Business tax cuts an overall plus

Lower taxes for businesses large and small that appeared in the Conservative government’s first budget will produce net positives for corporate bonds and spur investment, securities industry observers said.

"It’s one of the few pro-business developments we’ve seen out of the budget in awhile," said Darcy Briggs, a portfolio manager and fixed income analyst at Bissett Investment Management in Calgary. The budget calls for a reduction in the corporate tax rate from the current 21% to 19% by 2010, and small business tax rate cuts from 12% to 11% over the next three years.

Ian Russell, president of the recently created trade arm of the IDA, called the small business rate cut "a modest reduction," but agreed the overall business tax cuts were positive.

The budget also eliminated the federal capital tax retroactive to this year. That tax had been scheduled for a phase-out in 2008, so the latest development amounts to a two-year windfall for business owners. Of course, Briggs noted, not every businesses issues bonds or equities, but the tax rate reductions should still make it easier for companies to garner investment dollars and help foster business growth.

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On the personal tax side, Briggs said it was interesting to see the conservatives set the lowest marginal rate at 15.5%, 50 basis points higher than had been established in the last Liberal budget. But Briggs said the difference is largely made up by other tax credits. Among other things, the Tories offered tax credits for transit riders and breaks for students.

And, while the budget makes allocations for various segments of Canada’s economy, no economic sector stands out as an overt beneficiary. "From a fixed income standpoint, I really don’t see much change in how the market’s going to react to this," he said.

Perhaps the best thing from an investment standpoint, said Briggs, is that the budget showed "all the hallmarks of fiscal prudence" and didn’t open the floodgates and blow the surplus. Canada is the only G-7 country with dual surpluses and the Conservatives made efforts to protect that strong economic position. "Fiscal policy really hasn’t changed a lot," he said. "That may add some confidence to the market, in terms of being able to say, ‘Yeah, we have a new government but there really hasn’t been that big a change in fiscal management.’ That could be a positive view for foreign investment."

Russell called last-year’s liberal government budget "very constructive" because it worked to address productivity and investment problems in Canada. "The last Liberal budget was a start in the right direction. This government picked up on that," he said. "You can’t build Rome in a day and its going to be a long, steady process." Consistent with budget documents in the recent past, the Conservatives added a line item indicating a "commitment to work with provinces and territories" to create a common regulator for the securities industry.

Briggs said he suspects that goal will remain difficult to achieve, given the fact many provinces worry that Ontario’s securities commission would inevitably be the dominant player in any negotiations to create a national body. "That’s always been a stumbling block," he said. "It would make sense for a national regulator, but you always have the concerns from the other provinces."

Filed by Philip Porado, Advisor’s Edge, philip.porado@advisor.rogers.com.

(05/02/06)

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