Budget 2013 focuses on deficit taming

Finance Minister Jim Flaherty chose to focus on jobs and infrastructure in the latest federal budget released in Ottawa today, foregoing major spending in an effort to eliminate the deficit by 2015.

“In uncertain global economic times, the most important contribution a government can make to bolster confidence and growth in a country is to maintain a sound fiscal position,” Flaherty said in his budget speech. “We will not spend recklessly.”

True to those words, the budget contains the smallest increase in discretionary spending in nearly 20 years, leaving Flaherty will little room to manoeuvre on taxes and the retirement income system, as he did last year.

There are, however, a number of small changes of interest to investors and advisors.

Minor tweaks

For small business owners, the budget proposes to increase the Lifetime Capital Gains Exemption by $50,000 to $800,000 effective in the 2014 tax year. The exemption will be indexed to inflation after 2014.

Doug Carroll, vice president, tax and estate planning, Invesco Canada, notes the change gives small business owners some breathing room to plan ahead. “It gives an indication from this particular government that this is an ongoing aspect of the system and business owners don‘t have to be as worried that it‘s going to be cancelled anytime in the near future,” said Carroll, who was in the budget lock-up with Advisor.ca.

Ottawa’s also making technical changes to the dividend tax credit system, adjusting the gross-up factor applicable to non-eligible dividends to 18% from 25% and the corresponding dividend tax credit to 13-18ths of the gross-up amount, from two-thirds.

“The premise is that the government has realized the intention of the gross-up tax credit system is to integrate corporate taxation and personal taxation but it‘s gotten out of sync over the years so that someone who is running a small business is actually ending up with a larger tax benefit by having the dividend come out of their small business corporation,” Carroll explains. “They are ahead of the game, so those rates are being adjusted.”

The Feds are also helping the manufacturing sector through a two-year extension of the accelerated capital cost allowance for machinery and equipment.

Budget 2013 introduces a new Donor Super Credit for charitable donations, which complements the existing Charitable Donations Tax Credit with an additional 25% credit for first-time donors.

Carroll notes the existing federal charitable tax credit system provides a 15% credit on the first $200 of donations, and a 29% credit above the $200 level. “The super credit adds 25% to each of those credit rates up to $1,000. It‘s designed to encourage people to make donations to charity and it‘s only on cash donations.”

On the investment front, Ottawa’s moving to phase out the 15% federal tax credit for labour-sponsored venture capital corporations, noting the structure of the venture capital market has changed significantly since the credit was introduced in the 1980s.

“The LSVCC tax credit has been criticized by academics, international organizations as well as venture capital industry stakeholders as being an ineffective means of stimulating a healthy venture capital sector,” the budget states.

The credit will be reduced to 10% in 2015 and 5% in 2016 before being eliminated in 2017, effectively eliminating labour-sponsored mutual funds, says Carroll.

Tax fairness

Ottawa is tackling tax loopholes, introducing a myriad of minor amendments intended to improve the fairness and integrity of the country’s tax system.

New measures will ensure derivative transactions cannot be used to convert fully taxable ordinary income into capital gains taxed at a lower rate. And the rules would eliminate unintended tax benefits relating to leveraged insured annuities and leveraged life insurance arrangements, commonly known as 10-8 arrangements.

As part of the plan, CRA will be given new tools to reduce international tax evasion and aggressive tax avoidance, including a new Stop International Tax Evasion Program.

All told, Ottawa says the tax fairness measures will yield $315 million in savings in 2013-14, rising to $1.2 billion in 2017-18.

Jobs and infrastructure

The government is introducing the Canada Job Grant, to provide up to $15,000 per person for skills training, with the funding split evenly between Ottawa, the provinces and employers.

Businesses with a plan for short-duration training will be eligible to apply for the grant, which the budget says could assist as many as 130,000 people each year. Funding will come from existing labour market agreements with the provinces.

The Building Canada Plan, billed by the government as the largest and longest investment in infrastructure projects in Canadian history, includes $47 billion in new spending over ten years.

As promised, Ottawa says the deficit will decline each year until a surplus of $0.8 billion is reached in 2015-16. A surplus of more than $5 billion is projected in 2017-18.

This and that

For consumers, Ottawa is providing $76 million in tariff relief on clothing and sports equipment in an effort to reduce the gap in retail prices between Canada and the U.S. The current 18% tariff on baby clothing and ice skates will be eliminated. The government says it will support efforts by the provinces to appropriately regulate payday loan lenders, and will raise awareness that government cheques can be cashed free of charge at any bank.

The budget contained no changes to the pension system, although the government says it will work with the provinces and plan sponsors to promote low cost and secure pension options.

Ottawa also says it will work with partners to improve financial literacy among seniors. In addition, the government pledged to create a new financial consumer code, which it says would replace the current mix of legislation and dozens of regulations.