New capital gains exemptions and other tax deductions might seem promising, but experts urge cautious consideration
The latest federal budget doesn't understate itself. Under the He-Man-esque headline of “masters of our destiny,” the budget rolls out a set of investment-oriented tax deductions and spending measures aimed at boosting Canada’s lagging productivity and spurring economic transformation and growth. Many of those measures, such as the productivity mega deduction announced in September and new capital gains exemptions for businesses in certain sectors, will have direct impact on advisors’ clients as well as potential consequences for Canadian bond and equity markets.
Tax experts and economists weighed in on the implications in this budget for advisors, from new tax deductions to changes in RRSPs, through the impact of higher deficits and debt servicing costs. While the language around the budget may drip with significance, most experts described the spending package as more measured and noted that its key takeaways for advisors lie in its specific details.
“Frankly, it's a business-as-usual budget. A lot of the changes that we've seen are little, somewhat niche changes that are potentially going to have impacts on clients,” says Judith Charbonneau Kaplan, Vice-President, Advanced Wealth Planning Strategy & Services at Wellington-Altus. “But contrary to Budget 2024, when we had the changes to the capital gains inclusion rate, I'm not expecting advisors to be jumping on the phone calling clients saying, ‘hey, get ready for this or make these changes or here's some planning things we have to do.’”
Tax simplification, new exemptions, and an RRSP ‘rebrand’
Charbonneau Kaplan highlighted the key tax considerations that advisors should be aware of, starting with a shift in filing deadlines. Where the personal filing deadline for most Canadians was April 30th and for individuals with business income was June 15th, the new budget proposes consolidating those dates into a single deadline on May 15th which Charbonneau Kaplan says “avoids the interminable tax filing season.”
The budget also includes a new $15 million capital gains exemption called the Canada Growth Incentive. That is in addition to the productivity mega deduction announced in September. While Charbonneau Kaplan says the details of the new growth incentive are not yet sorted out, there is a potential that this could impact several business owners who have issued new shares from budget day onwards. She notes that Canadian advisors and investors may want to consider if they are eligible and if the shares they might be investing in are eligible for this exemption given its size and desirability as a full tax exemption.
Charbonneau Kaplan notes that for those investments to qualify the shares need to have been private at the time of issuance, but that if the company goes public those shares can still qualify for the exemption, so long as the company is Canadian and Canadian-listed. She notes that this exemption cannot accumulate with the lifetime capital gains exemption, but that it could accumulate if the company is sold to its employees. She also notes that several sectors, including professional services and real estate, would be excluded. The benefit would primarily cover businesses in technology and manufacturing, pointing to the government’s preference for sectors that should have significant productivity benefits.
Another measure that might grab headlines from the budget is the shift to “lifetime RRSPs” from the old RRSP model that converts to a RRIF at age 71. Charbonneau Kaplan says that despite the new name “there’s nothing meaningful changing.” Those lifetime RRSPs will still be subject to a mandatory withdrawal schedule once their owner turns 71. She notes that there is some simplification around the rollover of those accounts on the death of their holder, but there should be little impact beyond that.
On the tax simplification front, she notes that there will also be a new and easier route to claiming income from foreign property not used in business activities, such as a rental. The budget will also make permanent the rules allowing family members to establish RDSPs for individuals lacking contractual capacity without a legally appointed representative.
Deficits, growth, and bond market risk
The budget comes with roughly $152 billion of net new spending, some of which is made up by the new fiscal room opened up by stronger growth and higher energy prices. Two thirds of that net new spending is aimed at “growth and investment,” but Josh Nye, Senior Economist at RBC Global Asset Management, says that some of that investment may not be as productivity enhancing as its categorization would imply.
“There's a lot of social infrastructure investment in very low income housing, investment in indigenous communities. Not that those things are not worthwhile, but, when the government says that a lot of this new spending is investment-oriented, it's not necessarily going to boost the economy's long-run growth prospects,” Nye says. “Certainly some of it does, and that productivity mega deduction would be a big part of that.”
The new spending comes with a projected increase in the deficit to around 1.8 per cent of GDP from the 1.2 per cent achieved in last year’s budget. It’s worth noting, however, that the 2025 budget had projected a deficit to GDP ratio of 2.1 per cent and the aforementioned higher revenues brought the number down. Higher global bond yields and larger net debt will result in growth in debt servicing costs, which the government projects will hit 13.5 per cent of revenue in this fiscal year, up from 11 per cent in the prior fiscal year.
Canada’s deficit position, Nye notes, is still strong relative to many of its developed market peers. He doesn’t expect that this new spending will cause bond vigilantes to drive Canadian yields higher. Instead, broader global forces such as correlation to other developed market bonds, the issuance of AI debt, and persistent inflation will be greater factors for bond investors.
The growth aims of this budget as typified by the Productivity Mega Deduction and the Canada Growth Incentive, may help to further incentivize growth by Canadian small businesses. Nye notes that the tax system has long been criticized for disincentivizing growth past a certain point. He also highlights some of the mega projects included in the budget as likely positive for Canadian productivity. Those measures, along with some additional spending, are all in line for a government presiding over an economy in an uneasy growth position, with recent poor jobs numbers backing up the argument for further investment.
Advisors will now seek to make sense of this budget for clients amid its weighty pronouncements and significant new spending. Nye recommends a view of the context around these measures and the strategic aims of the government, noting that this represents more incremental change rather than outright transformation.
“It’s helpful to zoom out because there you get so many new measures that come out in these budgets. It's a lot of new spending, but the deficit profile is not all that changed. The general approach is still a more pro-growth, business-friendly government than we've had in years past. That’s generally a supportive factor for Canada’s economy moving forward and the performance of our equity market and the Canadian dollar,” says Nye. “This is more of a continuation of the path under the Carney government.”
