The good, the bad and the tepid: reaction to the federal budget

March 23, 2017 | Last updated on March 23, 2017
4 min read

Federal budget measures to promote economic growth don’t go far enough, says Ian Russell, president and CEO of IIAC, in a letter from IIAC responding to the budget.

For example, he cites the Canadian Business Growth Fund, announced March 9, 2017 and mentioned in the budget, which provides capital from Canada’s leading banks and financial institutions to entrepreneurs and innovators.

He also cites the Canada Infrastructure Bank, described in the budget as a way to “strengthen and grow the middle class.” The budget says the bank will “structure, negotiate and deliver federal support for infrastructure projects with revenue-generating potential.” For example, it will invest at least $5 billion in public transit systems in Montreal, Ottawa, the GTA, Calgary and Vancouver.

“The government should be introducing bold measures to address continued weak economic conditions and the ongoing high levels of unemployment,” says Russell.

Read: Federal budget takes aim at associated corporations

He’d like to see more initiatives that promote start-ups and expand businesses, which is key for innovation, job creation and economic growth.

For instance, he doesn’t have confidence in the Canadian Business Growth Fund, which he says is modelled after a U.K. program, but the wrong one — the U.K. Business Growth Fund.

“The government missed the opportunity to emulate a far more successful U.K. program: the U.K. Enterprise Investment Scheme (EIS),” Russell says. “In the last four years, the EIS has raised about £5.5 billion in equity capital for new and emerging businesses — ten times the amount made available by the U.K. Business Growth Fund.”

In the letter, IIAC says the EIS provides:

  • a personal tax credit for investment in EIS-eligible shares of small businesses,
  • an exemption from capital gains tax for EIS shares held more than three years, and
  • a rollover provision exempting capital gains tax on the sale of an asset, if the proceeds are reinvested in EIS-eligible shares.

Further, the tax expenditures of the EIS are more than offset by the revenues generated from corporate taxes, taxes paid on salaries to employees and value-added tax paid by EIS-financed companies.

“As is the case in the U.K.,” says Russell, “an EIS-like program would complement the Canadian Business Growth Fund and other measures to promote small business expansion.”

Other business reaction

On a positive note, the Canadian Federation of Independent Business (CFIB) says small business owners are relieved there’s no measure to raise taxes on capital gains or small business income. (The organization did expresses concern about the review of personal and capital gains tax treatment of businesses where several family members are involved.)

The Canadian Payroll Association (CPA) commends the reduced paper costs for employers with the budget’s introduction of electronic distribution of T4s for 2017 and subsequent taxation years.

“E-T4s are more secure, and this change will save employers over $100 million dollars annually, considering the cost of administering a paper T4 is $5 per slip and over 20 million slips are never used,” says Patrick Culhane, president of the CPA, in a release.

But, for CFIB, the biggest negative for entrepreneurs and employees is a projected 3% increase in employment insurance (EI) rates in 2018.

“The payroll budgets of every business and the take-home pay for Canadian workers will now drop for six straight years, with an EI hike in 2018 and 5 years of CPP premium hikes starting in 2019,” says Dan Kelly, CFIB president, in a release.

Read: Good and bad tax news from Budget 2017

Positive action on housing data and financial sector

Paul Taylor, president and CEO of Mortgage Professionals Canada, says in a release that he’s pleased to see no new mortgage rules — plus the commitment to analyze housing data.

The Housing Statistics Framework (HSF), detailed in the budget, will gather data on all residential property in Canada, including foreign homebuyer activity.

The HSF “will help assess the impact that the recent changes have had on Canadian homebuyers,” says Taylor, referring to tighter mortgage rules and tax changes like the foreign buyer’s tax in B.C.

Mortgage Professionals Canada also supports federal efforts to create a resilient and competitive financial sector.

For example, the budget mentions the recent launch of the Review of the Federal Financial Sector Framework to assess whether the current framework works. Further mention is made of recent action to review and modernize the deposit insurance framework. The government also proposes legislation to strengthen the bank resolution regime.

Read: Federal budget takes aim at associated corporations

Perspective on the deficit

Last, CFIB notes the deficit is concerning, saying it’s the number-two issue for CFIB members, behind the total tax burden.

But Avery Shenfeld, chief economist at CIBC Capital Markets, puts the deficit in perspective in a report on the federal budget. “We spent the last two weeks meeting with major international fund managers with positions in Canadian bonds,” he says, “and neither the deficit nor this budget was seen as a high-priority topic. Relative to other sovereigns, Canada’s federal debt and deficit are still running below the radar.”

Read the full federal budget here.

For the budget’s main tax changes, check out this handy infographic from Collins Barrow.

Also read: Liberals reviewing private corporations, high-income tax strategies