, this will be worth up to about $1,260 a year, with the amount indexed to inflation after that.
Simplified medical expense tax credit: The budget will ease requirements for individuals to submit paperwork for prescriptions and certain expenses.
Potential end to mandatory RRIF conversions: The government is currently consulting on what it calls an “RRSP for life”, merging RRSP and RRIF rules, which could eliminate the requirement to convert an RRSP into a RRIF at age 71. Minimum withdrawals, however, will continue to apply after age 71. As part of this initiative, Ottawa is also looking to allow surviving spouses to continue on the plan as successor holders and allow direct transfers on death.
New Individual Pension Plan requirements: Ottawa is looking to align IPPs with RRSPs and TFSAs on which investments qualify for the account. The budget also notes that some IPPs could be revoked or forced to make withdrawals if they hold more than 200% of their liabilities.
Adjusting the tax filing deadline: Beginning with the 2027 tax year, Ottawa proposes a single filing and payment deadline of May 15 for all individuals, including the self-employed and their spouses or common-law partners. The new deadline will be May 15, although your 2026 return will still be due in the spring on April 30.
“To wrap up, no rate changes, but some meaningful new incentives for businesses and new Canadian entrepreneurs seeking to avail themselves of some of these credits and exemptions,” said Rossi.