Budget fédéral de 2024 : Hausse de l’impôt sur les gains en capital; quelques pépites pour les entrepreneurs

Disponible en anglais seulement

Intro : 

After the release of the 2024 Canadian Federal budget, Camilla Sutton, managing Director and Head Equity Research Canada and UK BMO Capital Markets moderated a discussion with Doug Porter, chief Economist and managing director BMO and John Waters, BMO Private Wealth's, vice President and Director of Tax Consulting Services. Here's what our experts had to say. 

Intro 2 : 

Welcome to Markets Plus we're leading experts from across BMO discuss factors shaping the markets, economy, industry sectors, and much more. Visit BMO cm.com/markets+for more episodes, the views expressed Here are those of the participants and not those of BMO capital markets, its affiliates or subsidiaries. 

Camilla Sutton : 

Hello and welcome to our Canadian Federal budget call. I'm Camilla Sutton, head of Equity Research for Canada, the UK here at BMO Capital Markets. Thank you all for taking your time to join us today. First, I'd like to take a moment to acknowledge that the land I'm greeting you from is the unseated and ancestral territory of our indigenous, our Metis and our Natives people. We are honored to have the privilege to live and work together on these lands. Yesterday, finance minister Friedland tabled federal budget titled Fairness for Every Generation. Today, I'm very pleased to be joined by BMO's chief Economist and managing director Doug Porter for his take on how the key elements of this year's budget may affect the economic outlook over the next 12 months. And the most private wealth vice president, director of Tax consulting services, John Waters, who will share his insights on the most significant personal and small business income tax measures announced in the budget. Doug and John will each kick off with an overview of their thoughts. Doug and John have also both published full reports with their insights on the budget. Doug's report can also be found on the BMO economics website and John's on the private wealth insight hub. Doug and John, thank you both for being with us today. Doug, why don't we kick it off with you and your thoughts on the budget. 

Douglas Porter: 

Sure thing. Thanks Camilla, and thanks everyone for joining us here today. Well, this was a very unusual budget in that most of it had been unveiled in the weeks leading up to yesterday's grand reveal. So the major questions heading into it were the details on how the many spending announcements, especially on the housing side were going to be funded and basically how are we going to pay for all this, whether it was through higher taxes, bigger deficits, perhaps aggressively optimistic economic and revenue assumptions, or a combination of all three. Initially I'd say there's actually been some modest relief in equity land that the tax measures weren't aimed specifically at corporations through so-called excess profit taxes, and that there were no changes in marginal rates and no broad wealth tax measures, which had all been rumored in the weeks and even the hours leading up to the budget. 

But the increase in the capital gains inclusion rate is clearly the new news here, and I'm sure John will dig much more into the details, but just broadly, it will affect corporations, large and small trusts and also individuals on any gains above 250,000, and it is a fairly significant revenue intake that the government is looking at. It'll be phased in only by June 25th, so there's plenty of talk of asset sales ahead of the date. The government itself seems to be assuming some rush of sales is they see a big rise in revenues or a big bump up in revenues from this change even in the current year. In terms of the fiscal outlook, all the measures really bring us back to square one. The deficit projections are slightly wider than previously expected, but they remain at or just below 40 billion in the next few years. 

And the debt to GDP measure actually drifts down a bit and has been nudged lower thanks to a slightly better than expected economy just in the past six months or so. I actually considered the economic growth assumptions and the interest rate assumptions to be fairly reasonable. They are after all, based on a consensus of private sector economists including myself, so naturally we have no major quibble with them. If anything, they look to be a little bit on the cautious side, which is a good thing. Since there's really no wiggle room left, there's no contingency reserve in this budget, which is actually rare. One concern I have is that the election, which is expected for the next fall means that this may not be the end to tax changes. We always say that the only thing worse than high taxes are uncertain taxes, and there's certainly the potential for more measures in the 2025 budget. 

Still overall, I'd say there's some mild relief that the tax changes weren't even more aggressive given all the new spending priorities we saw in the past couple of weeks. So with that as a bit of an overview, let's briefly dig into some of the economic implications of the budget. So one of the most common questions I got in the immediate aftermath of the budget release yesterday is how does this affect the inflation outlook After all in the lead up, the finance minister said that the goal here was to basically set the conditions for the Bank of Canada to be able to bring down interest rates. So presumably it would help on the inflation front. I think if anything at the margin it slightly makes the Bank of Canada's job a little bit tougher because on that there was about $5 billion worth of net new stimulus measures, which is about two tenths of a percent of GDP. 

So it slightly increases the pressure on inflation. However, of course, at the same time as we got the budget yesterday, we also got the latest inflation numbers for the month of March, and they weren't bad. The headline number was exactly as we expected at two nine, still holding just below 3%, and if anything, there was some relatively good news on underlying inflation, which I think does set up the stage for potential Bank of Canada rate cuts around the middle of the year. So now let's turn to the interest rate outlook. So for quite a while we've been calling for the Bank of Canada to start trimming interest rates as of June and then cut them a number of times through this year and into 2025. We have slowly but surely sort of been reducing the number of rate cuts. A lot of this is just a US story because US inflation remains is going in the opposite direction of Canada. 

It remains very sticky and frustratingly high, and even Jerome Powell yesterday said that it's possible that fed rate cuts may be pushed out further even so we still do think it's possible if not even likely, that the Bank of Canada can begin trimming in June. It's not a done deal. It's not a slam dunk by any means, but we still think that that is the most likely time for the bank to start cutting rates. And then we see in total three quarter point cuts this year and then another three quarter point cuts next year. So it'll take the bank a Canada rate, we believe from 5% now down to 3.5% by the end of next year. And effectively, well, as I said at the margin, the budget does make the bank a Canada job a little bit tougher. We don't think that it significantly changes the outlook for interest rates. 

Now let's turn to housing. Of course, this budget was heavily focused on increasing the supply of housing to improve affordability. Does it pass the grade on that front? Starting off? I actually do think that there were a number of reasonably helpful and positive measures contained within this budget, many of which were released in the weeks ahead of the budget. But our view is that we're highly skeptical that it can seriously move the dial on supply. We think it is helpful, it will somewhat support supply, but the kind of numbers that many have been banding about the need for three or four or 6 million new units by 2031, those are just fantasy land. Frankly, we are not going to come even close to hitting those kind of numbers. And just to put it in perspective, the most housing starts we've ever had ever in a single year is just a little bit more than 270,000. 

We suspect that we really can't get much above that in the years ahead and in recent months, we've been closer to the low 200,000 level. We do think that at the margin this will somewhat strengthen starts over the next couple of years, but I think we're still talking about starts in the range of around 250,000 or maybe a little bit better than that in terms of affordability. The flip side of that is I'm highly skeptical that this alone supply alone is going to fix the affordability issue. A decline in interest rates will certainly help, but we have to have that accompanied without a big bounce back in home prices that would just simply offset the pullback in interest rates. Suffice it to say we are quite skeptical that we're going to see a significant improvement on housing affordability in the years ahead in terms of its impact on growth. 

As I said, there was some net new stimulus here, which probably slightly shades higher our view on growth from a bigger picture, we've been through a very sluggish period for the economy last year. The economy grew by just a little bit more than 1%. We're still looking for just a little bit over 1% growth this year. And when you stack that up against population growth that has now been above 3% in the past year, that's very, very sluggish. In fact, it's only been during periods of deep recessions that we've seen such a big decline in per capita GDP as we've seen over the past year. As I said, we think that at the margin this budget puts a little bit of upper pressure on home building and ultimately growth, and we do see growth picking up next year to closer to 2%. That's about in line with the economy's long run growth potential.

And we actually see Canada slightly pacing the US economy in 2025, but I'd have to say our view on next year really didn't change that significantly as a result of the budget. And finally, what does this all mean for the Canadian dollar? It's interesting it in the immediate wake of the inflation numbers that we saw yesterday, which we viewed as a relatively good news story, the Canadian dollar actually weakened because the view was that if anything, this settled an even stronger case for the Bank of Canada to cut interest rates independent of the Fed. And so it weighed modestly on the Canadian dollar, knocking it down close to 72 cents, and then in the immediate aftermath of the budget a few hours later, we actually saw the Canadian dollars strengthen a bit, perhaps somewhat on the relief that there weren't even more broader tax increases contained in the budget. That's not to downplay the importance of this capital gains tax change. It's very important. It's a relatively meaty change, but as I said, the overall impression, at least in the equity world and in financial markets, was a little bit of a sense of relief that the tax bite wasn't even greater than what we saw in yesterday's budget. That's it for the broad overview. I'd be delighted to take questions after we hear from John, but thank you very much and I'll hand it back to you, Camilla. 

Camilla Sutton : 

Appreciate it. Doug, that was a terrific summary. Thank you very much for that. And now John, let's turn to you. Can you kick us off with some of your overview? 

John Waters : 

Yes, thanks, Camilla. Happy to be here today. I think at Doug's report, he made reference to a spend in tax budget, and I would agree with that, but probably flip it around and call it, sorry, a tax and spend budget, but I would call it a spend in tax given the announcements that proceeded the budget in the last week or so, we're spending dedicating lots of funding towards housing and affordability, and particular the home buyer's plan, the increased to 60,000 from the withdrawal of 35,000. But the main headline, of course, is the increased taxes on the wealthy, particularly capital gain inclusion rate going from 50% to two thirds for all corporations and trusts, and for individuals fifth, greater than $250,000 in a given year of capital gains income. The other point, of course, was the confirmation of the alternative minimum tax to apply in 2024 and some tweaks specifically to address some of the concerns that the charitable community, so the headline of course, that the capital gains rate increase.

This has often been a persistent rumor in prior budgets. That was finally realized this year. Perhaps a little surprising because the government had sought to go after wealthy Canadians with significant capital gains in last year's budget with the changes to the alternative minimum tax that are still working their way through. But nonetheless, this will become effective as of June 25th of this year. And the government in their notes indicated it's a relatively small proportion of Canadians, about 40,000 people in about 1.3% of the population. Nonetheless, I'm sure we will feel, and we're already starting to feel a lot of questions around the considerations on selling accrued investments or real estate properties, cottages businesses, even before the increase in the capital gains rate. So some more to come on that, and I'm already getting a lot of questions from clients on particularly holding companies and should these be wound up, those types of things.

So lots of considerations and no doubt that will just intensify over the next couple of months. I briefly mentioned the alternative minimum tax. So this of course was introduced in last year's federal budget and brief background is that this alternative minimum tax has been around since 1986. It's a separate calculation that's theoretically done for all taxpayers. Basically take your regular income tax calculation and compare that to this alternative minimum tax calculation, which starts with your regular taxable income and adds back certain tax preference items and deductions and exemptions to come up with a revised taxable income figure and applying a flat rate of tax 20.5% federally to determine what should be a minimum tax owing with the ability to carry that forward up to seven years if it does apply. So the budget in 2023 proposed some significant changes to this calculation to better target high income Canadians.

Most notably for a MT purposes of this calculation, capital gains would be subject to a hundred percent inclusion for the purpose of this calculation. Versus of course, the regular 50% that the A MT tax rate would be increased from 15% to 20.5% federally and a restriction on the deductions allowed for a MT purposes, most notably to charitable donations to 50% what would otherwise be allowed for regular income tax purposes. So as a result, there was a lot of concern expressed within the charitable community in particular about the impact to donors and donations. So the government did listen fortunately, and in this year's budget did make some tweaks to the alternative, a minimum tax particularly to allow 80% of charitable donations to qualify as a tax credit for the purpose of this separate a MT calculation. So positive development there. But they also did affirm that the alternative tax will be effective in 2024.

So it is in play right now, even though it is still draft legislation. So certainly a consideration for many wealthier Canadians. A few highlights for business owners and private corporations, some positive developments here. I guess on the flip side of this increase in the capital gain inclusion rate is that there was an increase in the capital gains exemption for when you sell shares of a qualifying small business or farm and fishing property. Again, effective this June 25th date, the capital gains exemption will increase from approximately 1 million to 1.25 million and will be indexed. That amount will be indexed for inflation beginning in 2026. There was another incentive, a new incentive provided for business owners called the Canadian Entrepreneurs Incentive. So this is an additional amount beyond the capital gains exemption that I just referenced, that business owners could receive a reduced capital gains inclusion on the sale of qualifying businesses beginning in 2025.

In essence, it's a half of the capital gains rate, which at that point for those larger gains will be two thirds. So to receive a one third capital gain inclusion rate on the sale of a qualifying small business works on very similar rules is the capital gains exemption. But there are, it's a bit more restrictive. There are some additional qualifying criteria and specific industries are excluded from accessing this additional incentive. So professional corporations, consulting services, real estate, food accommodation, et cetera, do not qualify for this new incentive. The restrictions also are a bit more detailed. You must be a founding investor and actively involved in running the company for the last five years among some other criteria. So the exemption will be on the first $200,000 of qualifying gains beginning in 2025. That amount of lifetime amount will grow $200,000 per year for the next 10 years.

So that ultimately it will be $2 million where you can access that lower capital gains rate on the sale by business owners of qualifying businesses. So more to come on that one. And I guess the final point that I would highlight again in terms of business owners is some changes to the employee ownership trust structure that was again introduced in last year's federal budget. You may recall that this is a new structure within the tax legislation that will facilitate the transfer sale of business to an employee group. So it's sort of on mass through a trust structure. When the legislation was released last year, it was certainly welcomed by the business community, but there was maybe some concerns that the incentives for this type of structure were not sufficient to outweigh some of the risks to the vendor, particularly since they would have to give up significant control of the company, not yet receive the proceeds. 

Typically, that would come in over a period of time at a future profits of the business that would now be run by the employees and giving up control and having no recourse to take back the shares if the business falters. So in late 2023, government responded to some of those concerns by introducing a very significant incentive in the form of a $10 million capital gains exemption when a business owner sells to this employee ownership trust structure. But it was just sort of a quick headline in November, and we were awaiting some more details on that since then. So those details did come in yesterday's budget and confirmed that $10 million exemption is coming in place effective for 20 24, 25, and 26. However, that 10 million exemption is per business, not per individual, so would have to be shared amongst business owners if they all own shares of the same business. And also, there was a clawback provision if the business or the employee ownership trust ceased to qualify in the future. So again, a potential risk at least within three years for business owners thereafter, the risk would fall to the trust itself. 

Intro 2 : 

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