Harry Chana:
Welcome everyone to BDO's 2025 Federal Budget webinar.
While we may meet today on a virtual platform, I would like to take a moment to acknowledge the land that we are meeting on, is the traditional territories of many nations, including the Mississaugas of the Credit, the Anishinaabe, the Chippewa, the Haudenosaunee, and the Wendat peoples, and is now home to many diverse First Nations, Inuit, and Métis peoples. We do this to reaffirm our commitment and responsibility in improving relationships between nations and improving our own understanding of our local indigenous people and their cultures.
Hello, I'm Harry Chana, National Practice Leader for the Cross-Border Tax Practice Services at BDO Canada. And I'll be your host today as we dive into what this year's federal budget means for business leaders across the country. It's a real pleasure to be here with you. This continues to be one of our most highly attended sessions, and 2025 is no exception. With over 1,400 registrants today, your interest is what makes this event so anticipated. This year's federal budget comes at a crucial time for Canadian businesses. There's a lot to unpack, from new tax measures to shifting fiscal priorities, and our goal today is to help you understand what it all means for your organization and the broader economy. I'm joined by my colleague Greg London, our Domestic Tax Consulting Leader, who also oversees talent for the tax practice at BDO. Greg will help break down the key tax measures and share his perspectives on what organizations should consider as a plan for the months ahead. We are also fortunate to have an exceptional group of guests with us.
First, Robert Kavcic, Director and Senior Economist at BMO, whose analysis of Canada's economic landscape will help put the budget into context. Next, David Akin, Chief Political Correspondent for Global News, joining us from Ottawa. David brings years of experience covering federal and provincial politics, and we'll share his perspective on the political dynamics behind this budget. And finally, Dr. Jack Mintz, President's Fellow at the School of Public Policy, University of Calgary. Dr. Mintz is one of Canada's leading voices in tax and fiscal policy and will help us interpret the broader implications of the federal budget. It's a privilege to have such a distinguished group with us each offering a unique lens on the economic, political and policy that aspects that shape Canada's fiscal direction. Please use a Q&A feature on your screen to submit questions during the session. We'll do our best to address as many of these as possible throughout the webinar.
Now, to set the stage, I'd like to start with a few reflections on yesterday's federal budget, delivered by François-Philippe Champagne, Minister of Finance and National Revenue. The theme of the 2025 budget has been framed by the government as investment and austerity and focused on invest more and spend less. Prime Minister Mark Carney has also mentioned more recently that Canadians would need to make sacrifices. Ottawa's forecast a $78 billion deficit for the 2025 and 2026 year and is introducing a modernized capital and operating budgeting framework. The goal? Balance the operating budget by 2028, while maintaining disciplined borrowing for long-term investment in housing, defense, infrastructure and clean tech. The budget also confirms modernizing SR&ED incentives, expanding clean economy tax credits while maintaining department cuts. With the US tightening its trade and tariff posture, this is a test of whether Canada can reestablish fiscal credibility without losing competitiveness.
Now, whenever a new budget is released, I always find it helpful to look beyond the numbers to see how it's being received both in the markets and the headlines. So, a few that caught my eye from last night and this morning are from the Financial Post. The headline read, "Canada Budget 2025 offers billion in tax incentives to spur equity, to spur investment economy." From The Globe and Mail, the headline was, "When the Big Day came, it wasn't quite as advertised." And one from our panelist, David Akin quote, "Carney is dying for a majority government." We'll dig into this a little bit more when we speak with David.
So, to kick things off first, we're going to dive into an economic analysis behind the budget. I'm now going to pass it over to Robert Kavcic, Director and Senior Economist at BMO, who will share his thoughts and insights. Robert, over to you.
Robert Kavcic:
Great, thank you very much and I appreciate the invite to speak today and give you a recap of the budget and I'll try and put it in the broader economic context that we're seeing in Canada and go over some of the economic outlook. So, first of all, on the budget itself, couple things. Number one is it was a very big budget with a lot of fiscal stimulus and a lot of pretty big picture policy measures. Was it a little bit of a letdown? Maybe. And I only say that because we pretty much knew the vast majority of the policy that was gonna be announced yesterday in advance, and there wasn't a whole lot of new for markets and analysts to kind of, to pick up on as we read through yesterday's document.
But that said, this is a big budget. So, we're looking at $78 billion deficit for Canada for this fiscal year. $65 billion for fiscal 26-27. The debt to GDP ratio is holding above 42%, 43% or so through the forecast horizon. And we get probably net new fiscal stimulus hitting the economy of about $20 billion per year starting right now in this fiscal year. Now, keep in mind here that because we knew a lot of this in advance and because let's say the Bank of Canada knew a lot of this in advance, so things like increases in defense spending and a lot of the tax measures that we saw announced, we've already more or less incorporated that into our economic outlook. So, we're not necessarily scrambling this morning to revise up our growth forecast even though we are looking at a very meaningfully stimulative budget from Canadian policy makers.
With respect to policy itself, I would probably describe this as a pretty clear shift in the pro-growth direction for Canadian fiscal policy. It's another liberal government, it's another liberal government with big budget deficits, but underlying these deficits is a much more pro-growth policy tax. So, the increase in defense spending to 2% of GDP right off the bat, that's a lot of, that's transitioning through capital spending and through higher wages. Things like the personal income tax cut that we saw earlier in the year. Layered on top of that in the budget yesterday was things like accelerated CCA and tax credits for R&D investment. All of that's considered pro-growth. A big increase in infrastructure spending out over, over the forecast horizon, whether it's port infrastructure or just direct transfers down to provincial and municipal governments for things like schools, roads and hospitals. All of that's pro-growth and probably, you know, what we would arguably say Canada definitely needs at this point. And then really a big component in the budget as well. It doesn't have a big dollar amount attached to it, but it's very important. And that's this kind of idea that, that the federal government's gonna try and speed up the approval process of getting major private sector projects under construction and kind of get out of the way and reduce the red tape, so to speak, to drive more investment in the private sector across the country through the resource sector, through the manufacturing sector and areas like that. That's gonna kind of come down to execution in a lot of cases. But fundamentally I think it's a good message for the government to be pushing at this point.
So, when we look at that and we add it all up, it's a pretty big stimulative budget. A lot of it was already announced and we're encouraged that we're gonna get a positive fiscal impulse for the economy going forward. The other aspect of the budget we saw yesterday was another change to the immigration program. And I would call this one very important. In fact, I would say that even coming into the year before the trade war really started, this was probably one of the most important underlying trends in the Canadian economy because of the dramatic shift we're seeing here. And Ottawa really doubled down on the shift in immigration yesterday. So, that's a picture of population growth in Canada going back over the last decade. Typically, we've seen a pretty sustainable 1% run rate over the last two or three years. Of course, we saw population growth accelerate to three and a half percent, almost one and a half million people that was putting tremendous stress on things like infrastructure, services inflation, housing infrastructure, rental inflation. And policymakers looked at that and said, look, we have a very strong permanent immigration program. We have a non-permanent resident program that kind of got away from us because it was unregulated and unchecked. So, we saw hard caps on non-permanent residents put in place last year and this budget actually doubles down and cuts those targeted inflows even further through '26, 2027 and 2028. And that's through the Temporary Foreign Worker Program and through the International Student Program. So effectively that leaves us with a population that was growing at 3 to 4% and for the foreseeable future, the next couple years is gonna be growing at about zero as we get a net outflow of those non-permanent residents. And already you're seeing that on the ground in areas like housing where the minute those caps were put in place, we saw rental markets soften and rents start to come down. So that's a theme that's gonna be with us for a couple years still and ultimately, we settle back into about a 1% run rate and a very, you know, carefully monitored now and very well-defined immigration program for Canada.
So where does that leave us? So, from an economic growth perspective, Canada is growing pretty slowly right now. We're looking at 1.2% growth this year, 1.4% for 2026. Effectively, it's akin to like driving down the 401 at 70 kilometers an hour, right? We're not in a recession; we're not in reverse. We're going forward, we're growing, but we're growing below the speed limit, and we would kind of consider the speed limit for economic growth to be about 2% or just under. So, we're growing but we're growing at a slow clip. And really a lot of the headwinds out there would be on the trade and the confidence front. So, we're still clearly dealing with tariffs from the US. We're still not certain whether or not we're gonna get USMCA renegotiated ahead of July 2026. We're hopeful that we are, but obviously that's kind of stop and go right now on the negotiation front. So, in that environment it's really hard for businesses to come out and say, yes, I'm gonna take on a big hiring program, or I'm gonna deploy a lot of investment capital at a time when we don't know what the rules of the game are gonna be three months from now, six months from now, maybe even two years from now. So, we're a little bit concerned that businesses are still gonna be sitting on their hands through the turn of the year through maybe the first half of 2026. But if we get some clarity on the trade front, we get a lot of pro-growth policy, especially pushing investment.
And then we get into the middle of 2026, we have interest rate cuts filtering through the economy. We have the Canadian household that's in relatively good shape, all things considered. We think we're kind of setting the groundwork for better economic momentum through the second half of 2026. And we do see the economy getting back towards that kind of 2% speed limit through that period and then into 2027. Assuming of course we can get this overhanging trade issue out of the way. On the inflation front, we're actually in a pretty good spot right now. So Canadian inflation, you can call it about two-point half percent. The Bank of Canada of course publishes, you know, three or four different measures of inflation to confuse a lot of people. But when you look right down into the guts of inflation, it's probably about two and a half percent right now being the run rate. A lot of the post pandemic inflation episode, things like goods inflation, supply chain bottlenecks, all of that has come off. Oil prices are down, agriculture prices are down, food inflation has settled back down, even the service side has more or less settled down. So, we've made a lot of progress on inflation and that's really allowed the Bank of Canada to cut rates to where we are at this point.
We're still kind of stuck in a few areas like wage growth, which is still elevated even though the job market has cooled off. We're still stuck with the reality that a trade war is a negative supply shock in fundamental economic terms. So, what that does is it hold backs, it's holds back growth, but it also at the same time puts upward pressure on inflation. And I would argue that that's more of an acute issue on the US side of the border because of course they're the ones putting those tariffs on imports and therefore it's gonna be the US consumer that ultimately absorbs most of the pass through of those price increases. And interestingly enough, Canadian policymakers at one point had $60 billion worth of tariffs on imports into Canada from the US and they said, look, this might not be the best policy at this point because we're kind of shooting ourselves in the foot from an inflation perspective at a time when the economy actually needs stimulus. So, we did see policymakers very quickly pull those retaliatory tariffs off. So, some of that tariff risk is kind of fading away in Canada though it does still linger on the US side. And then ultimately psychology out there is still just dealing with the reality that we went through four or five years of 6, 7, 8% inflation and psychology takes some time to break and policy makers are being a little bit careful not to cut interest rates too far too quickly just to make sure that that psychology doesn't root in the economy and then we have to press the rewind button and go back and fight inflation all over again.
So by and large though, we're in a pretty comfortable spot I would say. And you can see in the forecast that we do have Canadian inflation over the rest this year and into 2026 kind of grinding its way back down to 2%. And so that has set the stage for the Bank of Canada to cut interest rates to this point. Our interest rate forecast is on the screen there. And I would say two big takeaways here. Number one is that we do suspect that there is scope for another 25 basis points of easing in the first quarter of 2026. And that kind of just hinges on us being a little bit more cautious on the economic outlook than maybe some on the street, maybe a little bit more cautious than the Bank of Canada is as well. For all intents and purposes though, I mean the Bank of Canada has pretty much told us as clearly as they're ever gonna tell us that they think they're probably done cutting rates at this point. So it's a little bit of a judgment call that if the economy remains soft through the turn of the year, there's scope for a bit more stimulus but these are relatively neutral interest rates and the Bank of Canada, especially if the economic data start to get a little bit better into the end of the year could very well be done at this point.
And that leads us to the kind of the next key takeaway here, and that's that the current level of interest rates is very neutral. And the one question I always get asked is a very simple question, "Rob, where are interest rates going?" And the answer right now is actually very simple because interest rates are going basically where they are today, right? And that's to say that we are in a very neutral interest rate environment today. So if you're budgeting for a few years down the road, yes we're gonna have an economic cycle, yes, we might get a little bit of easing if the economy weakens, but ultimately, you know, two and a quarter, two and a half percent, Bank of Canada policy rates are very neutral. 3 to 3.5% tenure year yields very neutral. If you look out in the mortgage market, 3.75 to 4% mortgage rates very, very neutral. So, if you have, you know, real estate investors or potential buyers sitting there waiting for one and a half percent mortgage rates again to come and save the market or pull them in, probably gonna be disappointed on that front. So yes, probably a little bit of scope for some further easing, that's takeaway number one. But the level of interest rates that we wanna budget for going forward on a, you know, 3, 5, 10-year time horizon is very consistent with what we see today.
So that's the macroeconomic outlook. I'll circle back to the budget picture from a bigger perspective, just to give us one kind of final look here at where we are on a fiscal position relative to history and relative to the rest of the world. So, running $78 billion deficits is, it's certainly a little bit concerning, but it's not the point where we need to really pull the fiscal alarms yet. Okay, so $78 billion, about two and a half percent of GDP. It's manageable, it's something that we've seen before and the fiscal anchor from what we can tell is not only balancing the operating budget, but kind of having this gradual move down in the deficit to GDP ratio over the years going forward. The debt burden at about 43% is manageable. And then probably most importantly, like debt service costs as a share of government revenues have come off the lows. But even with the $78 billion deficit in a few years of big borrowing, Canada's still only spending about 11, 12, 13 cents of every dollar of revenue to service that debt. And when we had a real fiscal problem in Canada back in the 1990s, that was up around 33-35 cents of every dollar of revenue. So, there's quite a bit of runway on that front. If there is a concern here, I would say that it's the same concern we've been bringing up during deficit budgets over the past number of years. And that's, if you're gonna have a fiscal anchor that's tied to something like a debt to GDP ratio or a deficit to GDP ratio staying relatively flat, it's almost inevitable that that anchor's gonna break at some point when the economy rolls over and the denominator falls. For example, we go into a recession and GDP falls, well those ratios immediately jump overnight. So, I don't put a whole lot of of stock to be honest in that underlying fiscal anchor. And I would probably say yes, we're in a good spot for now, but when we look three, five years down the road with structural deficits that are still around $50 billion and no hard fiscal anchor, at some point we might start to have a bit of a conversation on Canada's fiscal position, but, I don't think that point is necessarily today.
And then the last takeaway would be, well we can look through history, but we can also look across the developed world and say, what's Canada's fiscal position look like today? And it actually is starting in a pretty good spot. So that's just a quick scatter plot of how, you know, the G10+ Australia stand right now from a fiscal position as you go up the vertical axis, that's the budget deficit getting bigger. And then as you go out across the horizontal axis, that's net debt getting bigger as a share of GDP. So, where you wanna be is down in that bottom left corner. And Canada of course is still, you know, with a AAA credit down in that bottom left corner in a pretty well performing, pretty solid standing among the developed world economies. Contrast that to the US as an example where budget deficits today are running at about 6% of GDP and there's a legitimate and immediate fiscal problem facing that economy. Canada's not quite there yet. We have still some runway to go before we start to have those really tough conversations.
So, I'll leave it at that. That's kind of how we see the macro economy evolving and kind of the context that we kind of place this budget in.
Harry Chana:
Thank you, Robert, for your analysis. We have time for a question or so. So, one question I had is how did the market react to the budget?
Robert Kavcic:
So that's a very good question because ordinarily you would look at a $78 billion deficit and there would be, you know, maybe a little bit of shock over that, maybe a little bit of concern. But I think the market was so conditioned to see a big deficit number already. Like we talked about a lot of the policy being pre-announced that we were hearing whisper numbers of anywhere from 80 to 100 billion dollars on the deficit this year. So, there was actually chatter in the lockup about this being a very conservative or restraint heavy budget. And in isolation, no, I mean you're gonna increase the deficit to almost $80 billion, it's not at all restraint, but relative to what some of the expectations were, it actually came in on the low side of the bar. Even the issuance program, Canada is gonna probably issue almost $300 billion worth of GOCs next year through twos, tens and thirties. There was a concern that that number would actually be quite a bit higher. Year over year issuance is actually gonna be down. T-bills are gonna take up a lot of it. So, what we actually saw in the immediate hour after that budget came out was yields across, you know, the five years space, 10 years and 30 years actually backed off a little bit just because of that relief that that things didn't look a whole lot worse, and they could have.
Harry Chana:
Perfect! No, thank you, appreciate that, Robert. And again, thanks for all your insights on that. So, now we're gonna shift focus and I'd like to bring up our panel to join the conversation. So, we have David Akin, Chief Political Correspondent for Global News, joining us from Ottawa; Dr. Jack Mintz, President's Fellow of the School of Public Policy at the University of Calgary, joining us from Calgary. Welcome David and Jack. Great to have you both with us.
Dr. Jack Mintz:
Great to be here.
Harry Chana:
All right, so I wanted to break down this panel and talk about the budget really in four key areas. So, one's around budget timing, tax competitiveness, capital budget design and accountability around that. And then lastly around trade security and the global context. So, I'll start with budget timing. So, the federal budget, I'm sorry, the federal government has shifted its budget cycle to the fall, reserving the spring for the economic and fiscal update. Ottawa says that this modernizes the approach, it better aligns with corporate and provincial planning, improves transparency, allows for greater and faster implementation of capital and investment decisions. So, David, I'm gonna start with you. With budgets moving to the fall, what does this actually mean in practice and how governments manage their fiscal priorities?
David Akin:
Well, in fact, and thanks for inviting me and it's good to be here today. Busy morning on Parliament Hill. We had a caucus member of the Conservative Party defect to the Liberals so that's a big deal. But what I think we've heard from a lot of budget experts over the last 15, 20 years is a request to move the budget ahead. Too often, we've had budgets in late spring. After the fiscal year has started, we've had budgets sometimes in the fall of a fiscal year and that has caused a lot of problem for businesses trying to plan. It's caused a lot of problem for provinces as they set out their capital budget, they wanna know what transfers are coming from Ottawa. So, I think there was a great, there was a lot of cheering, essentially from the geeks who do budget planning and are deep into government's fiscal performance is, okay, we have the game plan now, capital and spending plans will be set to begin on April the first. Of course, just to remind everybody that government's fiscal year starts on April one, and I think there was broad appreciation from provinces as well. I think Ontario is doing a fiscal event today, so we may hear that, and we can talk a little bit more about this splitting up capital and operating budget. The theory is good, the execution, I think we'll still have some discussions about that.
Harry Chana:
Okay, thank you David. Jack, wanted to get your thoughts as well. Where do you stand on the move of the federal budget timing?
Dr. Jack Mintz:
Well actually I do agree with David. I think there's some sense to doing it. In fact, typically in the past, and I've been around department of Finance for almost all my career in various forms, that the view was that actually budget should come out in February in order to give the provinces, particularly, enough time for their budgets that tended to follow. But then of course various circumstances happened, and some budgets came out in March, sometimes they came out as late as April. And in the case of some provinces like Alberta, which tends to have its budget out by the end of February, this was not a very good practice. So, I do like the idea of moving it to the fall. I think politically, the government needed to give some sort of good excuse why it has delayed a budget for so long.
We have to remember that we haven't had one for quite, almost over a year and a half, which is not very good. But also, the economic statement that is in the fall tends to be almost like a mini budget these days. At one time the economic statement was just purely a review of where the economy is at and what the government was forecasting and didn't have a lot of measures in it. And then it started being broadened to include more and more measures. That economic statement will now be in the springtime. So, in a sense we've kind of just reversed things. So, we're gonna have our big budget in the fall and we're gonna have our mini budget later on in a sense. And so I think, you know, I think it's an okay shift, but I don't think it's going to matter too much except to the extent that it really does help the provinces and perhaps the private sector and having the major budget coming out at the end of the year, which I think is a more time for planning for the following year.
David Akin:
And Harry, can I just, one other little weird point that people may not know.
Harry Chana:
Yes.
David Akin:
There's no legislated requirement for any government to present a budget. It's not a thing you have to do. We didn't have a budget in the middle of the pandemic a couple of years ago; after the events of September 2001, the whole budget was timing was disrupted. It's required that you present what are called estimates, the government spending plan that you have to do, but you don't have to legislate a budget. And actually, when they presented this plan, I was asking finance officials and the finance minister, why not put it in the House of Commons rules and procedure or something still TBD on that. So, this tradition that Mark Carney is starting a fall budget, it's going to be dependent on the next prime minister, a Conservative prime minister, perhaps, will they continue the tradition of fall budgets? Because just cause they're doing it today doesn't mean they might do that next year or any other year.
Harry Chana:
That's right.
Dr. Jack Mintz:
And I agree with David on that, actually, it isn't legislated. It was a bit of a tradition over the years and then of course it's changed and it's not a matter of legislation, it's really up to the government what it wants to do. And who knows that fall budget could easily slip into January or slip into other times, you know? We'll just happen to see what prevails over time.
Harry Chana:
That's right. Yeah. And I guess that sort of leads to, David, I wanted to just pick up on something that you had said there. Just everything that's been happening in Ottawa over the last 24 hours and it's just under 24 hours since the budget was tabled. So, what's the sort of, what's the read on the political dynamics in Ottawa? Are the Liberals confident that they'll get enough votes to get this budget through or negotiations? Are they still fluid?
David Akin:
They are confident. So, as I mentioned, you know, I've just been coming from some, you know, chasing MPs this morning on Parliament Hill, every Wednesday morning at Parliament Hill, when the MPs are here, it's Caucus Day, so they're all meeting in their behind closed doors and they're going over the budget. But yesterday morning when we woke up, the Liberals had 169 MPs, including the speaker. It's 172 votes that are required to pass the budget. But the Liberals went to bed last night with 170, right? Chris d'Entremont, who has won five elections in Nova Scotia as a Progressive Conservative provincially, three elections as a federal Conservative, yesterday said he's out, he believes he's a Carney liberal and he crossed the floor. And so, a lot of the conversations I had with MPs, Conservative MPs call him a coward and they hate him and whatever. Chris d'Entremont made the decision he made, and he was introduced to caucus this morning by Mark Carney and it's a big deal. And d'Entremont is telling us there could be others in the Conservative Caucus. So, the rest of my day will be spent chasing around MPs we think are likely suspects who may also cross the floor.
But the point is 170 votes right now are on the Liberal side; they need two more. So, there might be some floor-crossers. The Conservatives have already said, Pierre Poilievre said yesterday, you know, these deficits, no way he's not voting for them. He will be advancing the political argument that deficits are causing, the Canadian government's deficits are causing food inflation. And as you just heard, Robert Kavcic say, well, inflation's down, food inflation's over. I’ll let a politician make whatever case they wanna make, but that is the political argument that Poilievre is making that those deficits are causing inflation. We'll see if that's effective. Certainly, if he's able to, people have an affordability concern and if he can say inflation means affordability and that inflation is caused by deficits, okay. So they're voting against it. The Bloc Québécois, there's nothing in it for Quebec. We've heard this from the Bloc Québécois before, they're pretty much not gonna vote against it. There are seven NDP MPs, seven, and if they vote as a group, that's it, the game's over, and that will be enough for the Liberals to get the budget through. They are thinking about it. They too, were meeting this morning behind closed doors talking about it. They're in the middle of a leadership race and one of those MPs, Heather McPherson from Edmonton is running for leader. She's running against Avi Lewis who's not in parliament. And Avi may be more hardcore to reject the budget, and Heather may have to appear for her leadership ambitions as if she wants to reject it. So, there's some weird dynamics going on with the NDP, one might abstain, one might vote in favor, others might abstain or might have more floor crossers.
So very fluid situation right now politically, but all the Liberals going into their caucus meeting this morning. We're very confident that there's not gonna be a Christmas election. And if you had a calendar out and you want to note it, I looked it up today. If the government falls on November 17th, that's when the budget vote's going to be held. The election would be either by law: December 29th or January the 5th. So Merry Christmas, you could be going to the polls. (Harry laughs)
Harry Chana:
All right, lots more to come on that one. Thank you, David. So, I wanna shift focus, talk a little bit about tax competitiveness and Jack, I want to maybe direct this question over to you. So, looking at the 2025 federal budget, with the expansion of expensing of certain manufacturing and processing building, buildings, they're build out of clean tech economy credits, does a budget go far enough to do any meaningful improvements on investment climate and business competitiveness? Or are these just incremental steps in the right direction? What are your thoughts, Jack?
Dr. Jack Mintz:
Well, I think we first of all have to remember that Canada actually by 2012 created quite an important tax advantage relative to United States and other countries and made ourselves look a lot more attractive for investment at that point. In fact, United States still had a corporate income tax rate at 39%. We brought ours down to 26% by that time. And same with compared to many other OECD countries, larger ones, smaller ones, whatever. We certainly established good tax competitiveness by that point. However, with the US making a dramatic change in late 2017 with the Tax Cuts and Jobs Act, it had lowered the effective tax rate, the corporate income tax rate, including state level taxes from 39% down to roughly 24-25%. In other words, eliminating our corporate tax rate advantage. Also, US has had what's called bonus depreciation for years, going back to the early part of this century. And in fact, it brought in, it reintroduced, let's say, expensing again for machinery in the United States under that act. And so it's been in place for some time. We, in 2018 in reaction to US tax reform, we brought in accelerated depreciation that has now been reintroduced in this budget. It was actually started to be clawed back this year, but now it'll be in place for at least another seven, eight years under, under the budget. So, in turn, and then we've introduced this productivity super deduction, which is for manufacturing, investments and structures. They were already manufacturing, already got expensing for equipment as well as clean energy. And so that, it's just an additional degree of tax competitiveness that's introduced for manufacturing.
The problem with our corporate tax system though is that we're just copying United States to a large extent. We're not creating an advantage and in fact we're in some ways we're probably doing the worst thing in favoring some industries over others. In fact, the manufacturing effective tax rate virtually drops to zero. It's the favored industry. And yet historically we have had decline in manufacturing for decades. Its share of employment has been dropping in Canada over the years. We've also had its share of value added has been dropping in Canada as well. It's happened in many other countries too. So there's been this other effects that are going on where manufacturing has changed to a large extent. And now we're getting countries including United States that are using tariffs to build up their manufacturing industry. And so maybe our, you know, this budget is focusing on manufacturing, but in the meantime there's a lot of growth opportunities in other sectors of the economy, whether it's communications, transportation, whatever, and yet they face relatively high effective tax rates on their investment. So, I don't look at it as a very strong step towards tax competitiveness that this budget is undertaking. And in fact, accelerated depreciation has not been a boom to investment in Canada. We've had it in since 2018, but our investment has been still pretty, pretty weak.
And so, I think if we're going to really achieve something on the tax competitiveness side, I think we need a much more fundamental corporate tax reform than what we're seeing right now.
Harry Chana:
Thank you. Thank you, Jack, for that. Appreciate your insights on that. I wanna just switch gears a little bit here and talk about the capital budget, just the new framework that that's been introduced here. So, from a communication standpoint, and David, I'm gonna get your thoughts on this first. Will Canadians understand the difference between the operating budget versus a capital budget or is a deficit still a deficit?
David Akin:
So, there's a couple of different ways to answer that. We've had this discussion as journalists who've been, this is my 20th budget that I've reported on. And this is not just Global, but this is all the journalists in the lockup is when we report to Canadians about the activities of their federal government, we ought to do so in a consistent way that allows Canadians to compare how the government was doing last year, was doing during the Mulroney years, and the Chrétien years. And that means a deficit is a deficit. There's just no getting around that.
Now and that said, it's great that we have this extra lens into how the government thinks it wants to judge itself. And again, we heard Bob Kavcic talk about the idea that one of the new fiscal anchors is going to be a balanced operating budget. Okay, we'll see about that. I can tell you, Jack, you may have looked at this, I'm sure you have, and other experts have, and there's already arguments about what is exactly an operating budget item and what is a capital budget item. And so that is going to muddy some waters. And then will future governments also come to the same agreements? When this was first announced, we sat in a technical briefing with finance officials and one of the things I asked them was saying, will you present some historical information about capital and operating? One of the common, one of the most valuable tools that any reporter on a budget has, anybody who's working on budgets are what are called the fiscal reference table. So, we can look over time, what percentage of spending went to defense, percent of GDP on deficits, et cetera. And there are no, as far as I can see yet, no historical reference for us to say, well what was the capital budget, say, during the 08/09 fiscal crisis versus the operating budget. And until we have some of that kinda information, I think we're more into political marketing than we are to a really useful tool. That's it again. I think there's a lot of people who say in principle, great idea, let's break it out. Always great to sort of break down and get some different lenses on how government is spending its money.
But right now, absolutely this is a lot of political marketing and when we're reporting on this, we are certainly want to be clear with our audience, and I think this is the case for my friends of the Globe and Mail or the National Post is deficits or deficits. And sure, happy to put footnotes in about capital and operating, but it's a $78 billion deficit. And that is not an austerity budget. It was Carney who first used that phrase austerity. In fact, I was the one who asked him a question at a cabinet retreat. It might come back to bite him because the NDP are not voting for an austerity budget, but I think you could say, if you look at it, it's a big budget, $78 billion biggest ever outside the pandemic and two and a half percent of GDP.
Harry Chana:
Yeah. No, thank you for your comments on that David. I wanted to just pick up on something there and Jack maybe just picking up on what David had said about this whole idea of capital versus operating budgets, sort of what have you seen in terms of making sure that, there there's no scope creep really in the definition of what's operating versus what's capital and how one doesn't bleed into the other and what have you seen other countries that have implemented similar budgeting frameworks do that have worked in practice?
Dr. Jack Mintz:
Okay, well first of all, I read the budget yesterday and spent a lot of time trying to understand the new approach to estimating capital expenditures. And I'll say a few things about that in a moment. It's extremely confusing even for an expert.
First of all, we have to remember that the federal government has been doing capital budgeting already, but it's only with respect to the structures that they buy, in other words, federal buildings and et cetera. So, they aren't expensed as part of the calculating the deficit. But there is amortization, which is deducted as an operating expense when determining the overall surplus or deficit of the government, which is also followed by the provinces and municipalities. What this capital budgeting does is actually broaden it beyond what normally has been done for public accounts purposes. And there are some examples in the world, for example, the United Kingdom that tries to follow some of this approach. And I think there is some value to understand that all government spending isn't just on consumption, it's also on creating on investment.
But I think that it is very confusing really about the way that it's currently presented. We're actually not, at least from what I could tell unless I miss it, I did not see anything measuring what I would call the stock of capital investment. And that would be an important measure because anytime the government spends on capital, it would add to the total stock of capital, it would depreciate over time and that would be a charge that would be laid against the operating budget. As the discussion in the budget makes clear, there is no stock, at least from what I could tell. And also, some of the capital spending that the government is doing in terms of grants that are giving to provinces, municipalities and private corporations and as well as tax relief, which I'll get into a moment. All that is going to be, that's all treated as a flow of capital expenditure, but it's not being amortized.
So, it's a very strange sort of treatment of capital. It's not really a capital budget at all, but it's sort of a statement about saying, well look, some of our spending is creating growth for the future and is an investment. And some of it is actual spending on what you might call operating expenditures. So, you know, that I think is a little bit valuable, but I think it really makes the whole budget very unclear. I had a lot of difficulty when they were referring to assets, what they meant by assets. They didn't... It was just a very difficult thing. And in the end, I looked at annex one to get a sense of how much government spending went up. So this coming year, government spending's going program spending's going up 7%, that's actually quite a big jump when you start thinking of it. So this is not an austerity budget at all. And in fact, spending is being projected to go up over the next five years, a total of 16%. And of course who knows what spending is gonna do after next year. You know, as we know these budgets are terrible at their various forecasting. And so we don't really get a lot of understanding with this capital budgeting outside of saying, well some of our money is going into various things.
The weirdest one, which no country does in the world, is to include tax incentives for investment, whether it's tax credits or accelerated depreciation or the big super productivity super deduction that was introduced in the budget because as governments, as studies have done, economic studies have shown over and over again. Some of these incentives don't work very well. You don't necessarily create the new capital expenditure with them. I think it's really a joke to kind of include them as part of the capital expenditure of a government. And in fact I think it just creates more smoke and mirrors about what the true meaning of capital is. And so, I do think that there's a lot of flaws in what's being achieved and it does make it very, very problematical in terms of trying to understand it.
So, in my view, I just go back to the current budgeting practice that we've had before now to really understand how big government is getting, how big the deficit is going to be, how much more debt is going to be required rather than trying to go through this minefield of what's being discussed as capital when some of the capital expenditures that are being listed aren't really expenditures at all.
Harry Chana:
Perfect! No, I appreciate that, Jack. David, you have the floor for 30 seconds. Any last parting comments just in terms of the budget?
David Akin:
Well just, I just want to come back to political marketing and build on what Jack said. If any of you have the actual budget book in front of you, on page 64, there is a chart at the top of the page and what it shows is just breaking down how are capital expenses going up over the forecast period of the budget five years. Oh, they're really going up, but direct program spending is down, direct program spending bad. Transfers to persons, we have to do that, OAS and CPP transfers to government going up about the same rate as the economy will grow. That's pure political marketing. We have no idea, as Jack said, exactly why a, when the government writes a check to the province of Ontario, they can call that a capital expenditure. We don't know what asset is behind that to back that up. Even political reporters can figure out that's a bit weird. It's a lot of political marketing so tread with caution. But if you have the finance minister coming to a chamber of commerce near you and he's in Montreal right now speaking to one there, he's gonna talk a lot about this capital and operating budget so be wary. (chuckles)
Harry Chana:
All right, thank you. Thank you both David and Jack for your insightful comments. Thank you once again. We're gonna shift gears here now and focus on the tax measures in the budget. So, I'm fortunate to have my esteemed colleague, Greg London with me here to walk us through some of the big ticket items and what they mean for our viewers. Greg, over to you.
Greg London:
Thanks Harry, appreciate that and great insights, that amazing to listen to David and Jack. So, my name is Greg London. I'm the Domestic Tax Consulting Leader here at BDO Canada. And yesterday I actually had the opportunity to be in Ottawa as part of the federal budget lockup with a couple of colleagues, Peter Routly and Jennifer Horner. They're on the webinar today to answer any of your questions.
This year's budget was titled, Canada Strong. It's one of contrasts I find. On the business side, it introduces some of the most significant investment incentives we've seen in about a decade. Measures that aim squarely at productivity, innovation, and competitiveness. On the personal side though, much quieter, restrain, perhaps even minimalist, reflecting stability rather than reform. My comments today are gonna focus first on a few of the business measures in the budget, particularly three areas that I think will be of interest to our clients. The new productivity super deduction changes to the scientific research and experimental development program, the SR&ED program, and a modernization of Canada's transfer pricing rules. I'll turn briefly to the personal tax side, highlighting what we didn't see in the budget and a couple of measures that were. So, let's start. On the business measures, one of the headliners for budget 2025 is what the government is calling the productivity super deduction. It's a set of accelerated tax incentives designed to encourage Canadian businesses to invest. In practical terms, the measures allow for immediate expensing, a hundred percent first year write off for a broad range of capital investments. It includes manufacturing and machinery, pardon me, and equipment using manufacturing and processing, clean energy and conservation equipment, data and digital infrastructure and expenditures on SR&ED. New and particularly impactful this year is that the immediate expensing now extends to buildings used in manufacturing and processing. Eligible buildings acquired on or after budget day and can be put into use before 2030, can now be fully written off in the first year they're used. The measures phase out gradually between 2030 and 2033. Historically, those buildings were subject to a modest capital cost allowance, so roughly about 10% per year. But now the ability to induct the entire cost upfront can change the economics of a large-scale manufacturing investment that takes place in Canada. If you combine this with the existing accelerating write-offs for clean tech, zero emission equipment, the super deduction effect to leave will give Canada one of the most competitive investment tax environments in the G7 in those spaces. The Department of Finance's own calculations show that it reduces Canada's marginal effective tax rate on new investment by more than two percentage points, which will push it below every other G7 country, including the US. Seems to be a clear signal that the government wants to attract capital, rebuild industrial capacity, and drive productivity growth through private investment.
So, I'm gonna shift gears now to SR&ED. So, the second major business measure is the enhancement of the SR&ED program. Building on proposals first introduced in the 2024 fall economic statement, budget 2025 makes the following key changes. The qualified expenditure limit for the enhanced 35% refundable investment tax credit rises from $3 million to $6 million so doubling. The phase out thresholds for taxable capital, which used to be at 50 million, are now at set at $75 million. And for the first time, Canadian public companies, not just private ones will be able to access the enhanced credit. The changes applied to taxation years that began on or after December 16th, 2024. The SR&ED program has long been the backbone of Canada's innovation ecosystem. These adjustments substantially increase the reach and relevance, particularly for scaling companies that are crossing the threshold from private to public ownership. For many businesses, this represents a timely opportunity to review how they structure their activities and how they capture eligible costs, both to maximize credit potential and to ensure compliance as the program evolves. I also saw in the budget that it indicated that a conjunction with increased dollars, the government wants to make it easier to file SR&ED claims citing a pre-claim review process in overall streamlining claims filing. We have the best SR&ED team in the country, so I would encourage you to reach out to them if you have any questions.
So, third of the business measures that I wanna talk about is a change that might not make the evening news, but it is a significant update in the budget. It's the modernization of Canada's transfer pricing framework. The 2025 federal budget delivers one of the most significant updates to transfer pricing in decades. After years of consultation, the government is modernizing section 247 of the Income Tax Act, fully aligning it with the OECD transfer pricing guidelines and the arm’s length principle that underpins international tax fairness. For companies either currently doing business across borders or planning to, here is what matters most. The transfer pricing penalty threshold doubles. It is now the lesser of $10 million or 10% of gross revenues up from the previous 5 million and 5%. It seems to signal the CRA's expectation of precision and robust documentation. Documentation rules are being redefined. While they are simplified for certain low risk cases, the standards are overall tighter and taxpayers now have just 30 days, not 90 to respond to a CRA audit request. And finally, substance now outweighs form. The rules require analysis not only of contracts, but of economically relevant characteristics, functions, assets, risks, conduct, and market contents all to be taken into consideration. In practical terms, transfer pricing audits will look beyond paper arrangements to the actual commercial behavior of the parties. The CRA will focus on whether intercompany pricing truly reflects what independent entities would've done in comparable circumstances. At BDO, we see this not simply as a compliance challenge, but as an opportunity. We are helping clients stress test current pricing policies, strengthen governance and document the economic rationale before the new framework takes effect for taxation years beginning after November 5th, 2025. Ultimately, this reform is about more than avoiding penalties, it's about building defensible value driven pricing strategies that align with global best practices and withstand CRA's scrutiny.
So, I'm gonna switch gears and move to the personal measures and again, a bit odd, but I'm gonna talk about what wasn't in the budget because I think it's noteworthy. A lot of rumors on what we would potentially see, but there was no wealth tax, no estate tax, no inheritance tax, and no increases to the top personal income tax rates. There was also no changes to the alternative minimum tax rules as some suspected. There was a rumor, for example, just before the budget, that we could see alternative minimum tax added to capital dividends, but it did not materialize. Given the government spending priorities in the fiscal environment, this restraint feels deliberate. It reflects an intent to provide stability for households and avoid additional pressures on high income earners or investors at a time, economic uncertainty remains elevated.
So, a couple things that were in the budget that were repeals the Trudeau of some, the Trudeau legislation era. Budget 2025 repealed the underused housing tax, the UHT. It was a 1% annual tax introduced in 2022 on vacant or underused residential properties owned by non-residents. As of the 2025 calendar year, no UHT will be payable and no returns will be required. Compliance obligations and penalties do remain in place for 2022 through 2024. But this marks a clear end of the regime going forward. The repeal seems to acknowledge what many in the industries have said since its inception. The administrative burden of the UHT outweighed the limited impact on housing availability. Pragmatic step towards regulatory simplification.
Another measure, we saw the removal of the luxury tax on aircraft and boats. It's being abolished. So as of budget day, there will be no tax payable on new sales, imports or major improvements to these assets. Vendor registrations remain in place temporarily for rebate purposes but will be automatically canceled by February 1st, 2028. This change is positioned as a competitive measure. One intended to support Canada's aviation and marine industries, particularly those tied to export and tourism, which were disproportionately affected by the previous tax. And finally, registered plans, so RRSPs, RESPs, TFSAs, and similar vehicles. There was a lot of chatter before the budget that we could see some changes to some of these investment vehicles. They largely remained unchanged. There are minor adjustments to update the eligible investment classes to really bring parity across them. But no new account types or contribution limit increases were introduced and no changes to RRIFs which had been rumored. For individuals, I think this means predictability, a steady policy environment for personal savings and retirement planning.
So, I think in closing, Budget 2025 can be viewed as a study in contrast. On the business side, it can be considered growth-oriented, rewarding capital investment, innovation, and international alignment. On the personal side, it feels measured and restrained signaling continuity rather than change. For practitioners and businesses alike, the message is clear. Canada is inviting investment, encouraging innovation, and aligning its tax framework with global standards, all while maintaining stability for individuals. As BDO's Domestic Tax Consulting Leader, my team and I will continue to analyze the fine print as legislation is tabled in the weeks ahead. But for now, these measures mark a decisive step towards strengthening Canada's competitive position in a fast-changing world. I'm gonna pass it back to Harry to close the webinar. Thank you.
Harry Chana:
Thank you very much, Greg, for that summary of the key tax measures. Definitely some immediate actions and some takeaways that, that we need to consider, and our clients need to consider. So, as we wrap up, I wanted to first of all extend my sincere thanks to our guests, Robert, David, and Jack. Thank you for sharing your insights, your commentary, your in-depth analysis of the budget. I know everyone joining us today, business leaders, taxpayers and professionals alike, truly appreciate your expertise and your opinions. So, thank you once again. A recording of this webcast will be sent out in the coming days, so you'll be able to watch it again or share it with your colleagues. Finally, on behalf of the entire BDO Tax Leadership team, our entire tax practice, and all of us here at BDO, thank you for spending your time with us today. Have a great day! I'm Harry Chana, signing off. Thank you.