Promises, promises: Flaherty sticks to campaign script

With the budget coming so close on the heels of the election that landed Stephen Harper’s Conservatives in power, the government had little choice but to address their promises so recently made. But seemingly in recognition of the minority status of this government, much of the immediate tax relief is focused on the consumer.

In his speech to the House, Finance Minister Jim Flaherty predicted this year’s budget surplus would hit $8 billion, which he said far exceeded the projections offered by the previous Liberal government in its 2005 Economic and Fiscal Update. The new government aims to cut debt by $3 billion per year.

"This budget provides almost $20 billion in real tax relief for individual Canadians," Flaherty said in his inaugural federal budget speech. "There is more tax relief in this one budget than in the last four budgets combined."

Front and centre in the budget is the cut to the GST, which will drop from 7% to 6%, effective July 1, 2006, with another 1% cut to come "in a future budget." There has been some concern expressed by small business owners that without sufficient lead time, such a change would be nearly impossible to implement.

"I think they’re trying to really let the average consumer see the savings, which just boosts their popularity," says Dave Clarke, a senior manager at Collins Barrow Chartered Accountants. "When people go to the till and pay 6% instead of 7% GST, that’s something they’ll see on a daily basis."

There was one minor surprise in the budget, a previously unmentioned Canada Employment Credit. Effective July 1, 2006, Canadians will be eligible for a tax credit on $500 of employment earnings, but since it only applies to the last six months of the year, the effective amount is $250. The credit will rise to $1,000 beginning in the 2007 tax year.

Budget in a plain blue suit Promises, promises: Flaherty sticks to campaign script The big little complicated tax cut Budget presents financial planning opportunities Business tax cuts an overall plus To Clients/Prospects: The 2006 federal budget and your financial plan Back to main

"I like the Canada Employment Credit," says Jamie Golombek, vice-present, taxation & estate planning at AIM Trimark Investments. "Employees have been at a disadvantage when it comes to deducting employment expenses. I have a computer at home. I’m restricted in my ability — I have no ability — to write off the capital costs."

"Effectively, it’s an increase in your basic personal amount," adds Tim Cestnick, principal of The WaterStreet Group.

As promised, the budget delivers a 15.5% tax credit for transit passes, which is expected to cost Ottawa $370 million. Transit infrastructure spending gets a boost as well, with $1.3 billion in capital investment.

Students will get a tax break, as the government eliminates federal income tax on scholarships, bursaries and fellowships. Broader relief is available as well, as the budget creates a new tax credit for textbooks, the cost to federal coffers estimated at $260 million over two years.

The Conservatives followed though on another high-profile promise, delivering a $100 per month child care cheque for children under the age of 6, which will cost about $3.7 billion over the next two years. This Universal Child Care Benefit will not affect federal income-tested benefits and will kick in July 1, 2006.

That’s not all the kids get you. Voters who were won over by images of Harper on skates will be happy to hear the budget includes a $500 "fitness tax credit" on eligible fees for children’s fitness programs.

"The Conservatives have pretty much stuck to script with respect to GST and childcare," Clarke says. "They recognize that they are in a minority government and they’re not implementing anything drastic that would create a lot of stress."

Parents of children with disabilities will see the maximum annual Child Disability Benefit increase from $2,044 to $2,300.

Charities could see their portfolios expand. Effective immediately, donations of publicly listed securities may be made to recognized charities, without the donor facing capital gains taxation. The same capital gains exemption is extended to donations of ecologically sensitive land, under the Ecogift program.

"There was a lot of anticipation about tax cuts, but at the end of the day, they’re a minority government. They couldn’t go overboard," says Cestnick. "If you look at whom they’ve targeted — students, charities, children and then employees for a change — they’re pretty broadly based," he says. "There are thousands of kids in soccer. The Liberals had much more targeted programs that many people couldn’t use."

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Business Tax Cuts to Come

There are business tax cuts, but the bulk of them will not come into effect until 2007 or later, and will depend on the Conservative party holding onto power.

Small business owners will see the threshold for their reduced federal tax rate rise from $300,000 to $400,000, effective January 1, 2007. Further out, the government is offering to sweeten the pot, cutting the reduced tax rate 12% to 11.5% in 2008, and again to 11% in 2009.

Corporate tax cuts will kick in January 1, 2008, with the general rate being reduced to 20.5%, on its way to a promised 19% by 2010. The corporate surtax will be eliminated altogether as of January 2008. The federal capital tax is eliminated immediately, retroactive to January 1, 2006, two years early than its previously scheduled elimination.

"When you look at the business tax cuts, this is the way the previous Liberal government was going anyway — they were reducing corporate taxes," Clarke says. "Even if this government is not in power, those tax cuts will probably still flow through."

Budget in a plain blue suit Promises, promises: Flaherty sticks to campaign script The big little complicated tax cut Budget presents financial planning opportunities Business tax cuts an overall plus To Clients/Prospects: The 2006 federal budget and your financial plan Back to main

Despite the tax cuts and high-profile spending on items such as childcare and the military, reining in spending appears to be the new Finance Minister’s top priority.

"I am proud to say that because of this budget, growth in program spending is projected to fall below the rate of economic growth," Flaherty told the Commons. "As a result, program spending as a share of GDP is projected to decline from 13.7% in 2004-05 to 13% in 2007-08."

The budget also included $5.5 billion to be spent over the next four years on infrastructure, including highways and border security. Security of the financial markets was also addressed. Canada has been often criticized as a safe haven for organized crime. To address this, the budget includes $64 million in new financing for the country’s anti-money laundering regime, with another $9 million to fight counterfeiting.

Conspicuously absent from this budget, however, are any significant cuts to spending or the downsizing of government, both of which are generally considered to be core principles of the Conservative party.

There was one vague reference to future cuts, saying that the Treasury Board was tasked with finding $1 billion in savings that cold be realized in 2006-2007 and again in 2008-2009. A report on where these cuts could be made is expected in the fall.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com.

(05/02/06)

This Advisor.ca budget coverage is sponsored by:

Steven Lamb