Carney’s fall budget wish list

But that changed in the second quarter as Canada’s economy weakened. This draws attention to the vulnerability of Canadians’ incomes and savings in the face of change. It also provides an important opportunity for the federal budget on November 4 to protect the financial position in the coming months.

Income gap reaches new high

Income gap, the difference in the share of disposable income between households in the top and bottom 40% of the income distribution, is a common news metric. It hit a record high of 49% in the first quarter, dropped slightly in the second quarter, and has increased year by year since the epidemic.

Interest rates have a lot to do with this. Fortunately, household interest payments fell nearly 5% in the first quarter for the first time since 2022. As a result, the disposable income of those indebted households increased.

Then U.S. tariffs entered the economy. In times of uncertainty, low-income families often suffer the most, and that’s still true now. Statistics Canada reported a decrease in average wages, primarily due to fewer hours worked in the first quarter. Those working in mining and manufacturing, and professional and personal services are particularly affected.

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

Unfortunately, taxes – the source of these future payments – will also be reduced. The Parliamentary Budget Office projects nominal GDP, a measure of the size of the tax base, to be lower, falling by an average of $12.9 billion per year from 2025 to 2029. This is also due to the impact of tariffs.

The government plans to add some taxes as well as penalties and resulting interest charges to boost revenue. However, a more active, proactive approach makes it easier to build income and wealth. Start by going back to the basics.

Investment diversification matters

While the first quarter of the year (Q1) got off to a strong start, Canadians’ financial well-being was impacted by the imposition of tariffs in the second quarter (Q2). Consider the following investment trends:

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1. Low-income households tend to earn interest income. Low-income households experienced the largest declines in net investment income. The decline in investment income (-35.3%) more than offset the decline in interest payments (-7.1%). Results for the second quarter were similar.
2. High-income households have more diversified portfolios and hold more stocks. These generate more tax-efficient capital gains and dividend income. The value of these households’ financial assets increased by 7.1% in the first quarter (nearly three times the rate of inflation) and by 9.6% in the second quarter, so net worth grew as well. These households 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 nearly two-thirds (64.8%) of Canada’s total net worth, with an average of $3.4 million per household. The bottom 40% of households account for 3.3% of total net worth, averaging $86,900.
4. As a special class of wealth creators, homeowners have lower borrowing costs and lower inflation, which led to greater savings from lower debt in the first quarter. Still, personal net worth fell among younger Canadians and those without investment portfolios as real estate values ​​also fell.

Rich people will be fine, others need help

What can we learn from this? The wealthiest households can continue to grow their net worth even if incomes are interrupted or fail to keep up with inflation and debt service costs are threatened by job loss, incapacity or retirement. This is because their investment income and capital appreciation make up for the income gap.

Where are the opportunities for low-income families? There are two. Faced with the same problem, it is crucial to be able to continue saving. Second, it’s important to earn more tax-efficient investment income.

This is where government policy comes into play. Paying more taxes may seem like a simple request to some, but it could lead to brain drain, fewer incentives to work or innovate, and capital flight. The real opportunity in the next federal budget is to help all Canadians grow their income and wealth against a backdrop of economic uncertainty, and to do so with the help of knowledgeable professionals.

Build income and capital: six part plan

Tax and financial literacy, while elusive, is critical to Canadians’ prosperity. Having the knowledge, skills and confidence to make responsible financial decisions enables people to plan ahead and navigate the increasingly complex systems that are barriers to accessing income support through tax refunds, credits and social benefits.

To that end, here’s my six-point wish list. Maybe you want to add it?

1. Interest income protection. Periods of high interest rates to combat inflation are particularly harmful to ordinary households earning interest income. If such monetary policy is necessary, protect these fragile savings from the effects of inflation and taxes. To this end, reinstate the $1,000 investment income deduction that was eliminated in 1987.
2. Professional Help Deduction. Canadians need help with tax and financial literacy. No matter how good the online help is, they cannot interact with it alone. Especially in the context of the Canada Revenue Agency’s (CRA) digital push, helping individuals better understand basic tax planning (such as an RRSP, TFSA or FHSA, whichever comes first) can foster lifelong wealth-building habits and help diversify investments. To remove barriers to obtaining professional help, make income tax preparation and financial planning costs tax deductible.
3. Waived CRA penalties and automatic interest claims. While the federal government is advocating for automatic tax filing for the 5.5 million lowest-income Canadians by 2028, in reality, navigating the tax and numerical complexities behind such a move may be out of reach for most of the target filers. Imagine the repayment nightmare for years to come if those tax returns are incorrect (remember CERB?). The CRA should have the authority to permanently waive interest or penalties arising from honest errors in the automated tax filing process.
4. Helping young people start saving. Young workers are most vulnerable to unemployment but benefit most from increased investment compounding time. Good saving habits can be encouraged through new graduate savings plans by providing matching grants for start-up savings in the first five years after postsecondary education, similar to those provided for Registered Education Savings Plan (RESP) and Registered Disability Savings Plan (RDSP) savings..
5. Recognize community service as a tax deduction. Younger Canadians aged 15 to 24 are most likely to volunteer, while those over 65 have been volunteering the longest. Keeping track of volunteer hours is no more troublesome than keeping track of funds donated to charity. The resulting tax savings may help create community wealth. The Liberals proposed a Heroes Tax Credit for health care workers in their platform. By expanding the charitable giving credit, this should be extended to those who volunteer to help others with tax preparation and financial planning.
6. Changing retirement savings options. Most people know that even though workers and their employers are paying higher premiums now, the Canada Pension Plan (CPP) alone cannot fund their retirement. Rising CPP premiums are squeezing the cash flow needed for Tax-Free Savings Accounts (TFSAs), which ensure a tax-free retirement. The required matching premiums also make it difficult for employers to raise wages or increase staffing. One way to improve cash flow to increase private savings is to increase take-home pay. The government should encourage TFSA savings by providing contribution tax relief to employees and employers who contribute to their employee accounts.

Learn more about tax planning:

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

Evelyn Jacks is president of Knowledge Bureau, a world-class financial education institution where readers can earn micro-credentials in financial literacy, the fundamentals of income tax preparation, and professional certificates for career advancement, all online.