Industry applauds Flaherty’s tax proposals

Tuesday’s proposed tax cuts by the federal government are garnering positive reviews from the financial services industry. But the ghosts of last Halloween still linger.

Last year’s economic statement by Finance Minister Jim Flaherty, in which he announced a substantial tax increase on income trusts, took the markets by surprise.

This year’s commitment to expedite corporate and small business tax cuts, reduce the GST by one percentage point and increase the tax-free income threshold to more than $10,000 are nothing earth-shattering but were nonetheless received with open arms by the industry.

The federal corporate tax rate cut, which will see the corporate tax rate drop incrementally from 22.1% to 15% in 2012, is drawing particular praise.

“This is a strong move that gives Canada a competitive tax advantage,” says Nancy Hughes Anthony, president and CEO of the Canadian Bankers Association. “This will be noticed on the world stage, clearly putting the spotlight on Canada as a place to invest, do business, live and work. This benefits all Canadians.”

The Canadian Life and Health Insurance Association and the Canadian Institute of Chartered Accountants made similar statements praising the corporate tax rate cut as well as the commitment to reduce the small business tax rate to 11% as a way for Canadian business to become more competitive — although this praise is attached to a mention that they would like to see the corporate tax rate equal that for small business.

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“We’d like to see the government go faster and even further by reducing the corporate tax rate so that it matches the small business rate, a move that would simplify the tax structure and enhance the prosperity of all Canadian businesses, says Kevin Dancey, president and CEO of the CICA. “Businesses deal with taxes like any other cost. They result in higher prices, reduced wages for employees or lower returns for owners and shareholders.”

CGA-Canada views Flaherty’s statement as a positive step forward that it hopes will lead to an eventual overhaul of Canada’s tax system, which it says is overly complex.

“Targeted and piecemeal tax cuts over time have made the tax system too complicated,” says Anthony Ariganello, president and CEO of CGA-Canada. “We need a fundamental review to make sure the tax system is fair, simple, efficient and competitive.”

On the individual side, the Canadian Real Estate Association singled out the GST cut, which would go into effect January 1, 2008, as a boon to future homeowners.

CREA CEO Pierre Beauchamp outlines that using the sliding GST scale that applies to the cost of new homes, a buyer of a $375,000 house in British Columbia would save $2,738.

“The 1% reduction in the GST will also help Canadians pay for home renovations, or in the purchase of appliances or furniture,” Beauchamp says.

The CREA says research it conducted found Canadians spend an average of $7,475 on renovations when they buy a home and another $3,950 on furniture and appliances. The GST cut represents $114 in savings based on these averages.

Unless they’re buying big-ticket items like a home, says chartered accountant Bruce Ball, a tax partner with BDO Dunwoody, the savings are likely going to be meagre for individual clients.

“On the corporate tax side, they made real reduction, although the lowest personal rate reduction by half a percentage point is a real reduction too,” Ball says. “In terms of the corporate tax reductions, they’re going to bring the rate down to 15%. That’s a pretty major change.”

Ball points out, though, that the savings an individual earner will take away with the new rules is only a little more than $200.

Vancouver-based advisor Adrian Mastracci says something is always better than nothing.

“Anytime any government gives you a tax reduction, they are effectively giving you back some of your money. Tax cuts are good business and good for individuals,” says the portfolio manager with KCM Wealth Management.

Mastracci says many of his high-net-worth clients will see substantial gains from the small business tax cut in particular since they tend to be owners of smaller companies.

“Many of the high-net-worth people have some sort of business of their own. Certainly a number of my clients do. The small business tax cuts the rate of tax inside the company,” he says.

If you account for the reduction of the GST and the raising of the minimum threshold, Mastracci says, the sum total of all of Flaherty’s cuts work well for affluent clients.

One person you might expect to be worried about the cuts is an economist, but that’s not the case at BMO Economics, according to senior economist Sal Guatieri. Guatieri says he and his colleagues have been concerned about how the Canadian dollar has been wreaking havoc on the economy and expect growth to stall in 2008.

He says the tax cuts should offset this and give some much needed momentum to the economy next year.

“Given significant headwinds affecting the economy through next year, we are not too worried about the inflation outlook. The main threat here is the rapidly rising Canadian dollar. It will not only dampen the economy but dampen inflationary pressure as well,” he says. “GDP will be 0.8% higher than it otherwise would be without the tax relief. A lot of that will be front loaded earlier in 2008 as people file their income taxes. It will be important support to the economy at a time when manufacturers and retailers will face the brunt of the high Canadian dollar.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(10/31/07)