Open this photo in gallery:
Prime Minister Mark Carney will be managing various priorities when his government tables its first budget on Nov. 4.Adrian Wyld/The Canadian Press
The federal government will walk a tightrope in its fall budget, with little room to raise taxes without further compromising Canada’s economic competitiveness, and limited flexibility to cut taxes and still fund spending, tax experts say.
“The tyranny of the numbers is that, if you’re going to spend as much as you are, you’re either increasing your debt or you have to increase taxes,” says Brian Ernewein, senior advisor, national tax, at KPMG LLP in Ottawa. “And I find it hard to see that there’s room to [raise taxes] on either the corporate or personal side.”
Prime Minister Mark Carney’s Liberal government will table the federal budget on Nov. 4. A raft of tax proposals promised during the 2025 election campaign, as well as others dating back to the 2024 budget, have yet to be implemented.
Canada’s fiscal priorities and outlook have changed since the 2024 fall economic statement last December, when Justin Trudeau’s Liberal government projected the 2025-26 deficit to be $42.2-billion. That was before U.S. President Donald Trump imposed tariffs on Canada.
On Sept. 25, the Parliamentary Budget Office released a report projecting the 2025-26 deficit to be $68.5-billion. Meanwhile, the C.D. Howe Institute projects a $92.2-billion deficit for this year, a figure that includes the cost of defence spending and election platform promises.
Key proposals
The key Liberal tax promise from the 2025 election campaign – dropping the rate on the lowest tax bracket to 14 per cent from 15 per cent – became effective July 1, at a projected cost of $4.2-billion in 2025-26 and $22-billion over four years.
The legislation to pass the tax cut is included in Bill C-4, which was at second reading in the House of Commons as of Oct. 8. Also included in Bill C-4 is a cut to the GST for first-time home buyers of new homes valued at up to $1-million, a promise projected to cost $383-million this year and $1.6-billion over four years.
However, the Liberals have yet to move forward with other campaign promises, notably reducing the minimum amount that must be withdrawn from a registered retirement income fund by 25 per cent for one year, at a projected cost of $600-million.
Equity markets have recovered dramatically since April 7, when the Liberals made the RRIF promise, arguably negating the need for relief, Mr. Ernewein says. That leaves the government with the choice of proceeding with the promise at significant cost or breaking it.
The Liberals also promised during the 2025 federal election campaign to conduct a review of corporate taxation. Simplifying the tax system would provide the government an opportunity to broaden the tax base while lowering tax rates, says Trevor Tombe, economics professor at the University of Calgary. That would also boost productivity without resulting in a significant loss of revenue.
The tariff factor
The federal government is already forgoing billions in projected revenue by deciding to reverse certain tax measures, such as the digital services tax, and dropping most retaliatory tariffs on U.S. goods as part of trade negotiations between Canada and the U.S., says Ron Nobrega, a tax partner at Fasken Martineau DuMoulin LLP in Toronto.
That loss in projected revenue, and the need for the government to adjust its plans, may have contributed to the relatively late release of the budget this year, Mr. Nobrega says.
Fred O’Riordan, national leader of tax policy with EY Canada in Ottawa, says he’d like to see the government address lagging productivity by reducing personal income taxes.
In eight of 10 provinces, the top marginal tax rate is above 50 per cent, and “the threshold level of income where [the highest tax rate] hits is relatively low by international standards,” he says.
If the government needs to raise revenue, it should consider raising consumption taxes, Mr. O’Riordan says.
Mr. Ernewein says he’ll be watching to see if the government moves forward in the federal budget with promises to provide faster write-offs for depreciable property and immediate expensing for certain manufacturing equipment and clean technology assets.
The Trump administration’s One Big Beautiful Bill Act (OBBBA), which made permanent the full expensing of qualified business property and the deductibility of domestic research and experimental expenditures, raised the stakes for Canada to keep pace.
“We would want to make sure we are competitive because it’s relevant to where companies locate manufacturing facilities,” Mr. Nobrega says.
However, he says there’s little chance the federal government will try to match U.S. tax breaks on tips, overtime and social security benefits included in the OBBBA.
