Inflation remains stubbornly high, holiday season labour shortages are likely to cause havoc for some businesses and the Canadian economy is probably headed into at least a minor recession in early 2023. These headwinds aside, the federal government promised another $22.1 billion in new program spending while pledging greater fiscal responsibility in yesterday’s Fall Economic Statement 2022.
On the deficit front, the eye-watering shortfalls of the pandemic era are seemingly behind us, but Ottawa will still be in the red for the foreseeable future—maybe longer. The Fall Economic Statement projects a deficit of $36.4 billion in 2022-23, far less than the $52.8 billion shortfall projected in Budget 2022. The deficit picture would then improve to a $4.5 billion surplus in 2027-28, fully eliminating the federal deficit and restoring fiscal balance. Unless there’s a recession.
In that case, all bets are off, with the Department of Finance warning in its ‘downside scenario’ that if Canada slips into recession “… the budgetary balance would deteriorate by an average of approximately $16 billion per year and add 3.3 percentage points to the federal debt-to-GDP ratio by 2027-28,” driven by lower revenue and increased program spending if Canadians require support to weather a downturn ahead. To be sure, the sunnier government deficit projections should be viewed with a degree of skepticism given the likelihood of an economic slowdown. If supply chain challenges from lingering pandemic-related manufacturing bottlenecks or geopolitical challenges stemming from the war in Ukraine further stymy growth, then these forecasts may prove even less reliable.
Finance Minister Chrystia Freeland underscored the extent of the economic uncertainty in her speech delivering the Fall Economic Statement: “It’s important … that I’m honest with Canadians about the challenges that lie ahead,” she told the House of Commons. “Interest rates are rising as the central bank steps in to tackle inflation. And that means our economy is slowing down.”
Spending is, too, but not as much as some economists might like. The Fall Economic Statement made several new spending commitments totalling approximately $22.1 billion over six years. There was little news in the way of new tax measures. However, Finance did announce that the application of the proposed interest and financing expenses limitation (EIFEL) rules will be deferred to taxation years beginning on or after October 1, 2023, as opposed to taxation years beginning in 2023. Finance also released further revisions to the draft legislation relating to the EIFEL rules that are meant to address certain issues identified in the last public consultation. The revised draft legislation is open for consultation until January 6, 2023.
In addition, Finance also deferred the requirement to report certain reportable and notifiable transactions under the proposed mandatory reporting rules until such time that these rules receive Royal Assent as Finance is still considering feedback it received during the last consultation period. Previously, Finance had noted that the mandatory reporting rules would apply to transactions occurring after 2022.The mandatory reporting rules that require disclosure of uncertain tax treatments will still apply for taxation years beginning after 2022, but penalties will not apply until after the rules receive Royal Assent.
In terms of personal tax changes, Finance reaffirmed its commitment to examining a new minimum tax regime for wealthy taxpayers and will release a detailed proposal and path for implementation in the 2023 Budget. It also extended the new Residential Property Flipping rules to apply to profits on assignment sales realized on or after January 1, 2023, subject to the same exemptions that apply to the flip of a residential property.
Aside from these announcements, there are several new programs on the docket ranging from initiatives to promote sustainable technology innovation to youth job training.
The most significant new proposals include:
- Providing an advance on the Canada Workers Benefit—a refundable tax credit—that would automatically issue payments to people that qualified for the benefit the previous year, at a cost of $4 billion over six years
- A new 2 per cent tax on corporate share buybacks by public corporations in Canada. Full details are to be announced in Budget 2023, with plans for the tax to come into effect on January 1, 2024
- Making all Canada Student Loans and Canada Apprentice Loans permanently interest-free—including those currently being repaid—beginning April 1, 2023. The measure would cost $2.7 billion over five years
- Negotiating with payment card networks and financial institutions to lower credit card transaction fees for small businesses
- Providing $250 million over five years beginning in 2023-24 to Employment and Social Development Canada to fund a new Sustainable Jobs Training Centre, along with new sustainable job training programs
- A refundable tax credit equal to 30 per cent of the capital cost of investments in areas such as clean hydrogen and clean technologies, namely electricity generation and storage systems, low-carbon heat equipment and industrial zero-emission vehicles. The investment tax credit is projected to cost $6.7 billion over five years
- Funding to modernize the National Research Council’s scientific infrastructure, at a cost of $962.2 million over eight years
- Funding for federal departments such as the Canadian Nuclear Safety Commission, the Impact Assessment Agency of Canada and the Canada Energy Regulator. The proposal is estimated to cost as much as $1.28 billion over six years
- $802.1 million over three years starting in 2022-23 for youth employment and skills training
- A commitment to move forward with the new Canada Growth Fund to attract investment across the economy
As many Canadians struggle with affordability issues and a substantial number of small to medium-sized businesses continue treading water in the wake of the coronavirus pandemic, the government is walking a fine line—communicating to markets that it’s serious about fiscal prudence, while stressing to taxpayers that Ottawa has the necessary fiscal firepower to help them if the economy sputters early next year.
The challenge is that massive debts incurred while COVID-19 relief floodgates were opened, coupled with fast-rising borrowing costs, will limit the government’s flexibility in the months ahead. Time—and economic developments—will tell if they can manage this tricky policy balancing act.
Armando Iannuzzi, Co-Managing Partner
For more information on Fall Economic Statement 2022, contact a member of our team.