In its 2018 budget, the federal government should respond to lower U.S. corporate tax rates by accelerating write-offs of business investment, argues the C.D. Howe Institute.
In its shadow budget released Thursday, the think tank also calls for removing the small business deduction, phasing out certain tax credits, reducing personal tax rates and various changes to bolster retirement-savings programs.
The federal government will table its 2018 budget on Feb. 27.
Here are some of the proposals in “Righting the Course: A Shadow Federal Budget for 2018.” You can read the entire document here.
- Faster expensing of capital investments: eliminating the “half-year rule” and the “available-for-use” requirement would allow businesses to claim larger deductions faster.
- Scrutinize tax credits and deductions that are “spending programs in disguise”: the budget proposes reducing the base amount for age credit to $4,000, phasing out the first-time home buyers tax credit, and eliminating the labour-sponsored venture capital corporations (LSVCC).
- Reduce “punitive” personal income tax rates: between provinces raising rates on high earners and the feds’ recent four-percentage-point hike on taxable income above $200,000, the combined federal/provincial top tax rate in 2017 is hovering around, or exceeding, the 50% mark across the country. This leads to taxpayers “trying to realize their income in different forms, at different times and in different jurisdictions,” and to less entrepreneurial activity over time, the think tank argues. It proposes doubling the threshold for the highest tax rate to $411,684, up from the current $205,842.
- Transition away from the small business deduction: the deduction, which produces a lower tax rate for small firms, expands the small business sector at the expense of large firms, the budget says. “At the same time, the Small Business Deduction may encourage self-employed individuals to incorporate in order to access the lower tax rate,” says the budget. “Business owners using small private corporations to engage in personal income tax planning was the focus of last year’s debate and anti-avoidance policies adopted by the federal government.” C.D. Howe proposes providing the Small Business Deduction “for young, growth-oriented firms rather than simply all businesses that are small” to mitigate disincentives for growth. The alternative proposal is to allow immediate expensing of capital investments up to $200,000 for tax purposes in order to target the preferential small business tax rate to “businesses pursuing growth-oriented strategies. It would have the additional advantage of benefiting growing small companies, rather than private corporations whose main purpose is to reduce personal income taxes on business income.”
- Extend favourable tax treatment to donations of private company shares and real estate: the budget proposes amending the Income Tax Act provisions for donating privately held securities. It would exclude the entire disposition from tax, and partially exclude the disposition of real estate when those assets are donated to charity.
- Level the field for group RRSPs: DC pension plans and pooled registered pension plans help their participants prepare for retirement by allowing sponsors to deduct some administrative expenses from outside income. Participants in group RRSPs pay these expenses from plan assets. The budget proposes “to let group RRSP sponsors and/or participants deduct some administrative expenses, currently levied against plan assets, from outside income.”
- Increase age limits for tax-deferred saving: C.D Howe proposes increasing the age at which contributions to tax-deferred retirement saving schemes must end to 72 on January 1, 2019, and adjusting the contribution time frame by one month every six months, after that date. “Among other advantages, this change should encourage older Canadians to stay in the workforce longer,” the budget says.
- Raise eligibility age for public pension benefits: the budget proposes adjusting the Canadian age of eligibility for the CPP and OAS with life expectancy. “For Canadian demographics, that constant proportion is 34%, which would trigger an increase in the age of eligibility from 65 to 66 in 2025, phased in from the beginning of 2023,” the budget says.
- Increase tax-deferred saving limits: “The current rules for calculating equivalency between DB and DC pension plans or limits for RRSPs are badly out of date, putting people with DC plans and/or RRSPs at a major disadvantage relative to those in DB plans,” the budget says. It recommends updating the assumptions underlying the equivalency factor (Factor of Nine) “to reflect current economic and demographic realities.” This would increase the tax-deferred savings limit for capital accumulation plans from 18% of income to 30%.
- Eliminate mandatory drawdowns from RRIFs: Low yields on safe investments and longer life spans means there is still risk of Canadians outliving their savings, even after the 2015 federal budget’s reduction of mandatory minimum withdrawals. The budget recommends a consultation on two options: “more regular adjustments to keep the withdrawals aligned with returns and longevity; or eliminating minimum withdrawals entirely.”
- Extend eligibility for pension credit and income splitting: the budget would allow the use of credit or income splitting for life-income funds, RRIFs and RRSPs before age 65.
- Increase GST for transportation fuels to 10%: the budget would also eliminate aviation fuel taxes and instead charge them at this rate.
- Lower the threshold for the medical expense tax credit: the current medical expense tax credit only applies to expenses exceeding 3% of net income or $2,306 (whichever is lower), and is calculated at the bottom tax rate. The budget would lower the threshold to 1.5% of net income or $1,150, whichever is lower.
- Amend the Excise Tax Act to cover digital goods and services: C.D Howe proposes amending the Excise Tax Act to apply to businesses that supply digital goods and services, such as streaming, for consumption within Canada, regardless of where the company is located. This would level the playing field between foreign and domestic providers (which must charge GST/HST on their sales), it adds.
Progressive think tank the Canadian Centre for Policy Alternatives also released an alternative budget this week with recommendations for the Liberal government.