Pre-budget analysis and shadow budgets are floating freely near Parliament Hill these days in anticipation of the federal government’s third budget since taking power in January 2006.
While each forecast offers unique perspectives on what should or could happen in Tuesday’s upcoming budget, the general consensus is that the Harper government will stay the course, said Wally Conway, a 26-year veteran of the tax legislation division of the Department of Finance who is now a senior tax advisor at PricewaterhouseCoopers (PWC), an international consulting firm offering tax services to public, private and government clients.
“The budget is shaped by predominant pressures and persistent desires,” Conway said during a conference call on Friday. “This government wants to win the next election and, if possible, a majority.”
Conway says while individual and corporate tax incentives will reduce revenues, they will also help mitigate current market conditions thereby boosting business competitiveness.
“I would speculate that the government will continue its present course. That is, to introduce measures to enhance competitiveness of Canadian business, to convert budget surpluses to tax rate reductions, to reduce debt and avoid budget deficits.”
Despite the stay-the-course expectation, the C.D. Howe Institute released its own shadow budget, touting the necessity of properly directed spending.
“Federal spending, properly directed, can increase the nation’s productive capacity, by facilitating and rewarding investment by individuals and businesses and strengthening the economic union,” the institute stated in its official release.
The authors of the shadow budget suggest:
- Federally investing in provincial tax reform — thereby helping the last five provinces (British Columbia, Ontario, Manitoba, P.E.I. and Saskatchewan) harmonize their taxes and offset any lost revenue.
- Increasing the RRSP and RPP limits to $22,000 in 2010 and to $32,000 by 2015.
- Allowing withdrawals from RRSPs to restore contribution room for each investor.
- Increasing the tax-deductible contributions of defined benefit plans from 110% of liabilities to 125%.
- Immediately raising the age at which RRSPs must be converted to RRIFs to 73 with further consideration to additional increases.
- Introducing tax-prepaid savings plans (TPSPs) that allow Canadians to earn income within the plan exempt from tax and as an additional source of revenue for retirement.
- Reinvesting capital gains by allowing taxpayers to calculate a year’s taxable gains (as they do now) but also receive a matching increase in the dollar limits to their RRSP contributions (unbound by current caps and percent-of-earned income limits). Also, instead of paying capital gains tax, which applies to 50% of gains, individuals would be able to reinvest up to half their net capital gains in an RRSP in the first 60 days of a calendar year.
- Introducing a single-point decrease in middle tax brackets and adding an upper-middle income tax bracket (thereby lowering marginal tax rates for most Canadians). C.D. Howe believes that these measures would constitute a down payment on a longer-term rate reduction plan, which, by 2012, would have a federal personal rate structure set at 15%, 21% and 25% (the last rate applying to income above $100,000 in 2008 dollars).
- Raising the maximum Working Income Tax Benefit amount for families from $1,000 to $1,500 and the maximum for singles from $500 to $750.
Bruce Harris, tax partner at PWC with expertise in personal and small-business tax issues, believes the next budget will offer more broad-based tax incentives that will particularly benefit low- and middle-income earners. “The type of amendment will be different than [past] changes that were more targeted tax savings, such as the physical activity and transit pass tax credits.” Changes to tax bracket thresholds, as recommended by the Standing House Committee, affect more people, which is preferential if this government wants a majority in the next election, said Harris during the PWC pre-budget conference call.
Harris also believes the government will take into consideration the recommendations from the Standing House Committee and the C.D. Howe Institute regarding the increase of the RRSP threshold (from 18% to 25%) and the implementation of a separate, second tax-free retirement investment vehicle.
“The U.K. already has a system that allows individual investors a chance to save 7,000 or 8,000 [pounds] tax free per year. Our government may need to put a limitation on these savings, as the U.K. has done, and may need provisions to ensure the funds are truly used for their intended purpose, but [options] may allow the government to indirectly keep a pre-election promise by indirectly facilitating no tax on capital gains [through these new thresholds and retirement investment plans].”
“On the corporate tax side, we don’t expect a lot of changes,” said Gord Jans, tax partner at PWC. “The lack of financial room makes any substantial changes unlikely.” Jans points out that the Blue Book proposed by the Conservatives and subsequent budgets already reduced the 19% corporate tax to 18% by 2010 with a further reduction to 15% by 2012.
“But we still expect some changes [in the budget] that could bring some relief for certain sectors, such as manufacturing, forestry and the auto industry.”
Jans also believes the budget may extend the depreciation rules, allowing a $4 million annual limit up from $2 million, and R&D tax credits for public companies. (He does not see this option broadened beyond private sector to public companies or foreign companies as yet, due to affordability issues.)
Another area Jans believes the government may offer incentives is through environmental initiatives. “The form of that is hard to predict,” said Jans, but he anticipates that there may be incentives to help truck drivers (and companies) to reduce emissions — a proposal from the Standing House Committee — or these incentives may take the “form of accelerated depreciation deductions in investing in energy conservation.”
On the whole, though, Jans expects that the upcoming budget will mean “more tweaking than wholesale change,” at least on the corporate side.
Originally published on Advisor.ca on February 25, 2008