Canadian Finance Minister Bill Morneau introduced a budget Tuesday February 27 that includes European-style gender-based budgeting, measures to address the gender pay gap, use-it-or-lose-it parental leave for fathers, an $18 billion deficit and no major tax cuts for businesses that fear aggressive tax reforms south of the border puts Canada at a competitive disadvantage.
However, small businesses will see a one percentage point tax cut in January 2019, down to 9%.
For independent entrepreneurs, including farmers and doctors, the more contentious tax changes proposed by the Liberal government is taxing passive investments through Canadian Controlled Private Corporations.
Small business owners currently sock away some of their earnings into investment vehicles and the earnings are taxed at the lower small business rate. The federal government proposes to treat those earnings as personal income and tax it the higher personal income tax rate.
The budget backs off somewhat on the new tax measures with some changes. Essentially, any company that passes the $150,000 threshold on passive investments will not qualify for the small business tax rate.
While the changes are welcome, Iain Black, president of the Greater Vancouver Board of Trade (GVBOT), still thinks the new taxation scheme is unwarranted.
“The whole thing, in my view, is still totally unnecessary,” Black said, adding it will erode the ability of small business to plan for the future.
“They’re going to be forced to think short-term to avoid taxes...which is unnecessarily limiting their incentives to grow from small businesses into medium and large ones.”
Morneau’s third budget includes $20 billion in new spending over six years, a deficit of $18 billion for 2018-2019, and no plans to eliminate the deficit in the coming years, contrary to a pre-election promise that it would be eliminated by 2019.
The budget projects a debt-to-GDP ratio of 30% in 2018-2019. The longer term plan is to reduce the debt-to-GDP ratio to 28.4% by 2022-2023.
“The Canadian economy is doing well—remarkably well,” Morneau said, adding Canada’s economy added 600,000 jobs over the past two years.
“Unemployment rates are near the lowest levels we’ve seen in over 40 years.”
It's that robust growth that some businesses had hoped would translate into either tax reductions or a plan to accelerate deficit reductions.
Morneau’s budget provides neither, although the 2018-2019 deficit is now lower than projected in the last budget. The previous budget had forecast a deficit of $28.5 billion for this year.
The Business Council of British Columbia (BCBC) criticized Morneau’s budget for its “endless string of operating deficits” and lack of measures to put Canada on an even competitive footing with the U.S.
"The government is not doing enough to address the fact that Canada has become too costly, too complex and too slow-moving to take advantage of new global opportunities - or to facilitate the investments needed to boost productivity and real wages,” said BCBC president Greg D’Avignon.
But as University of BC economics professor Kevin Milligan points out, the U.S. is accomplishing its radical tax cuts through deficit spending.
“The overall budget framework, I think, is a very sustainable one,” he said. “The deficit is less than 1% of GDP. The debt-to-GDP ratio is trending downward, which is what you want at this point in the business cycle.
“In contrast, in the United States, theirs is going upwards sharply and it is not sustainable, whereas I think our is extraordinarily sustainable on the path that we’re on.”
Budget 2018 is predictably staid in terms of significant tax measures, deficit reduction or major spending. It contains no major spending announcements for things like child care or transportation infrastructure.
The funding for those key areas was already laid out in 2016 in the Liberal government’s first three-year plan, and it's expected the Liberal government is holding back any largess for next year's budget, which would come down just months before the next federal election.
The most notable new spending measure in the budget is $3 billion for science and research, which Morneau said is “the single largest investment in investigator-led fundamental research in Canadian history”
The budget also sets a new target for conservation, with a goal of protecting 17% of Canada’s land and water, at a cost of $1.3 billion.
While Clean Energy Canada applauds the budget’s various measures on carbon pricing and clean energy investments, it notes that there is no funding in this year’s budget for a promised zero emissions vehicle strategy.
Measures of note in the 2018 budget include:
• increasing rental financing initiative to $3.75 billion from the previous $2.5 billion over three years to provide 14,000 new purpose-built rental units;
• $100 million over five years for the Strategic Innovation Fund to explore implementation of low-Earth orbit satellites to provide rural broadband;
• measures aimed at reducing tax evasion and tax fraud and closing tax loopholes;
• confirmation that tax revenue from legalized marijuana will be shared with provinces and territories, with the latter getting 75% of revenue;
• capping excise tax on recreational cannabis at $100 million annually for first two years, with any surplus going to provinces;
• $1 billion in additional funding to the Canada Workers Benefit to ensure up to 2 million low-income workers are receiving the tax benefit;
• an additional $448 million over five years for the summer jobs program for youth;
• extension of 15% Mineral Exploration Tax Credit to March 2019 which, combined with a provincial credit, provides an investment credit of 32% to investors;
If there is a central theme to Morneau’s budget, it is its focus on gender policies. These include a “gender-based analysis plus” policy that requires spending decisions to be viewed through a lens of removing barriers for women and girls.
It's not clear how the new gender based budgeting will work, although in Sweden, such policies require that sidewalks be plowed after a snowfall as a priority, since statistics show more women than men in Sweden walk or take public transit than men, who tend to drive more.
New parental leave provisions adds five weeks to the current 35, but only for fathers.
Currently, parents can take up to 35 weeks of parental leave through employment insurance. They will now be able to take an additional five weeks, but only if the father takes it. The cost of that program is $1.2 billion over five years.
The budget has no funding for a national pharmacare program, but does set up a new advisory council to make recommendations for its implementation.
Anita Huberman, CEO Surrey Board of Trade, said the federal budget contains no strategy for dealing with the U.S., which is not only drastically cutting taxes but also threatening the North American Free Trade Agreement with revision or abandonment.
“What was most concerning is that there is no contingency fund in the face of global economic pressures," she said. "With NAFTA uncertainty, the federal government is forecasting another deficit budget with limited revenue potential.”
“In addition, the Surrey Board of Trade was disappointed that a comprehensive tax reform that would help small and medium sized businesses, the backbone of our economy, was not mentioned.”
