New capital gains exemptions and other tax deductions might seem promising, but experts urge cautious consideration
The latest federal budget doesn't understate itself. Bearing 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.
"A $15 million tax deduction should never be looked away from," adds Hemal Balsara, Head of tax, retirement and estate planning, insurance at Manulife Canada. "That's huge and its going to encourage investment in the country."
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.
Balsara highlights another benefit in the budget he thinks will also have signficant benefits for business owners, especially so-called 'serial entrepreneurs:' the enhanced small business rollover. The small business rollover benefit, he says, was quite limited in its eligibility and therefore wasn't used heavily by business owners, but it allowed certain business owners to defer capital gains on the sale of a business provided they invested those gains in an eligible small business. The new rules broaden the amount of time they have to make that investment, increase the amount that can be deferred, and widen the criteria for the sold shares of a business that can be used for this investment.
"The Canada Growth Incentive is going to the one that gets the headlines, but [the broadening of the small business rollover] will increase the scope of people who use it," Balsara adds. "Then there's a subset of serial entrepreneurs who, with the CGI and then also with this, small business investment rollover, are going to find something that can be very beneficial."
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 proposed changes would simplify foreign property reporting, with a higher reporting threshold and expanded access to a simplified reporting method.
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.
"They worked well within the parameters. And I think this goes back to Prime Minister Carney's understanding of what the institutional investor community is looking for. They're looking for clear commitment to guardrails or anchors," says Paul Taylor, VP and Portfolio Manager on the Multi-Asset Strategies Team at Mackenzie Investments. "We can't spend like drunken sailors, and we need to show people we're not doing that."
Taylor acknowledges that even the relative fiscal restraint shown in this budget will result in the accrual of higher overall debt levels and growth in debt servicing costs. He says that the Federal Government is cognizant of that issue, but the need to spur growth in the Canadian economy outweighs those rising debt costs.
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.
Taylor adds that the growth incentives in this budget are aimed at securing Canadian sovereignty and diversifying the Canadian economy away from a reliance on exports to the United States. That sovereignty aim incorporates these tax incentives with major projects and defense spending increases, all of which should encourage investment from local and foreign capital.
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.”
