2017 Federal Budget – Thoughts

The Federal Budget was delivered in Parliament on March 22, 2017. From a tax perspective, it could be referred to as “The Budget That Wasn’t”. Leading up to Budget Day, there was much speculation in the financial media about the various tax measures that might have been implemented based upon “signals” in the marketplace. However, other than a few modifications, no major tax changes were included. One signal that had significant traction was an increase in the inclusion rate on capital gains from 50% up to 66.7% or even possibly 75%, both rates we have experienced in the past. It was not to be, and since the Budget, the Minister of Finance has quelled the rumour and clarified that there is no government intention to change the inclusion rate on one-half a realized capital gain as income. Prior to the Budget, there was also discussion of including as income the value of employer-provided group benefits; however, this was also nixed before the Budget.

There is, however, a note in the Budget that may impact individuals who have accumulated some wealth or earn a higher- than-average income, especially where a corporate entity is utilized. The Government advised that a paper will be released in the near future outlining measures to counter avenues high-income earners can otherwise utilize to “unfairly” reduce their tax payable. These may impact dividends distributed to family members, as well as retained earnings in a corporation where a lower than personal corporate tax rate has been paid and such funds have not been distributed to shareholders but retained and invested at the corporate level. In addition, the Budget refers to planning where income that would otherwise be fully taxable can be converted to capital gains where only one-half would be taxable.

Much of the Budget dealt more with the spending side of the fiscal plan. There are plans to assist a number of sectors in the economy, with an emphasis on innovation, technology, clean energy, and agriculture among others. Much of the financing plans span several years in to the future with some well beyond the electoral mandate of the current government. Recipients and beneficiaries of such spending plans are certainly positive and pleased.

Of concern to many, certainly those with a 30-40 year memory, is the size of the current deficit, which is now approaching $30 billion with plans to continue such borrowing into the future. The current federal debt is now just over $600 billion and is projected to grow to over $750 billion by 2022. There is no indicated intent to get back to a balanced budget position any time soon. Perhaps this will not present a major problem as long as interest rates remain low. However, over time, we may well see higher rates and the cost of servicing such debt may again become of greater concern. It is as if we have forgotten the huge deficits and debt accumulation in the 1980s and early 1990s. The tide was stemmed first by the Chrétien / Martin government and then continued by the Harper / Flaherty duo. Significant borrowing was undertaken just after the 2008 debacle; however, it is questionable as to whether such spending really had as much impact on GDP growth as was hoped for. Now we are moving back into this government debt realm which can leave us as a country with much less fiscal flexibility to respond to a potential future negative economic event.

I believe the most likely future response will be continued pressure to increase tax revenue since once spending programs are in place, it is politically very challenging to reduce them.