The 2024 Federal Budget Breakdown

It’s everyone’s favorite time of year, we have a new federal budget!

Ok, I’m kidding, its easy to conclude that the budget is duller than reading a snail’s travel blog. However, it’s extremely important, so I’ve taken some time to watch paint dry… I mean read the budget to help point out what may directly impact your lives.

Let’s start by listing the major points and changes before analyzing the impact and unpacking what experts are saying.[1]

Inflation fell from a peak of 8.1% in June of 2022 to 2.8% in February of this year.
Canada’s GDP has increased by 1.1% in 2023.
Income tax brackets have changed slightly to reflect our current inflationary environment.
The capital gains inclusion rate has increased. Currently, 1/2 of capital gains are taxed at your highest marginal tax bracket. This number will increase to 2/3 for corporations and trusts. For individuals, any capital gains realized over $250k in a calendar year will also be subject to the 2/3 inclusion rate.
The lifetime capital gains exemption from the disposition of shares of a qualified small business corporation has increased from $1.02M to $1.25M.
The Homebuyer’s plan will increase how much you can withdraw from your RRSP for a downpayment for your first home from $35k to $60k. The first repayment can also be delayed to 5 years after your withdrawal. It still needs to be paid back 15 years after the first repayment.
There will be automatic enrollment in the Canada Learning Bond for children who do not have an RESP opened for them by the time they turn 4 years old. Starting in 2028, all children who were born in 2024 or later will have an RESP automatically opened for them if they do not have one already.
The alternative minimum tax (AMT) rate will increase from 15% to 20.5%.

Let’s dig a little deeper into these changes:

First, the good news: Canadian inflation is falling and this figure is trending in the right direction. Although we are getting closer to our central bank’s target rate of 2%, just like a marathon, the last bit is the hardest, which is perhaps why interest rates remain unchanged.[2]

Now that we are done with the good news, let’s examine the rest.

For those of you who have read my past commentaries, you will know that GDP (gross domestic product) is a measure of economic activity. Put simply, it is the sum of everyone’s income within Canada and a recession is defined as two consecutive quarters of GDP shrinkage.[3] Though we have technically avoided a recession, numbers without context are useless. GDP per capita (per person) gives us a more accurate reading of productivity. In 2022, our GDP per capita was $55,306 (USD). In 2023 that number dropped to $53,247.[4] Our standard of living dropped, yet the overall output of Canada increased, due to an increase in immigration. Among the G7 countries, we are second last in terms of productivity.[5]

“The value produced per hour worked in Canada is 17 percent lower than the G7 average” – MEI, a think tank based in Montreal.

Regarding the proposed changes to the capital gains inclusion rate, despite being framed as impacting only the extremely wealthy, many experts hold a different perspective. The rationale behind taxing capital gains differently from regular income lies in incentivizing investors to undertake risks. Policymakers must also remain cognizant of the global competition for investment and must therefore strike a delicate balance in the taxation of capital gains, ensuring it does not deter capital from flowing elsewhere.

“The Canadian economy needs savings and it’s the relatively wealthy that now have less incentive to save — or more incentive to move those savings out of the country,” Derek Holt, head of capital markets economics at Scotiabank. “Less reward after tax is likely to discourage risk-taking. Discourage investment. Discourage anything that might address Canada’s productivity problems.”[6]

“Increasing the cost of capital might appear to be good politics to some, but it is bad economic policy for all,” Goldy Hyder, Business Council of Canada president and CEO.⁶

The proposed increase in the capital gains exclusion rate is poised to introduce additional taxation for professionals, including physicians, lawyers, realtors, etc. who often manage their retirement savings within a corporation.[7] Moreover, it will impact individuals planning to pass their estates to their children, including those of you who own a secondary property such as a cottage.[8]

Finally, the increase in the home buyer’s plan may appear favorable at first glance however, it fails to tackle the underlying issue of housing affordability. Utilizing funds earmarked for future retirement to purchase a home does not address the root problem. Moreover, by tapping into these savings, individuals forfeit the potential growth that could have accrued over the years if invested wisely. Around the office, we say “you can’t eat your house.”

Remember that these changes will have to pass in Parliament but such approval is widely expected.

Overall, reactions are mixed to the new federal budget. At TFP, we are working hard to better understand these new rules and factor in the new changes to your financial plan.

Let us know if you have any questions about the new budget.

Have a great weekend,