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The government is continuing its streak of closing tax loopholes while targeting middle-class voters with tax credits in the 2014 budget.

Ottawa’s limiting the use of graduated tax rates on testamentary and grandfathered trusts and eliminating tax exemptions for non-resident trusts, saying the two measures will bring $355 million into federal coffers.

Last year the government increased reporting requirements for foreign property, and lowered dividend tax credit rates.

“It speaks to the government’s interest of closing those tax advantage opportunities,” says Paul Woolford, tax partner at KPMG Enterprise.

The trust changes will affect high net worth clients the most, he adds.

While these measures risk alienating rich Canadians, who tend to vote Tory, that hasn’t happened so far, says well-connected Conservative John Capobianco, senior partner of public affairs at Fleishman Hillard.

“You didn’t get a lot of people complaining about it,” he says. Closing loopholes also appeals to populist supporters.

“Where voters get upset is […] where they feel there’s an unfairness,” he says—for instance, middle class taxpayers who feel the rich aren’t pitching in.

Woolford adds a cancellation of the five-year tax exemption for non-resident trusts will affect few people.

Meanwhile, Ottawa’s introduced new credits and programs, and enhanced older ones, in keeping with its focus on the middle class and consumer issues.

It’s increased the adoption expense tax credit from $12,000 to $15,000. There’s a new tax credit for search and rescue volunteers similar to the one for volunteer firefighters. Those with diabetes will now be able to claim their service animal.

CRA will now calculate and apply the GST/HST tax credit automatically, eliminating the need for an application. Acupuncture and naturopath services are now exempt from federal sales tax.

Well-timed with the Olympics, the government’s also changed the way world-class amateur athletes calculate RRSP room. Canadians looking for a job can now apply to the Canada Apprentice Loan, which like federal student loans, are interest free. And the government also plans to introduce legislation to close the cross-border price gap on imported goods.

Much like past measures, including the 2013 break on tariffs paid on baby clothes and sports equipment, the credits in total do little for taxpayer’s bottom lines. Last year’s tariff measure costs the government an estimated $76 million a year. The search and rescue volunteer credit will cost government an estimated $10 million.

Many of the other measures, such as amateur athlete trusts and the change to the medical expense tax credit, aren’t projected to cost the government anything. That’s important since Finance Minister Jim Flaherty plans to eliminate the deficit by the 2015 election.

“The measures are feel-good measures. They’re looking to encourage these sorts of things, but I don’t think they’re going to have a broad base to any extent,” says Woolford.

With the search and rescue volunteer credit, the government is again catering to the middle class. This strategy helps establish the Conservatives as their advocates, a demographic New Democrats and Liberals have also courted in recent months.

Track record

And, with the economy on the mend, revenues should see a boost from increased commercial activity.

The economy’s in better shape now than when Conservatives won a majority government in 2011, says Robert Kavcic, vice president and senior economist at BMO Capital Markets. “The recovery is on more solid footing,” he says.

While Canada’s performance was strong during the recession compared to other developed countries like Italy and France, Kavcic points out the Eurozone crisis and other global problems set a low bar.

“The recovery to date has been pretty sluggish, but I don’t think that’s a feature that’s unique to Canada,” he adds. “That’s pretty well the case across the developed world.”

The government’s initial reaction to the financial crisis had the “single biggest direct economic influence” of all its policies, he notes. The way it handled the resulting deficit has also helped keep Canada steady.

“They’ve actually managed to keep finances in pretty healthy shape relative to most of the developed world,” he says. Compared to the U.K. or U.S., which cut spending deeply, hurting their countries’ recoveries, Canada’s cuts didn’t have that effect.

“It’s been more a case of real government spending holding flat and not contributing to growth any more,” explains Kavcic.

Today’s budget projects the 2014 deficit will be $2.9 billion. The government predicts a surplus of $6.4 billion in 2015-2016, but Kavcic says it’s possible the country will be in the black sooner.

It would take a large and unexpected economic event to derail the government’s plans, he adds.

Last budget?

This budget could be Flaherty or Prime Minister Stephen Harper’s last. Flaherty has health issues and Harper has had to deal with a Senate scandal and discord among his MPs.

With the next election slated for October 2015, either of them would have to step down by summer to have a successor in place.

Capobianco opines both men are here to stay. Of Flaherty, he says, “he’s always made a point of saying he wants to stay until the budget is balanced.”

Flaherty has been Harper’s only finance minister since the Conservatives came to power in 2006. So he has a lot of leeway in running his department, says Capobianco. But anyone in that role is constrained by the Bank of Canada’s monetary policy and the priorities set out by the prime minister.

“Certainly there’s nobody as well-positioned in cabinet to be Finance minister than the current minister,” he adds. But others have held economic portfolios. Tony Clement, who’s the minister responsible for the public service, is a front-runner and one of the longest-serving Cabinet ministers. He’s made cuts to government departments and worked to modernize the more than 300,000-member workforce. He was also Industry minister.

Current Industry Minister James Moore has also handled his economic portfolio well, and in the long-term he also has finance minister potential, says Capobianco.

And will Harper quit before the next election? “No. Flat out,” Capobianco says. “There’s still work to be done; he still wants to complete his vision of Canada.” Besides, the PM would relish going up against Justin Trudeau and Tom Mulcair, he adds.

A January Abacus Data poll puts the Liberals in the lead with 26% of support. The Conservatives, who have enjoyed years of support in the low-30% range, are at 21%, while the NDP are at 18%.

Next year, as the government prepares an election, expect a splashier budget.

Says Kavcic: “2015—that’s when we’re going to see the real fireworks.”

Originally published on Advisor.ca

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