Financial Advice: 2024 Canadian Federal Budget

The 2024 Canadian Federal Budget came out on April 16th, 2024, and it is more of the same, higher spending and higher taxes. While the majority of the taxation is directed at higher-income individuals and corporations, the effect will be felt by all Canadians. By taxing these individuals and corporations more it makes Canada a less attractive place to invest. The reason is high tax rates reduce your potential return and therefore investments look less attractive for the amount of risk involved. This should reduce future and current investment in Canada and our ability to generate jobs going forward. On the other side, spending has increased on many multi-year programs, which will be very difficult to cancel going forward. Even with the increased taxes, there remains a deficit in spending vs. tax revenue, therefore it is unlikely that taxes get reduced in the future.

There was an obvious effort to target housing and promote housing growth. They offered additional tax cuts to developers and allowed first-time home buyers to borrow more from their RRSPs ($60,000 from the Home Buyer’s Plan) and borrow for longer (30 years). Which helps them purchase by increasing the amount they can borrow. They have also made it more difficult for investors by increasing capital gains tax and potentially even more difficult with the Alternative Minimum Tax, which still needs to be passed. The higher taxes and higher allowable borrowing amounts are inflationary which are hoped to be offset by making it less attractive for investors and investment companies. Only time will tell, but these changes will likely cause slower economic growth and stickier inflation. 

This isn’t all bad. Canada does a great job at fostering education and innovation for individuals and companies, but a terrible job at rewarding it. This is why many successful Canadian entrepreneurs and corporations leave once they get to a larger size. This is proven in our ability to grow jobs over the past 10 years. Where job growth in the private sector has increased by only about 15%, while self-employed jobs are flat at 0. Government jobs continue to grow at the fastest rate, increasing about 28% over the past 10 years. 

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Job growth is a result of where money flows and the ability to operate. Over the past 4 years, more funds have flowed into taxes and government programs rather than remaining in the private sector resulting in faster job growth. This was amplified during the COVID years when public businesses could operate (and received increased funding) and private businesses could not. Given the private sector is the largest employer in Canada it would be nice to see policy to better support it.

2024 Canadian Federal Budget Changes

There were many changes in the Federal Budget, too many to list. We will do our best to highlight the ones that we believe are more important.

Biggest Change

Increase of Capital Gains Inclusion Rate from 50% to 66.6% (On all capital gains over $250,000 for individuals but ALL capital gains for Corporations and Trusts).

This was the biggest surprise to the Federal Budget and the most impactful across the board. This charges a higher tax rate for capital gains on amounts greater than $250,000. While this affects very few individuals, this does affect corporations broadly. This will reduce the appetite for investment in Canada as you are being paid less for the amount of risk you are taking. Overall, very minimal impact on individuals (even high-income earners) but a great impact on te choice of a large investment in Canada. This will be the main funding source for the following new expenses.

New Larger Expenses

New Disability Benefit

$2,400 a year for low-income individuals with a disability. $6.1 billion over the next six years and $1.4 billion per year going forward to be paid to qualified individuals. 

Pharmacare Plan

The government will look to cover contraceptive and diabetes medication at the start of their new Pharmacare plan. This is about $1.5 billion over the next 5 years.

Indigenous Peoples

This budget includes $5 billion to cover loan guarantees for resource projects undertaken by Indigenous communities. These are guarantees, therefore, unlikely to cost the taxpayer $5 billion.

$1.2 billion for education infrastructure in First Nation Reserves and $918 million for housing and infrastructure.

Foreign Policy and Defence

Boost military spending to 1.76% of GDP by 2030. This is expected to be $8.1 billion over the next five years and $73 billion by 2044. This includes $1.6 billion over the next 5 years for Ukraine.

Asylum

The budget looks to spend $1.1 billion over the next 3 years on housing for asylum claimants, plus another $274 million for immigration and refugee legal aid. Another $743 million over five years to strengthen the asylum system and streamline the process.

Artificial Intelligence (Sort Of)

$2.4 billion to build AI capacity, with the majority of that money going towards improving access to computers and technician infrastructure. They call it AI, but it’s not, this is a computer infrastructure improvement. $50 million over 5 years for support to those who lose their job to AI. 

School Food Program

$1 billion over five years on a national food program that aims to provide meals for 400,000 children. 

Loans for Childcare Centres

$1 billion in low-cost loans, grants, and student loan forgiveness to expand childcare across Canada.

New Smaller Expenses

CBC gets more

An extra $42 million for the CBC, on top of the $1.3 billion they received last year.

Education Assistance For Medical and Teachers

$253.8 million over four years to forgive student loans on health and education workers.

Homeless

$250 million over two years for the homeless

Other Changes

Lifetime Capital Gains Exemption

Increase to Lifetime Capital Gains Exemption and Canadian Entrepreneurs Incentive. This increases the Lifetime Capital Gains Exemption to $1.25 million and the Canadian Entrepreneurship Incentive to $2 million. This is a nice increase, once again it is great to see Canada promoting innovation. 

Alternative Minimum Income Tax

Confirms Alternative Minimum Tax proposal, with a few minor changes to donations. Likely to come into play but we don’t want to rush into anything because this is likely a 2025 issue.

Home Buyer's Plan

Increase the Home Buyer’s Plan to $60,000 from $35,000.

Increased CRA Powers and Penalties

Provides the CRA with further information-gathering powers. They have introduced harsher penalties for tax avoidance and collection. $50 per day if deemed “non-compliant” in their request for assistance or information. Also, penalties of up to 50% of the owed tax amount if you intentionally avoid income tax. Also, $100,000 to any related party.

Summary

There are a lot of changes and even more, we have not included. To avoid making this too long we have kept it to just these topics. For the full budget, you can visit Canada.ca.

Overall we believe this promotes less growth in Canada. On the positive side, there are programs to help lower-income individuals which will be beneficial. The difficult part is slow economic growth affects the whole country and results in lower job growth, given the rate of population growth the timing is not ideal. We should be looking to stimulate investment in Canada to create jobs for our growing population. 

Justin, Konrad, and Merriel

More articles and information are available at www.knowprotectgrow.com 

Content Sources: Bloomberg, Trading Economics, Yahoo Finance, BCA Research

Disclaimer: This newsletter is solely the work of Konrad Kopacz and Justin Lim for the private information of their clients. Although the author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an official publication of Echelon, and the author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and they have not been approved by, and are not necessarily those of, Echelon.

Echelon Wealth Partners Inc. is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.

Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by the author. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions, and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.

These estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.

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