Highlights of the 2024 Federal Budget

On April 16, Deputy Prime Minister and Minister of Finance Chrystia Freeland delivered the 2024 Federal Budget titled "Fairness for Every Generation." This budget includes proposals to address the availability and affordability of homes, as well as cost of living and tax fairness.

The items in this budget do not take effect until they receive parliamentary approval. However, we anticipate that some of these proposals could directly impact individuals and businesses if approved. Below are the highlights of those items.

1. Tax fairness for every generation

Capital gains inclusion rate

The government is proposing changes to the taxation of capital gains. Currently, one-half of capital gains are included in taxable income (known as the "inclusion rate"). The proposed changes increase the inclusion rate on capital gains realized by corporations and trusts from one-half to two-thirds.

For individuals:

• The capital gains inclusion rate will remain at one-half for capital gains realized annually up to $250,000, and increase to two-thirds on capital gains realized annually above $250,000. Capital gains resulting from the sale of a principal residence will remain exempt from taxation.

For employees with Employee Stock Options:

• Those claiming the employee stock option deduction will be provided a one-third deduction of the taxable benefit to reflect the new capital gains inclusion rate, but will be entitled to a deduction of one-half the taxable benefit up to a combined limit of $250,000 for both employee stock options and capital gains.

Lifetime capital gains exemption

The lifetime capital gains exemption currently allows Canadians to exempt up to $1,016,836 in capital gains tax-free on the sale of small business shares and farming and fishing property. This tax-free limit will be increased to $1.25 million, effective June 25, 2024, and will continue to be indexed to inflation thereafter.

Canadian Entrepreneurs’ Incentive

To encourage entrepreneurship, the government is proposing the Canadian Entrepreneurs’ Incentive which will reduce the inclusion rate to 33.3% on a lifetime maximum of $2 million in eligible capital gains once fully implemented. The incentive will be available to founding investors in certain sectors who own at least 10% of shares in their business, and where the company has been their principal place of employment for at least five years. It will result in a one-third inclusion rate, and the limit will increase by $200,000 each year, starting in 2025, until it reaches $2 million in 2034.

Tax treatment of charitable donations for Alternative Minimum Tax

The Alternative Minimum Tax (AMT) is a parallel tax calculation that allows fewer tax credits, deductions, and exemptions than under the ordinary personal income tax rules. Taxpayers pay either regular tax or AMT, whichever is highest.

Budget 2024 proposes that the tax treatment of charitable donations be revised to allow individuals to claim 80% (instead of the previously proposed 50%) of the Charitable Donation Tax Credit when calculating AMT.

2. Housing affordability

In an effort to increase the number of affordable homes for Canadians, the federal budget proposes various new measures across several key categories.

Building more homes

• Public lands, Canada Post properties, National Defence lands, and unused federal office buildings will be made available for housing units.
• $15 billion in additional funding for the Apartment Construction Loan Program is expected to result in 30,000 new homes.
• $6 billion over 10 years on a new Canada Housing Infrastructure Fund for infrastructure improvements to increase housing density.
• $409 million for the Canada Mortgage and Housing Corporation (CMHC) to launch the new Canada Secondary Suite Loan Program, allowing homeowners to access up to $40,000 in low interest rate loans to add a secondary suite to their homes.

Making it easier to own or rent a home

• First-time homebuyers who purchase a newly constructed home will be able to amortize their mortgage over 30 years, which can help to reduce mortgage payments.
• The Registered Retirement Savings Plan (RRSP) Home Buyers' Plan (HBP) withdrawal limit will increase from $35,000 to $60,000, increasing the amount a first-time home buyer can borrow from their RRSP. The repayment grace period is also being temporarily extended from 2 years to 5 years for buyers taking out a loan until 2025.

Helping those who can't afford a home

• $976 million over 5 years to the Canada Mortgage and Housing Corporation (CMHC) to launch a "Rapid Housing" stream that will supply affordable housing and additional shelters.
• $800 million over 6 years to Natural Resources Canada to launch a Greener Homes Affordability Program designed to support energy-efficient upgrades to low-income households to help lower energy bills.
• $1.3 billion over 4 years to address homelessness through the Infrastructure Canada for Reaching Home: Canada's Homelessness Strategy.
• $918 million over 5 years to narrow housing and infrastructure gaps for First Nations, Inuit and Métis.

3. Health and education

Launching the Canada Disability Benefit

Proposed to take effect in June 2024, with payments to eligible recipients beginning in July 2025, the new Canada Disability Benefit will provide a maximum benefit of $2,400 per year ($200 per month) to low-income persons with disabilities between the ages of 18 and 64. Eligibility will be limited to those who satisfy defined low-income thresholds and have a valid Disability Tax Credit (DTC) certificate.

Disability Supports Deduction

The Disability Supports Deduction allows individuals who have an impairment in physical or mental functions to deduct certain expenses that enable them to earn business or employment income or to attend school. Budget 2024 proposes to expand the list of expenses recognized under the Disability Supports Deduction.

Improving mental health services

To increase the quality and availability of mental health services available to Canadians, the federal budget proposes various new measures and programs:

• Launch of a new Youth Mental Health Fund – $500 million over five years for the creation of a new Youth Mental Health Fund which aims to help younger Canadians access mental health resources.
• Supporting the Mental Health of black Canadians – $4 million over two years for the Public Health Agency of Canada in support of initiatives aimed to increase mental health assistance and outcomes for Black Canadians.
• Supporting Indigenous Mental Health – $630.2 million over two years to support access to mental health services for Indigenous people.
• Kids Help Phone – $7.5 million over 3 years to the Public Health Agency of Canada to support Kids Help Phone in their work providing mental health, counselling, and crisis support to young Canadians.
• First Nations and Inuit Health – $562.5 million in 2024-2025 to support medically necessary services through the Non-Insured Health Benefits Program, including support for mental health services, medical travel, and medications.

Supporting health care in rural and remote areas

The reach of the Canada Student Loan Forgiveness Program will be expanded for health care and social services professionals working in rural and remote communities. Professions included are dentists, dental hygienists, pharmacists, midwives, teachers, social workers, personal support workers, physiotherapists, and psychologists.

Making it easier to save for your child's education

The Canada Learning Bond (CLB) provides up to $2,000 to low-income families to help them start saving early for their child's post-secondary education. An amendment to the Canadian Education Savings Act will introduce automatic enrollment into the CLB for eligible children who do not have a Registered Education Savings Plan (RESP) opened for them by the age of four.

Increasing student grants and loans

In last year's budget, the Canada Student Grant for Full-Time Students was increased from a maximum of $3,000 to $4,200 per year until the end of the 2023-2024 school year. Similarly, interest-free Canada Student Loans were increased from $210 to $300 per week until the end of the 2023-2024 school year. The budget extends both increases for an additional year, with student grants and loans available for the 2024-2025 school year.

4. Research, innovation and productivity

Investing in artificial intelligence (AI)

To strengthen Canada's artificial intelligence competitiveness, the budget proposes an increase of $2.4 billion in targeted AI support and $50 million over five years for AI safety.

The New Canada Carbon Rebate for Small Businesses

For businesses with 499 or fewer employees, the budget proposes to return fuel charge proceeds previously collected through a new refundable tax credit. This measure is estimated to deliver $2.5 billion to over 600,000 Canadian small- and medium-sized businesses.

Extending temporary support for seasonal workers

To address gaps in Employment Insurance support between seasons, the government introduced temporary rules in 2018 to provide up to five additional weeks—for a maximum of 45 weeks—to eligible seasonal workers in 13 economic regions. The budget proposes to extend this support from October 2024 until October 2026.

Enhancing research and development

To promote research and development initiatives, the budget proposes to:

• Allow businesses to write-off the full costs of assets that enable innovation and productivity (such as patents, data network infrastructure equipment, computers, and other data processing equipment).
• Boost research grant funding and support for Canadian researchers by $1.8 billion over five years.
• Provide $825 million over five years to increase the annual value of master’s and doctoral student scholarships to $27,000 and $40,000, respectively, and post-doctoral fellowships to $70,000.

5. Our perspective: The economy, the Bank of Canada and the financial markets

The release of the Federal budget shows that for the new budget year, the government expects the deficit will be $39.8 billion, or 1.3% of GDP, with net new spending in 2024 of $5.3 billion, or 0.2% of GDP. Looking ahead the budget deficit is expected to decline to $20 billion in 2029, signaling a commitment to fiscal discipline. A large focus on the budget centered on targeted investment in housing and improving the affordability of housing for Canadians. A portion of the new spending initiatives are planned to be financed through increases to capital gains taxes for firms and trusts, and for individuals with capital gains in excess of $250,000. Overall, nothing from Budget 2024 materially alters our outlook for the economy, monetary policy or financial markets.

Here are our key takeaways from 2024's budget:

• Economy: A key element of Budget 2024 addressed Canadian housing affordability both by addressing supply shortages of houses and apartments and enacting measures to make homes more affordable for buyers. Housing has been a detractor to Canadian economic growth for much of the past two years, with investment in residential structures contracting in six of the last seven quarters. New spending on housing in Budget 2024 however, is projected to be only $1 billion which we don't believe will materially impact GDP growth this year. While we don't expect the budget will materially impact near-term economic growth, federal debt levels continue to rise, and over time, government spending on interest payments can crowd-out productive investments. However, in our view Canada's debt-to-GDP ratio, which is about 42% this year, will likely continue to moderate in the years ahead, underscoring some fiscal discipline and better budget balance going forward.
   
• Monetary policy: Ultimately, we don't believe the proposed budget will significantly impact any future inflation readings or upcoming Bank of Canada (BoC) interest-rate decisions. The targeted investment in housing to increase supply and improve affordability seeks to ease price pressures in the cost of shelter. However, this will likely take time to play out and will have minimal impact on near-term inflation readings. Additionally, Canadian inflation has surprised to the downside in the first three months of 2024 and is approaching the BoC's target. Given, the progress made on inflation along with sluggish growth in the domestic economy, we expect the BoC could have a credible case to cut rates later this year.
   
• Markets: Over the long-term, we believe fundamental factors such as interest rates and corporate earnings growth are more powerful drivers of market returns than fiscal policy. In our view, the proposed budget does not materially change our economic and market outlook. We believe that the potential for lower inflation, central bank interest rate cuts, and healthy corporate profit growth creates an attractive backdrop for equity markets in the year ahead, particularly in the U.S., which is also more levered to growth and technology sectors.

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This budget is in draft form and subject to parliamentary approval. If you have questions regarding how any aspects of it may impact your financial strategy, please contact your Edward Jones financial advisor.