Tax Alert - Federal Government fiscal update as of July 8, 2020

July 7, 2020

Finance Minister Bill Morneau provided an economic and fiscal snapshot on July 8th to Parliament. This snapshot is the first official economic update provided by the federal government since December 16, 2019. The 2020 Federal Budget was scheduled to be tabled on March 30, 2020, however it was postponed indefinitely due to COVID-19. This snapshot forecasts a deficit for the 2020-21 fiscal year of $343 billion, an unprecedented increase in the federal deficit.  To put that in historical perspectives, the previous largest deficit in Canadian history was $55B in 2009 in response to the financial crisis.

When examining the deficit as relative to the size of the economy, it will represent approximately 15% of the current year GDP, the largest in Canadian history.

The $343 billion deficit is the result of the massive fiscal stimulus introduced by the Federal Government to support both Canadian individuals and businesses during the COVID-19 crisis, and the expected decline in tax revenues due to the current shut-down of large segments of the Canadian economy and the resulting economic recession. Personal tax revenues are expected to decline by approximately $31 billion and corporate tax revenues are expected to decline by approximately $11 billion.

Estimated costs of COVID-19 measures that are contributing to the federal deficit were projected as follows:

  • Canadian Emergency Response Benefit (CERB) – $73.1 billion
  • Canadian Emergency Wage Subsidy (CEWS) – $82.3 billion

The snapshot estimates total federal government debt to reach $1.06 Trillion by the end of March 2021.

Canada had a debt-to-GDP ratio of approximately 30% prior to the pandemic which was the lowest of the G-7 countries.  The COVID-19 economic and health crisis will put incredible pressure on the nation’s finances for years to come, with the debt to GDP ratio now estimated to be 49.1% by the end of March 2021. The highest the debt-to-GDP ratio has ever been post-WWII is 66.6% in the 1995-96 fiscal year.

The finances of provincial and municipal governments will also be significantly challenged. It is critical that the government put a fiscal plan in place for the upcoming years to reign in government spending and provide the right environment for the economy to recover. This will be a huge challenge for the government as they plan for a full federal budget this fall.

It is also expected that the government may have to increase tax rates or broaden the base of taxation in order to help reduce the federal deficit. It is critical that the government consult with the business community to ensure that any required tax increases do not impede the economic recovery, which is key to all Canadians’ future.  The economic snapshot provided today did not contain any tax changes.

BDO can help

These are uncertain times. Our BDO Canada Tax professionals are here to help your business respond to COVID-19 and manage through these unprecedented times. For more information about government programs introduced during the COVID-19 crisis, such as the Canada Emergency Response Benefit (CERB) or Canada Emergency Wage Subsidy (CEWS), please visit our website. Reach out if you have any questions.

Dave Walsh, Partner National Tax Service Line Leader

Craig Mulcahy, Partner, SR&ED and Government Incentives Leader

Bruce Sprague, Partner, Western Canada Tax Leader

Greg London, Partner, Eastern Canada Tax Leader

Peter Routly, Partner, Southern Ontario Tax Leader

Rachel Gervais, Partner, GTA Tax Service Leader

The information in this publication is current as of July 8, 2020.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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