With rumours swirling about an impending spring election, Canadians might have guessed at the tone of Finance Minister Jim Flaherty’s second budget, an upbeat tome of tax cuts balanced with spending on the hot-button topics of the day.

“This budget is about helping families,” said Finance Minister Jim Flaherty, in his budget speech to the House of Commons. “It is also about achieving our country’s full potential, and showing a modern, ambitious and energetic Canada to the world.”

Despite slightly slower growth, economic conditions couldn’t have been much better for this budget. Once again relying on private sector forecasts, Flaherty is predicting economic growth of 2.3% in 2007, rising to 2.9% in 2008 — not bad considering the country’s growth streak.

The budget identifies the greatest risks to the Canadian economy as being the recent fall-off in productivity growth at home, and an extended downturn in the U.S. housing market.

Anyone expecting a manufactured crisis to force an election, however, may be disappointed. There were funds earmarked for cleaning up water supplies; research and development in renewable energy; and increased spending for health care, culture and veteran’s services.

Conspicuously absent from the budget documents, however, was any mention of Conservative election promises to forgo taxation on capital gains that are reinvested within six months.

  • Tax planning, perks and hidden gems
  • Old age benefits
  • Some boosts for small companies
  • Families first
  • Flaherty takes on regulatory reform
  • TEMPLATE LETTER — To Clients/Prospects: The 2007 Federal Budget and your financial plan

  • “The government has now had over a year to consult with industry, they’ve had numerous submissions on how that might work, yet there’s nothing in the budget at all that addresses broad-based capital gains tax relief for Canadians,” says Jamie Golombek, vice president, tax and estate planning, AIM Trimark Investments. “There’s limited ability now to donate to a private foundation and avoid capital gains tax on that donation. But we were expecting something far more broad-based in terms of capital gains cuts.”

    The 2007 budget promises to pay down $9.2 billion in national debt, and anticipates making payments of at least $3 billion per year through 2009. Total revenues are expected to ring in at about $236.7 billion for 2007-08, rising to $243.5 billion for 2008-09.

    Canada’s “fiscal advantage” will see the federal debt-to-GDP ratio fall from 35% (2005-06) to 30% by 2008-09, with a goal of reaching 25% by 2012-13. The debt-to-GDP ratio for fiscal 2006-2007 is projected to be 32.8%. With net debt and the debt ratio falling, the feds are promising at least $1 billion worth of personal tax cuts per year, to be funded by interest savings.

    Correcting the fiscal imbalance between the provinces and Ottawa was a prominent theme, with Flaherty vowing to hand $39 billion over to the provinces over the next seven years.

    “We are returning equalization to a principled, formula-based program,” Flaherty said. “With fiscal balance restored, governments can focus on what matters to Canadians.” Those priorities include health care, access to education and environmental issues.

    Flaherty’s formula would honour the “Offshore Accords” negotiated with Nova Scotia and Newfoundland and Labrador. The accords allow these provinces to keep more of their resource revenues, by either excluding the full amount, or by including 50% of their resource revenues, whichever is greater.

    At the same time, Flaherty promised “non-receiving” provinces that a cap would be put in place to ensure equalization payment recipients do not end up with “a fiscal capacity higher than a non-receiving province.”

    “It is important to move away from what some have called double equalization,” he said. “The overpowering sentiment that I have heard from Ministers of Finance across Canada has been the desire for predictability. We now have a historic document where the provinces and territories know where they stand, going forward to 2013-2014.”

    Social transfers for health and education are to be set at an equal per capita rate for all provinces.

    Post-secondary education will see a funding increase of $800 million starting in 2008-09, with a 3% annual escalator. According to budget documents, that would add up to $16 billion in new funding over seven years. Flaherty also promised $250 million in child care spending.

    Each province, meanwhile, can expect an additional $25 million per year over the next seven years, to spend on infrastructure improvements.

    The budget also promises more money to municipalities, giving $2 billion as year from 2010 through 2014.

    “I would hope that cities will reflect on their own budget exercises and try to be prudent in their budgeting,” Flaherty said. “The days of governments with their hands out to other governments, are passing. It’s time for governments to be self reliant and answerable to their own taxpayers.”

    Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

    (03/19/07)

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