Alberta's business groups are concerned about the potential tax hike

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Economists expect the federal government to raise taxes to some extent when it releases its federal budget on Tuesday, leaving Calgary's business community likely to be targeted in the process.

As the government embarks on a pre-budget tour in recent weeks with several billion-dollar housing and national defense announcements, suspicions have grown that the Liberals' solution will be new taxes aimed at corporations and the wealthy.

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Federal Finance Minister Chrystia Freeland said at a press conference last week that Canada's deficit will not grow in the upcoming budget, reaffirming her pledge last November to keep the deficit at $40.1 billion.

University of Calgary economist Lindsay Tedds said: “Basic math tells me that revenue has to be raised to cover these two gaps – spending and the fiscal hedge.

The federal government has pulled no punches to outline its strategy ahead of Tuesday's budget, except to confirm there will be no tax increase on the “middle class”. However, Tedds said only a small number of events can raise the necessary funds. What could achieve heavy lifting would be to increase the capital gains inclusion rate, which currently only taxes capital gains at half the marginal tax rate.

Raising it to 75 percent would be “within the economic case” and could bring in $5 billion to $8 billion a year, he said. This rate was reduced from 75 percent to 50 percent in 2000 by the Liberal government of Jean Chrétien.

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Mike Holden, chief economist for the Alberta Business Council, believes it's not a good idea to increase taxes in any form “when the economy is already slowing down.”

“Logic suggests there will be tax increases… I hope they don't, but I'm not optimistic,” he said. The BCA represents 135 Chief Executive Officers in Alberta.

The potential for unexpected income taxes

One of the concerns of the business community is the possibility of unexpected taxes on the oil and gas sector and food chains, which would tax companies that suddenly make above-average profits due to certain economic conditions. Recently, environmental organizations such as the David Suzuki Foundation have supported such a measure.

In 2022, the government imposed a one-time windfall tax of 15 percent on Canadian life insurers and banks' profits above $1 billion.

Deborah Yedlin, president and CEO of the Calgary Chamber of Commerce, said the prospect of such a tax is worrying Calgary's energy-focused business community.

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“That's not the way to unlock innovation and that's not the way to unlock investment,” Yedlin said.

Yedlin said companies in Canada's oil and gas industry have posted record profits over the past few years, which means a sudden tax could affect the sector. Holden said he believed an income tax windfall was unlikely with the BCA.

While the windfall tax poses minimal political risk to the Trudeau government, Tedds of the U of C said such a levy would generate only marginal revenue for the federal government.

“Two ways” to cover public expenses.

However, there is still an option for the federal government to announce a corporate tax increase. The Business Council of Canada has warned that raising corporate tax rates would be bad for business investment at a time when the country is struggling with GDP per hour — commonly known as labor productivity.

Tedds also expressed doubt that Canada will raise the overall corporate tax rate in the coming years due to the possibility that the US will overhaul its corporate tax regime – a decision that could depend on the outcome of the US presidential election in November.

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Meanwhile, Holden and Yedlin praised the Liberal government for its housing efforts announced ahead of the budget and acknowledged that the benefits of those investments will take years. The two business groups are also seeking a final answer on investment tax credits for carbon capture, capture and storage projects, a long-awaited key to de-risking such large projects, they say.

Overall, Tedds said the federal government has several options to cover its costs.

“There are two ways of doing this: you either get a lot of small things or you get two big things – the GST increase and the rate of capital addition – and you've probably filled a big part of the gap.

— With Canadian Press files

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