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There are no grand gestures in Finance Minister Jim Flaherty’s inaugural budget. It’s more slender than previous Liberal budgets and, like the Tory party, comes cloaked in blue. But the headline number of $20 billion in tax cuts is meant more for consumers, students and families, rather than investors.
And, gone are the extensive last-minute spending programs the Liberals used to divert surpluses that would otherwise be dedicated to paying down the federal debt — though a discussion paper accompanying the budget suggests such "unplanned surplus" could be used to top up the Canada Pension Plan.
As promised, Flaherty made the GST reduction to 6% the centrepiece of his budget — with excise levies increased on tobacco and alcohol to compensate for the lower tax rate. Other GST rebates for some employee benefits will be reduced. At the same time, there were a host of consumer tax breaks.
Tim Cestnick, principal at the WaterStreet Group in Burlington agrees that it’s more of a consumer budget, with tax relief that is more broadly targeted than what Liberal governments did in the past.
Still, there are a couple of investor-friendly measures. The mineral exploration tax credit for flow-through shares that expired at the end of December has been reinstated. While the mining industry is booming — thanks to strong commodity markets since 2000 – the budget insists on the need to build a stronger base. The 15% credit will continue to 2008.
Cestnick says "the government recognizes it seems to have worked to encourage mining-based activity." He doesn’t expect that it will cost the federal coffers that much.
And the inclusion rate for capital gains — the amount that is taxable as income — falls to zero for donations of securities to charities. That measure will also apply to donated employee stock options. Jamie Golombek, vice-president of taxation and estate planning at AIM Trimark notes that both the Liberals and the Conservatives supported the move during the election.
"I welcome that change," he says. "It will stimulate a tremendous amount of charitable giving," adding that people were waiting for a decision from the government. "That will be a huge opportunity for advisors when they’re talking to their clients."
Anticipating the move, the Community Foundations of Canada suggested that eliminating the capital gains tax on stock donations would potentially unleash millions more in charitable contributions. The budget estimates the move will create a "donations pool" of $300 million annually.
The Tories are also raising the pension income credit from $1,000 to $2,000. The credit will benefit 2.7 million taxpayers with pension income, providing an average savings of $155.
However, while they are keeping the Liberals proposal to increase the gross-up on dividend income to 145%, along with a 19% dividend tax credit, up from 125% and 13.3% respectively — in order to provide a more level playing field between corporations and income trusts — there is no mention of fixing the Old Age Security clawback. This year, it kicks in at about $60,000 in income. For older investors with a portfolio dominated by dividend stocks, the increase in the gross-up from 125% could well lead to clawbacks.
Dave Clarke, a chartered accountant and senior manager at Collins Barrow in Ottawa notes that many of his older clients seem to plan their retirement around the clawback. On the other hand, Jamie Golombek says that 95% of eligible seniors collect OAS without any clawback.
"I think it’s a pretty good budget for investors," says Clarke. He notes that now that the dividend rule changes are official, there is a more even playing field between dividend and income trust investors. "It moves forward on eliminating double taxation of dividends," he points out. Also, slightly lower tax rates for corporation will benefit investors.
As for enhanced dividend credits, now that Ottawa has made it official, Golombek thinks the provinces will follow suit.
Still, the Tories offered no concrete proposals about capital gains deferrals. That was canvassed during the election campaign as a means to improve capital market efficiency, by letting people sitting on a large capital gain exit their investment tax-free for a better-yielding one. In the past, the Finance Department has considered Tax-Prepaid Savings Plans, where the investment income could be drawn out tax-free.
More recently, some in the tax community have proposed Capital Gains Deferral Accounts. Neither was hinted at the budget. On the other hand, Cestnick said that as a minority government, the Tories had to be restrained in their tax plans.
And they met the Liberals part way. "They didn’t completely eliminate the Liberal tax cuts," says Golombek. "That’s positive."
To pay for the GST cuts, the Tories have decided to keep half the Liberals’ personal income tax cuts from November — which made it onto the 2005 tax forms, but were not passed into law. The rate for the lowest tax bracket will remain at 15% until July 1, after which it will rise to 15.5%, for a combined rate of 15.25% for the 2006 taxation year. The measure does not affect the 2005 tax year. Thereafter, the rate will remain at 15.5% with the threshold, currently $36,378, subject to annual indexation.
Similarly, the Basic Personal Amount remains at $8,648 for the 2005 taxation year, rising to $9,039 until July 1, after which it will fall $400 to $8,639.
However, in 2007, the amount will rise by $100 plus inflation, and in 2008 by $600 plus inflation until it reaches $10,000 in 2009.
Filed by Scot Blythe, Advisor’s Edge Report, scot.blythe@advisor.rogers.com.
(05/02/06)
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