A wish list for Carney’s fall budget – MoneySense

But things changed in the second quarter as the Canadian economy weakened. This has highlighted the weakness of Canadians’ incomes and savings in light of the changes. It also presents an important opportunity for the November 4 federal budget to protect financial well-being in the coming months.

The income gap is reaching a new high

The income gap, the difference in the share of disposable income between households in the top 40% and the bottom 40% of the income distribution, is a commonly used measure that makes the news. This was a record high of 49% in the first quarter, with a slight decline in the second quarter, and has risen every year since the pandemic.

Interest rates have had a lot to do with this. Fortunately, household interest payments fell by almost 5% in the first quarter for the first time since 2022. Disposable income therefore increased for households with debts.

Then US tariffs entered the economic picture. Lower-income households tend to suffer the most during periods of uncertainty, and this holds true now. Statistics Canada reported declining average wages, mainly due to reduced work hours in the first quarter. Those working in mining and manufacturing, and in professional and personal services, were particularly affected.

For households with the lowest incomes, income grew faster than average in the second quarter (+5.6%). But on closer inspection, this was actually due to an increase in government transfers, including employment insurance, social assistance and pension benefits.

Unfortunately, tax collections – the source of these payments in the future – will also decline. The Parliamentary Budget Office expects lower nominal GDP (which measures the size of the tax base), on average $12.9 billion less per year between 2025 and 2029. This is also due to the impact of tariffs.

The government plans to increase taxes for some, as well as fines and resulting interest charges, to boost revenues. However, a more positive, proactive approach is to make building income and wealth easier. That starts with going back to basics.

Diversification of investments is important

Despite a good start in the first quarter of the year (Q1), Canadians’ financial well-being was affected by the impact of the tariffs imposed in the second quarter (Q2). Keep the following investment trends in mind:

Article continues below advertisement

1. Lower-income households typically earn interest income. Net investment income fell the most for low-income households. The decline in investment income (-35.3%) more than offset the decline in interest payments (-7.1%). Second quarter results were similar.
2. Households with higher incomes have a more diversified portfolio and hold more shares. These produce more tax-efficient capital gains and dividend income. The net wealth of these households grew as the value of their financial assets rose by 7.1% in the first quarter (nearly three times inflation) and by 9.6% in the second quarter. These families also experienced limited growth in mortgage debt (+1.9%).
3. As a result, by the end of the second quarter, the richest 20% of households had accumulated almost two-thirds (64.8%) of Canada’s total wealth, on average $3.4 million per household. The bottom 40% of households accounted for 3.3% of total wealth, with an average of $86,900.
4. As a special category of wealth builders, homeowners experienced lower financing costs and lower inflation. This resulted in more savings such as debt reduction in the first quarter. Still, personal wealth fell among younger Canadians and those without investment portfolios as real estate values ​​also fell.

The rich will be fine, others need help

What can we learn from this? The wealthiest households can continue to grow their wealth even as incomes are interrupted or fail to keep pace with inflation and debt service costs are threatened by unemployment, disability or retirement. That’s because their investment returns and capital growth offset the income gap.

Where are the opportunities for lower-income households? There are two. In light of the same problems, being able to save consistently is crucial. Secondly, it is important to generate more tax-efficient investment income.

This is where government policy comes into play. It seems easy for some to pay more taxes, but that can result in brain drain, less incentive to work or innovate, and capital flight. The real opportunity in the next federal budget is to help all Canadians build both income and wealth in the face of economic uncertainty, and to do so with the help of expert professionals.

Build income and capital: a six-part plan

Tax and financial literacy is elusive, but critical to Canadians’ prosperity. Having the knowledge, skills and confidence to make responsible financial decisions enables people to plan ahead and deal with increasingly complex systems that hinder access to income supplements through tax refunds, credits and social benefits.

So here is my six-point wish list. Maybe you would like to add something to it?

1. Protection for interest income. Periods of high interest rates to combat inflation are particularly damaging to average households earning interest income. If this monetary policy is necessary, protect those vulnerable savings from both inflation and taxes. To do this, bring back the $1,000 investment income deduction, which was eliminated in 1987.
2. Deduction for professional help. Canadians need help with their tax and financial literacy. They will not achieve that interaction with online help alone, no matter how good it is. Especially at a time when the Canada Revenue Agency (CRA) is pushing for more digitalization, helping individuals better understand basic tax planning – whichever comes first, for example, an RRSP, a TFSA or FHSA – can strengthen lifelong wealth-building habits and help diversify their investments. To remove barriers to professional help, make the costs of income tax preparation and financial planning tax deductible.
3. Waiver of CRA penalties and interest on automatic filing. Even as the federal government promotes automatic tax filing for 5.5 million lowest-income Canadians by 2028, in reality, navigating both the tax and digital complexities underlying this initiative may be out of reach for most targeted filers. Imagine the refund nightmare that will last for years (remember CERB?) if these tax returns are incorrect. The CRA should be given the authority to permanently waive interest or penalties arising from honest errors in the automatic tax filing processes.
4. Help young people start saving. Young workers are most susceptible to job loss, but benefit most from the longer accumulation time of their investments. By enabling matching grants for entry-level savings during the first five years after post-secondary education, similar to those available for the Registered Education Savings Plan (RESP) and the Registered Disability Savings Plan (RDSP), healthy savings habits can be encouraged with a new graduate savings plan.
5. Recognize community service as a tax deduction. Younger Canadians between the ages of 15 and 24 are most likely volunteerwhile people over 65 volunteer the most hours. Tracking volunteer hours isn’t much trickier than tracking dollars donated to charity. The resulting tax savings could help create wealth in the community. The Liberals had proposed a hero tax credit for health care workers in their party platform. This should be extended to those who volunteer to help others with tax preparation and financial planning by expanding the credit for charitable donations.
6. Change the options for pension savings. Most people know that the Canada Pension Plan (CPP) alone will not fund their retirement, even with the higher premiums that employees and their employers are now paying. Rising CPP premiums squeeze the cash flows needed to fund a tax-free savings account (TFSA), which guarantees a tax-free retirement. Required matching premiums also make it difficult for employers to provide wage increases or expand the workforce. One way to improve cash flow for more private savings is to increase take-home pay. Governments should encourage TFSA savings by making contributions tax-deductible for both employees and employers who contribute to their employees’ accounts.

Read more about tax planning:

About Evelyn Jacks, RWM, MFA, MFA-P, FDFS

Evelyn Jacks is president of Knowledge Bureau, a world-class financial education institute where readers can pursue micro-credentials in financial literacy, learn the basics of income tax preparation, and earn career-enhancing specialized credentials, all online.