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The good and bad about what is missing in Budget 2018

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By Ted Mallett

Last week’s Federal Budget set the tone this government’s positioning for the next couple of years leading up to the 2019 general election. The Finance Minister clarified a few things of interest to business owners.

First and foremost, the government clawed back most of their own plans on the taxation of passive income within corporations. The original proposal defined in July of last year and then modified in October was theoretically expected to bring in $3 to 4 billion per year in the medium term—assuming officials could even implement such a complex framework through the personal tax system. It turns out, they couldn’t. What we saw in the Budget was a completely modified, simpler and less costly measure that would only expect to net the federal government about $700 million annually.

The simplification came in dealing with the issue through the corporate tax system rather than the personal. Corporations with levels of annual passive earnings above $50,000 will now begin to see their eligibility to the small business deduction whittled back progressively. Other adjustments to the tax code will alter the calculation of refundable portions of corporate tax depending on whether taxable dividends paid to shareholders are eligible or non-eligible.   

This move was touted by the government as almost inconsequential to rank and file business owners because the new measures would only affect three percent of Canada’s 1.8 million corporations. The true proportion is almost certainly higher because the base is likely inflated by large numbers of empty or inactive entities. Nonetheless, as with the original plans, it will be holding companies, and firms in real estate, financial and professional services that will be affected the most.

The Budget was also notable in what it didn’t address. For an economy virtually ten years clear of the last recession, the government shows no inclination to lay out a path to balanced budgets. It’s not that the deficits are gargantuan—at about 1 per cent of GDP, they certainly aren’t as high as domestic historical or current international peaks. However, there seems to be an abandonment in this election cycle of the principle that when times are good, spending should be kept in line with what money is coming though the door. Canada’s economy will be greyer and slower growing in the coming years, which means the burden of our government debt overhang will be more problematic.

And, although the spending plans look like a steady 14.5 per cent of GDP, that may change dramatically in later years based on the announcement of a new advisory council on pharmacare. The dollar numbers could be huge, depending on how it might be structured. With governments usually keen to avoid taxing voters directly, business owners have good reason to fear added burden may be placed on them.
On the subject of uncertainty, there is nothing that addresses concerns about Canadian business competitiveness in light of new US tax reduction measures and the running possibility that NAFTA will be torn up. The White House’s latest salvo aimed at Canada’s steel and aluminum industries demonstrates the US’s hard ball proclivities. It is unlikely that either of these uncertainties could be fully allayed by direct budget measures, but signalling does have its value. 

A better-than-expected economic performance in 2017 gave the government a $3 to 4 billion annual boost to its fiscal outlook—which, rather than looking at measures to boost future competitiveness, they decided to spend in its entirety on signalling-type programs related to equity and innovation. 

Along with concerns about high general corporate and rising payroll tax rates, the government had been informed earlier by both large and small business groups that following the US tax reform measure to allow immediate expensing of machinery and equipment spending would go a long way in helping fill the yawning gap in Canada’s business investment performance. It is surprising that this boost was not included in the budget plan, given that this measure would not affect long-run corporate tax revenues, only their timing.  

The Finance Minister laid out plenty of good intentions in his budget—it’s too bad that similar tone could not be directed at the people and groups who actually make most of the business investment decisions in this country. 

 

Ted Mallett is vice-president and chief economist at the Canadian Federation of Independent Business.