Spending, minor tax changes expected in federal budget

(February 4, 2005) Federal Finance Minister Ralph Goodale will have billions to spend when he brings down his second federal budget in Ottawa on February 23. But it appears unlikely he’ll introduce any major tax changes.

In November, Ottawa announced that the surplus for the current fiscal year, which ends April 1, would be close to $9 billion. But experts expect most of that money to go to big-ticket social programs, such as child care, health care, education, cities and paying down the debt.

In addition, with a minority government, Goodale will be reluctant to rock the boat and risk losing a vote on the budget.

On the tax side, Jamie Golombek, vice-president, tax and estate planning at AIM Trimark Investments, says he’d like to see a lowering of the capital gains inclusion rate for charitable donations.

“Currently, if you have a capital gain, you pay tax on 50% on that. If you donate something that’s gone up in value to charity, you pay tax on half that amount, so only one-quarter of the capital gain is taxable on public-traded securities,” he explains. “It would be nice if they eliminated the capital gains tax altogether on donations.”

In its pre-budget submission, the IDA suggested that Ottawa lower the effective capital gains tax rate for investments in small companies (those with assets of $50 million or less) to 25% from 50%.

“Lower taxes on dividends will reduce the cost of capital for dividend-paying corporations and narrow the gap with U.S. rates,” said IDA president Joe Oliver when he appeared before the federal government’s standing committee on finance last November. “The lower rate will encourage reinvestment by existing shareholders and enhance market participation generally.”

Golombek says that has also been talked about and it would certainly be an incentive for small business, but adds that it’s hard to say if it’s going to happen this time around.

The IDA also asked Ottawa to cut personal income tax rates by a modest 1% across the board and increase the threshold at which the top marginal rate begins, to $150,000 from $114,000. “These adjustments can be phased in over a four-year period so that the cost of the program remains within projected fiscal surpluses,” Oliver said.

Lower personal marginal tax rates would help small, knowledge-based companies to attract and retain highly-skilled professionals and make it more likely these companies will expand their operations in Canada, the IDA said.

“They may do some tinkering with the tax brackets, considering last year was the end of Ottawa’s five-year tax reduction program,” Golombek adds. “But I’m not sure we’re going to see anything.”

The IDA and other industry associations have repeatedly called on Ottawa to raise the annual RRSP contribution limit to $27,000. But Golombek rules that out entirely, noting that Ottawa introduced gradual increases to those limits in the 2003 budget (topping out at $18,000 per year in 2006).

Golombek is hopeful Ottawa will finally move forward on tax pre-paid savings plan (TPSPs), first mentioned in the 2003 budget. “They’ve had a lot of time to look at it so I’m hoping they’ll finally introduce the program on February 23.”

Unlike RRSPs, contributions to TPSPs are not tax deductible, but the investment income grows tax free and is not taxed when the plan is collapsed.

Golombek says he would also like to see an enhancement to the Canadian dividend tax credit mechanism. “That’s really the reason income trusts have become so popular is because the industry has come up with a way of eliminating corporate tax, which is why the government has been trying to clamp down on it.”

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“What we’re hoping for is a fix to avoid the double taxation that happens in Canada. I’d love to see the introduction of a higher dividend tax credit for public company shares and the same dividend tax credit system we have now for private company shares, so we’d have a two-tiered system. But it’s somewhat complex and I’m not sure whether they’ve had the time to work through the technical details yet.”

“My worry is that they will instead attempt to introduce another type of restriction of income trusts, such as taxing them to solve the problem of leakage.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com

(02/04/05)

Doug Watt