Results of the U.S. elections on Nov. 5, 2024, will shape U.S. policies in ways that could eventually affect immigration to Canada and inflation in the country. Canada’s reaction may be to amend tax policy to make housing more affordable and business loans more accessible. This might be achieved through adjusting existing tax policies and programs—including a variety of deductions and credits—that had been used to alleviate the unaffordability caused by inflation.
The Canadian tax landscape has seen a number of legislative proposals in response to changes in the economy. Results of upcoming elections in the United States could prompt even more changes to Canadian tax policies.
Vice President Kamala Harris, the Democratic candidate, and former President Donald Trump, the Republican nominee, are running on platforms that differ in many respects and could affect Canada in different ways.
Meanwhile, their respective parties are vying for control of the bicameral legislature. The balance of power in the U.S. Congress, including the size of the majorities, as well as who controls the presidency, will shape U.S. public policy at least through 2026. Election Day in the U.S. is Nov. 5, 2024.
Generally speaking, Harris has expressed support for many policies implemented or advocated by President Joe Biden’s administration, in which she was integral. These include higher tax rates for corporations, high-earning and wealthy individuals, expanded clean energy tax credits and incentives, and tax cuts or credits for lower-income households. These policies are expected to have a relatively minor impact on the Canadian economy, meriting little to no response in comparison to a second four-year term under Trump.
The policies of a second Trump administration would largely mirror policies from the former U.S. president’s first term. In 2017, under Trump, Republicans enacted the Tax Cuts and Jobs Act (TCJA), which generally involved lower tax rates for businesses and individuals. The TCJA featured several business tax benefits that were scheduled to eventually become less favorable; many of those milestones have since passed. More than 30 provisions in the TCJA are scheduled to expire Dec. 31, 2025, increasing the likelihood of significant tax changes in the U.S. next year.
Trump proposes further lowering the corporate tax rate, as well as changing tariffs and immigration policy. These policies—especially the new tariffs—would likely result in increased inflation and immigration in Canada. This would further increase the cost of living for Canadians, which would likely prompt—as discussed below—the government to react through the revision of certain tax policies.
Various Canadian policies—some of which were already included in previous Canadian budgets—may require adjustments depending on outcomes of the U.S. elections. More specifically, an expected increase in immigration may lead the Canadian government to respond by adjusting policies aimed at housing affordability.
This may include additional housing tax credits and stricter enforcement of existing housing policies, such as the Underused Housing Tax (UHT) and Home Buyers’ Plan (HBP)—or crack-downs on short terms rentals. Canadians could also expect to see new tax policies that address highly skilled foreign workers, such as workers’ credits or tuition credits to further skill levels.
A Trump presidency may also produce a larger pool of immigrants and asylum seekers looking to enter Canada. Increased immigration to Canada could exacerbate its current housing shortage.
Canada has implemented the UHT, which requires affected owners of residential property (RP) in Canada to file an annual return where the RP is considered vacant or underused. New, restrictive U.S. immigration policies may increase immigration to Canada, affecting the degree of required enforcement of Canada’s UHT.
Increased immigration to Canada would increase housing prices, prompting a government response. One option to address housing unaffordability would be to increase UHT’s effectiveness by ensuring compliance. By increasing UHT enforcement, the UHT’s goal of reducing housing unaffordability would be better served.
To further mitigate the impact of increased immigration, the recently improved HBP could be reassessed as well. The HBP allows first-time home purchasers to make a tax-free withdrawal of $35,000 ($70,000 for couples) from their RRSPs to buy or build a home.
The HBP withdrawal limit may also warrant an adjustment.
After housing prices rise, achieving the same affordability outcome through the HBP may require a boost in the withdrawal limit proportionate to the increase in housing prices. Canadian policymakers could therefore adjust and improve withdrawal and pay-back limits to levels suitable to an ever-growing population and unprecedented rent and home prices.
Increased immigration may also incentivize Parliament to address Canada’s underproductive labour force by offering Canadian businesses a larger pool from which to select highly skilled workers. The government may even offer credits, such as workers’ credits or tuition credits to further skill levels. On the other hand, the Federal government has shifted its prior stance on immigration by recently calling for a reduction of both temporary residents and overall immigration, due in part to public perception of shortages in housing, health care services, and jobs.
The official opposition party, which is leading in the polls, has been sending similar signals. It remains unclear whether this new stance would be reversed in light of the potential increase in immigration during a Trump presidency.
An increase in immigration could also complement the newly proposed Canadian Entrepreneur’s Incentive (CEI) from Canada’s 2024 Budget. The CEI could significantly reduce taxable capital gains for entrepreneurs—particularly those in the tech industry—while promoting broader economic growth in Canada. The CEI could incentivize business owners to hire more foreign skilled workers to grow their businesses and eventually take advantage of this credit on disposition.
In general, tariffs are believed to have a much larger impact on inflation than a change made to tax rates would have. This is because the cost of a tariff is passed on to consumers who have to use more of their after-tax dollars to purchase the same good or service. As nearly 80 per cent of Canada’s exports are destined for the U.S. (worth about one-fifth of Canada’s GDP), tariff policy would likely have a substantial impact on Canada.
While lowered U.S. corporate tax rates would affect inflation minimally, they would make Canadian businesses less competitive. Trump has proposed to reduce corporate tax rates, which could result in Canadian businesses operating in more a costly tax environment than competitors south of the border.
Canada could mitigate this by lowering its corporate tax rates. However, because corporate tax rate decreases in the U.S. would be less impactful in producing inflation in Canada than tariff policy, Canada would likely want to focus many of its reactive tax policy proposals on the tax rate cuts.
Trump’s proposed tariffs might result in worldwide inflation for a couple of years, leading to higher interest rates in Canada and a depreciation in the Loonie. In that case, Canada might proactively mitigate this by seeking an exclusion from the Trump tariffs during CUSMA negotiations. However, the CUSMA tariff negotiations may be an uphill battle because the U.S. would likely leverage its recently launched challenge against Canada’s newly created Digital Services Tax Act (DSTA).
Canada’s DSTA taxes the revenue of large companies that provide digital services to Canadians, which the U.S. claims results in discrimination against American companies and unfairly benefits Canadian companies. This ongoing dispute could drive a wedge between the two nations during upcoming tariff negotiations.
The DSTA challenge, in tandem with potential new tariffs on Canadian exports, could prompt Canada to double down and increase its DST on large American digital service providers. This would help fund subsidies for Canadian exporters in an effort to offset an expected increase in inflation.
In a similar vein, a Trump election could merit a Canadian response on the green credit front if the Trump administration attempts to repeal clean energy tax credits from the Inflation Reduction Act (IRA).
In response to the IRA, Canada had attempted to keep pace with the U.S. by introducing several new measures for clean energy tax credits in Federal Budget 2023. The repeal of green credits by a second Trump administration would make Canada more cost competitive in the clean energy and green technology sectors than the U.S.
Currently, the clean energy investment tax credit offers a refundable credit on the capital cost of eligible property and is set to expire in 2035. As such, a change to the IRA would create a long-lasting competitive advantage for Canadian businesses in the space. Therefore, there is no expectation that the Canadian government would need to react by further adjusting these credits.
Depending on the balance of power in the new American government in 2025, there could be new U.S. policies that increase immigration to Canada and create a new bout of inflation. Canada could react by committing to measures that would seek to:
As noted above, a myriad of taxes, deductions and credits have recently been proposed or passed at various levels of government to alleviate the unaffordability caused by inflation. Moving forward, these policies may need to be reconsidered and amended to accommodate for shifting economic conditions caused by new taxes, tariffs and immigration policies across the border.
