March 2010

Gambling on growth

Bringing down an exploding deficit without raising personal income taxes? It’s a rather novel approach, but it’s what Minister Flaherty is gambling on. Should we celebrate? Not just yet!

The March 4th budget tabled by Minister Jim Flaherty tends to be more economic than fiscal. In fact, the federal budget doesn’t contain much that directly affects personal income taxes and, as such, won’t have any real impact on most taxpayers’ wallets. Rather, the government is focusing on reducing its expenses and pursuing its economic recovery programs. And it’s gambling that the economy will not only grow but that, in five years, it will generate enough revenue to absorb the deficit.

Budget 2010-2011 - Forecasts
Real GDP growth (%) 2009 2010 2011 2012 2013 2014 2009-2014
-2.5 2.6 3.2 3.0 2.8 2.6 2.0

Source: Department of Finance Canada

Surprise: no income tax hikes!

The big surprise for Canadians who lived through income tax hikes during most of the latest deficit period, in the 1980s and 1990s, is to come out of it without too much damage. In fact, the government is even going ahead with its previously announced tax cuts and implementing:

  • an increase in personal income tax brackets (you have to earn more to be taxed at the same rate)
  • an increase in the Child Tax Benefit
  • and an increase in the Working Income Tax Benefit.

This budget also includes a raise in the Universal Child Care Benefit, which could put up to $140 more a year in the pockets of some single-parent families. It’s also making changes to the Registered Disability Savings Plan, which is the equivalent of an RESP for parents who want to save to ensure a handicapped child’s financial security.

The budget is (just a little) tough on banks

The government is also proposing measures to help consumers. Two of these affect how financial institutions operate:

  • prohibiting negative billing, a practice whereby a bank can bill you for certain services/products, like mortgage or credit card insurance, without your express consent
  • reducing, from seven days to four, the maximum time your bank can hold funds from a cheque you deposit to your account; as well, your bank will have to allow you to access up to $100 from that cheque within 24 hours.

If you own a business

For business owners, the news is both good and bad.

  • First, the decision to reduce corporate tax rates is being upheld. In 2012, Canada will be the G7 country with the lightest tax burden on corporate profits. Who ever said Canada wasn’t a good country for business?
  • As well, the government is reducing – and even eliminating – custom tariffs on many intermediate goods used by Canadian manufacturers. Fewer tariffs and less paperwork should help increase productivity.
  • The job-sharing program is also being maintained. This program allows an employee to receive employment insurance (EI) benefits if his/her employer is forced to reduce his/her work week because of the current economic climate.
  • But, be careful: Starting in 2011, employment insurance contributions will be higher, a type of payroll tax that many economists believe to be counter-productive.
  • Finally, it will no longer be possible for both employer and employee to claim a deduction when part of the employee’s compensation is paid in the form of stock options. Listed companies were saving nearly $2 billion a year with this loophole. The new measure won’t be popular for some, but very few people will feel sorry for the companies that are losing this unfair advantage.

What else?

Aside from that? Not much.

If you’re thinking of getting hair implants or liposuction, you’re out of luck. If these medical procedures are purely for aesthetic reasons, you’re no longer entitled to a tax credit.

Seriously, there’s not much else… But no new taxes either! We can be happy that the government is holding the line on stimulating the economy ($19 billion this year) without asking taxpayers for one more red cent. The economic situation is improving, but economists agree that it’s too early to stop using measures that are helping to boost the economy. It’s also a relief to see that many of the planned tax breaks are being retained, despite a dramatic increase in the deficit.

But the question remains: What happens if the Minister’s growth projections don’t materialize? With no room to manœuvre, could the backswing of the tax pendulum be even tougher on taxpayers next year?

The answer in March 2011.