Trade tensions weigh on the 2026 Federal Budget

• The 2026 Federal Budget may be more progress report than roadmap.
• The already announced Productivity Mega Deduction aims to make Canada one of the most tax-competitive jurisdictions for business investment.
• Trade tensions remain the biggest economic wildcard for Canada, with the global rise in bond yields also posing serious risks.
• Ottawa faces growing calls to make some long-overdue updates to inflation-adjusted thresholds and savings-plan rules.

 

By the time Ottawa tables its 2026 federal budget, much of its economic agenda may already be public. Since September alone, the government has announced the Productivity Mega Deduction, promised faster advance income tax rulings for investments of $1 billion or more and extended the cut to the gas tax.

Instead of saving its biggest moves for one fiscal event, Ottawa has increasingly rolled them out as soon as they’re ready, says Doug Porter, Chief Economist at BMO Financial Group. “This government has not been shy about doing things when they think it needs being done and not waiting for a budget,” he says. “Realistically, it may well be a progress report.”

While fewer splashy surprises could make for a less exciting Budget Day, the budget still matters for investors and business owners. Here are some of the ways Ottawa can build on what’s already in place.

What’s already on the table

When Prime Minister Mark Carney unveiled the Productivity Mega Deduction at September’s Canada Investment Summit, it marked the next step in the government’s push to encourage business investment. According to Dante Rossi, Director of Tax Planning at BMO Private Wealth, the measure builds on last year’s Productivity Super-Deduction by expanding the amount of assets eligible for immediate write-offs to roughly 65% of companies’ capital spending, up from about 15%.

Unlike the super-deduction, which was only announced in last year’s budget, the Productivity Mega Deduction doesn’t have a phase-out period - it’s proposed to be permanent. Although the measure hasn’t passed into law yet, Rossi says the budget may flesh out further details on the proposed legislation.

The deduction is designed to lower the marginal effective tax rate, which measures the overall tax burden on an additional dollar of business investment. The government’s own figures show the proposal would lower the marginal effective tax rate on new business investment to 6.4% from roughly 13%.

The deduction would put Canada at the lowest marginal effective tax rate of any major economy, less than half the 16.9% rate in the U.S. and the average 19% across the Organisation for Economic Co-operation and Development. “That just cuts to the theme of encouraging investment capital into Canada,” says Rossi. “The tax system has been highly focused on competitiveness and attracting capital into Canada, and these proposals aim to do that by allowing businesses to recover investment costs more quickly through faster tax write-offs.”

While it’s too early to measure the impact of the deduction itself, Porter points to broader signs that capital investment has started to improve, with machinery and equipment investment rising for three consecutive quarters after a weak start amid the trade dispute with the U.S.

Outside of measures to spur business investment, Porter said the budget could also spotlight affordability initiatives introduced earlier this year, including GST relief for first-time homebuyers, the Canada Groceries and Essentials Benefit (CGEB), which provides 25% more support than the former GST/HST credit, and the extension of the gas-tax holiday until January, with a gradual phase-in planned thereafter.

The constraints shaping this budget

Trade uncertainty remains the biggest wildcard hanging over the budget, Porter says. Even if the Democrats win control of the House and Senate in the upcoming U.S. midterm elections, he doesn’t expect it to meaningfully alter the tariff dispute between Canada and the U.S. because President Donald Trump has largely pursued his trade agenda through executive action rather than Congress.

Until that’s settled, Canada’s economic outlook stays up in the air. “They’re going to be making this budget in pencil,” he says.

Looking ahead, Porter would like the budget to provide a fuller accounting of defence spending, including what Ottawa has committed to submarines and icebreakers. The deficit is tracking near $65 billion, roughly on target and possibly a little better.

With 10-year Government of Canada bond yields sitting near 4%, about as high as they’ve been in 19 years outside of 2023, Ottawa has little room for error. “The last thing you want to do is be seen as letting the deficit run at a time when the entire world is fixated on fiscal problems,” he says.

On affordability, Porter expects Ottawa to highlight measures it has already introduced, such as the gas tax cut and steps to increase housing supply, rather than announce costly new ones. He sees the budget as more likely to pull together the government’s response on trade, defence and major projects than roll out fresh initiatives.

Long-overdue updates

While both Porter and Rossi believe many of the major policy announcements that typically would have been included in the budget have already been announced, there is still room for a few changes that could meaningfully help Canadians.

One area attracting growing calls for reform is the uneven use of inflation indexing across parts of the tax system. While contribution limits for Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) are adjusted over time, several other thresholds and limits have remained unchanged for years.

Rossi notes that industry groups continue to advocate for changes to Registered Retirement Income Fund (RRIF) rules, which still require withdrawals to begin in the year the recipient turns 72, despite rising life expectancies and the need for retirement savings to sustain a longer retirement.

As an example, he also points to the Registered Disability Savings Plan (RDSP), whose $200,000 lifetime contribution cap hasn’t changed since its introduction in 2008 . “It’s a healthy number, but it’s also a stagnant number,” he says. “It doesn’t recognize the impact of inflation experienced over the decades, which ultimately erodes the real value of tax-based benefits .”

The same concern extends to business owners. Rossi points to the small business deduction, which provides a lower tax rate on the first $500,000 of active business income earned by qualifying private companies. Despite years of inflation and economic growth, the federal threshold hasn’t moved since 2009. The Canadian Federation of Independent Business has called for an increase to $700,000, and some provinces already offer a higher limit.

“There’s some incongruency between federal limits and provincial limits, which just make the tax system even more complicated,” he says.

The small business limit is also affected by a second threshold that has remained frozen since 2018. Once an associated group of companies earns more than $50,000 in passive investment income, its $500,000 business limit begins to shrink. As inflation and higher yields push more businesses past that trigger, the reduction kicks in sooner, reducing the amount of income eligible for the small-business tax rate. Rossi says that updating either threshold would be welcome news for private business owners.

For Rossi, the case for updating individual thresholds points to a broader need to simplify the tax system. “Our system is quite complex and it’s only getting more complex every time they introduce new measures.”

 

 

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