Canada: 2008 Federal Budget Highlights

On February 26, 2008, the Minister of Finance – the Honourable James Flaherty –presented the third budget of the current Conservative government. The budget was titled "Responsible Leadership" and stressed a number of themes, including:

  1. Maintaining strong fiscal management;
  2. Strengthening Canada's tax advantage;
  3. Investing in the future;
  4. Supporting communities; and
  5. Providing leadership at home and abroad.

The most significant initiative in the budget was the announcement of the Tax-Free Savings Account, as described below.

As with previous budgets, the budget is clearly focused on the middle-class. There was no "poison pill" designed to trigger an election. The Liberals immediately announced that they will allow the budget to pass and will not cause the government to fall.

The following summary features certain highlights of the 2008 Budget, with an emphasis on those areas that would be of greatest interest to clients of Borden Ladner Gervais LLP.

Economic Forecast

The government noted that growth in the Canadian economy has been strong. Through the first three quarters of 2007, the economy expanded at an average rate of 3.4%. The unemployment rate is at its lowest level in 33 years, with losses in the manufacturing sector offset by gains in other sectors. The higher Canadian dollar has resulted in increased investment by Canadian businesses in machinery and equipment, and a containment of inflation pressures. Higher prices for energy, grain and mineral products have resulted in record prices for Canadian-produced commodities. Profit strength in the financial, wholesale and retail trade, and oil and gas sectors has offset weaknesses in the manufacturing and forestry sectors.

However, the budget points out that Canada's immediate economic prospects are diminished and the country faces several important risks. Primary risks include as low down in U.S. demand resulting from a U.S. recession, and turmoil in global financial markets. Furthermore, tighter global credit conditions are expected to reduce global economic growth. The higher Canadian dollar, rising energy prices and low-cost producers in developing countries threaten to decrease the competitiveness of Canadian exports. Accordingly, private sector forecasters have revised their outlook for the Canadian economy, and expect real GDP growth of 1.7% in 2008 and 2.4% in 2009, down from last fall's forecast of 2.4% in 2008 and 2.7% in 2009.

BUDGET MEASURES

Personal Income Tax Initiatives

The Conservatives continue to focus tax reductions on the middle class, including the introduction of a Tax-Free Savings Account. Starting in 2009, anyone over the age of 18 may open a Tax-Free Savings Account in which investment income, either in the form of interest or capital gains, accumulates tax-free. Withdrawals are tax exempt and may be used for any purpose. Contributions may be made up to $5,000 per year, while unused contributions may be rolled over indefinitely into future years. This will create a new investment option for, among others, self-employed individuals and professionals who will be able to build a tax-free portfolio beyond their RRSP.

Business Taxes and Other Initiatives

The Conservatives have introduced tax reductions for businesses that include:

  • The 50% straight-line accelerated CCA treatment for investment in manufacturing or processing equipment will apply for one additional year, and the accelerated treatment will then be provided on a declining basis over a two-year period; and
  • Improvements to the scientific research and experimental development tax incentive program.

Other Initiatives for Business

  • Streamlining the cross-border tax-withholding and return-filing rules. More specifically:
  • Exempting dispositions by non-residents of treaty-protected property from the withholding requirements;
  • Ensuring that a person who purchases property from a non-resident is not liable for the withholding tax in certain circumstances; and
  • Eliminating the need for a non-resident to file a Canadian income tax return in certain circumstances where no Canadian tax is payable.
  • Automotive
  • Providing $250 million dollars over five years to support strategic, large-scale research and development projects in the automotive sector to develop greener and more fuel-efficient vehicles.
  • Energy
  • $250 million for research and demonstration of carbon capture and storage;
  • An increased CCA rate for carbon dioxide pipeline;
  • $200 million to support nuclear energy and maintain nuclear safety; and
  • Expanded tax incentives for clean energy generation.
  • Forestry
  • Providing $10 million over two years to Natural Resources Canada to promote Canada's forestry sector in international markets.
  • Mining
  • Extending the Mineral Exploration Tax Credit for an additional year.

Other Measures of Note

  • The creation of an independent Crown corporation, the Canada Employment Insurance Financing Board, to:
  • Maintain a separate bank account for annual EI surpluses;
  • Implementing a new EI premium rate-setting mechanism; and
  • Maintaining a $2 billion dollar cash reserve.
  • Allocation of up to $400 million for a Police Officers Recruitment Fund to encourage the recruitment of2,500 new front-line police officers.

Investment in Infrastructure

  • The creation of a Crown corporation, PPP Canada Inc., to support Public-Private Partnership;
  • Allocation of $500 million to support capital investment for public transit; and
  • Making permanent the Gas Tax Fund, which will grow to $2 billion, to help finance municipal infrastructure.

Improving Our Borders

  • New electronic passports to be introduced in 2011, which will be valid for 10 years;
  • $14 million over two years to expand the joint Canada-U.S. NEXUS program for low-risk and frequent travelers;
  • $26 million over two years to facilitate the processing of visas and enhance border security through the use of biometric data.

Investing in Knowledge

  • $350 million for a new Canada Student Grant Program, beginning in 2009, and rising to $430 million by2012-2013;
  • $123 million over four years to streamline and modernize the Canada Student Loans Program;
  • $80 million per year to Canada's three university granting councils for research;
  • $15 million per year for the Indirect Costs of Research program; and
  • $140 million for Genome Canada.

International Assistance

  • The budget reaffirmed the commitment to double international assistance to $5 billion by 2010-2011.Furthermore, the government said it would make Canada the first G8 country to meet its commitment to double aid to Africa.

What Was Not in the Budget

The Conservatives had already implemented a cut from 7% to 5% in the GST. Furthermore, they had lowered the personal income tax rate from 16% to 15%, as well as increasing the basic personal exemption. This budget had no broad-based personal tax relief. The government did state, however, "Going forward, as resources permit, the government intends to implement further broad-based tax relief – with a particular emphasis on personal income tax."

Unlike last year, there was no increase in transfers to provinces. Furthermore, unlike previous years, health care was not a major issue in the budget. This is consistent with the Conservative's intent to stay out of areas of provincial jurisdiction. In regards to military spending, there were no major announcements. There was little mention of the war in Afghanistan. The government did, however, pledge to increase funding for the military by2% per year, starting in 2011-2012.

SUMMARY

In recent weeks, economic forecasters had predicted that the government had little money to spend in the 2008Budget. Past cuts to the GST and other taxes combined with major increases in spending, including transfers to the provinces, left the government little room to manoeuvre on expenditures without going into deficit. Budget2008 will be remembered as a "small" budget with no significant initiatives. The major initiative of a Tax-Free Savings Account will evolve into a $300 – $400 million expenditure by 2012. The days of billion-dollar tax cuts will not be seen again at least for a few years.

Politically, there were no "poison pills" to cause the opposition to vote against this budget. The Bloc Québécois and the NDP will say the budget did not go "far enough" to address a variety of pressing issues and, consequently, likely vote against the budget. The Liberals will allow the budget to pass to avoid triggering an election. The Conservatives have delivered a well-crafted "political" budget that should receive broad-based support from the middle class.

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