Ontario budget elicits

The Ontario government unveiled the province’s 2008 budget on Tuesday, promising to boost education and skills training, while declining to follow the advice of federal finance minister Jim Flaherty, who called for corporate tax cuts.

So far, response to the budget has been measured, with words like cautious, modest and careful being tossed around.

“The provincial government put forth a very careful budget for 2008,” writes the Conference Board of Canada. “Overall spending growth is so limited that the government expects to produce surpluses … totalling $1.8 billion.”

Derek Burleton and Pascal Gauthier, two TD Bank economists, say the budget “contained even fewer surprises than last year.”

The centerpiece of the Ontario budget was a $1.5 billion investment in education and skills training and a pledge of $1 billion toward municipal infrastructure. Robert Kavcic, an economic analyst with the Bank of Montreal, says this is “modest additional relief for manufacturers,” but it won’t change the bank’s opinion that the sector’s future remains “poor.”

Many financial industry watchers had hoped the government would succumb to federal pressure and significantly reduce corporate tax rates, but that didn’t happen. It’s understood that major tax cuts would have been difficult, considering Ontario is dealing with a precarious economy, so no one is crying foul at the lack of action.

“Economists could argue that a little more stimulus would have been timely, perhaps in the form of additional tax cuts,” says the Conference Board, “but the politics of the day do not allow the government to plan for a deficit.”

However, the provincial Liberals didn’t turn a blind eye to tax relief completely. A few of the highlights include an elimination of the capital tax for manufacturers, effective January 1, 2007; a 10-year income tax exemption for new corporations that commercialize intellectual property developed by education institutions; improvements to the Ontario Innovation Tax Credit, which is available to small businesses; and a property tax grant that’s being offered to low- and moderate-income senior homeowners.

These tax measures, however small, are being applauded by Ontario’s business community. Len Crispino, president and CEO of the Ontario Chamber of Commerce, says the budget “begins to lay a stronger foundation for a more productive economy with certain targeted measures to improve our infrastructure, strengthen our labour force and reduce the cost of doing business.”

Ian Russell, president and CEO of the Investments Industry Association of Canada, is also pleased with the tax cuts, though he would have liked to have seen the government go a little further. “Essential components of the province’s budget were the measures to reduce the tax and regulatory burden on provincial business,” he says. “[But we’re] disappointed that the province failed to accelerate the full elimination of the capital tax or reduce corporate taxes.”

There’s not much in the budget that will significantly affect the financial planning community. The only area that some advisors might ponder is the tax relief given to seniors.

The senior homeowners’ property tax grant will give older Canadians with an income of $35,000 — and who pay property taxes of at least $2,000 — $250 back. Seniors who bring in between $35,000 and $50,000 will also get some cash back, but it will be less depending on their level of income.

“A plan like this that is based on income is fairly helpful to a large number of seniors,” says Ted Rechtschaffen, president and CEO of TriDelta Financial Partners.

He points out that while $35,000 might seem small, many seniors do make that amount, even ones with a high net worth. “The reason is that if you don’t have a defined benefit pension, and you are under 72 and choose not to draw much or any income from your RRSP, you can be quite wealthy but still have a very low income in retirement,” he explains.

The tax grant won’t affect Rechtschaffen’s clients’ financial plans in any meaningful way, though “it is always appreciated by those receiving it,” he says. “This will not be enough to impact much in terms of lifestyle or financial plans, but as the saying goes, it is better than nothing.”

Ontario’s economic future was also discussed in the budget. The government predicts that real economic growth in the province will slow to 1.1% in 2008 — a 0.7% drop from what the Liberals predicted in the fall. The government thinks the economy will pick up in 2009, however, with growth at 2.1%.

TD’s Burleton and Gauthier say the Ontario government has overestimated its numbers. The bank thinks GDP growth will be a sluggish 0.8% this year and 1.4% next year. Kavcic, BMO’s economist, also predicts 0.8% GDP growth this year. If the banks are correct, the Liberals’ expected surplus won’t be as great as they hope.

“The government predicts that each percentage point subtraction to GDP growth results in a $730 million hit on the bottom line,” the two TD economists said in their analysis. “Based on this rough sensitivity, the underlying surplus would shrink by $200 million and more than $1 billion by fiscal year 2009/2010.”

With nothing of major consequence in this budget, it’s likely it won’t elicit long discussions around the water cooler. But that could change if the province doesn’t bow to industry pressure and bring its corporate income tax rate — which is 14%, or 4% higher than Alberta’s and B.C.’s — in line with those of other provinces.

“We have long argued that Ontario will face growing problems of attracting and retaining business if it has more than a 2% point spread between Ontario and … other large provinces,” says TD. “That suggests that over the next several years, Ontario needs to get its rate down to 12%.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(03/26/08)

Bryan Borzykowski