(March 23, 2004) For weeks analysts have been saying the rookie budget of Finance Minister Ralph Goodale would contain few surprises. They were right. Perhaps least surprising was the return of now-Prime Minister Paul Martin’s trademark “prudence.”

“Putting the fiscal and economic prudence back into the budget was a good thing and I think financial markets would applaud it,” said Peter Drake, deputy chief economist at TD Bank Financial Group, “but I don’t think there’s anything in there that’s really going to shake markets one way or the other.”

Smart spending

Drake says given the economic challenges facing the country down the road, it was probably wise of the government to invest where it did: in health, education and community. He does point out, however, that the government seems to be throwing money at the problems, without addressing the structural issues in these areas.

Help for lower income Canadians

Some of the moves made in education are aimed at improving access for lower income Canadians.

“They’ve created something called a Canada Learning Bond for children with low-income families and they’ve also enhanced the Canada Education Savings Grant for low- and middle-income families,” says Jamie Golombek, vice-president of tax and estate planning at AIM Trimark. “I think that second one is quite an important thing for advisors to tell their clients.”

Golombek says this is especially important for low-income clients who may not have been able to take full advantage of RESPs, despite the 20% government grant.

“Now what [the federal government is] doing is [it’s] going to increase that. The first $500 that you put into the RESP will get a 40% grant if your family income is less than $35,000 and 30% grant if your family income is between $35,000 and $70,000,” he said. “It will encourage low-income Canadians to save even $500 dollars a year to a child’s education because you can get a 40% matching. That’s huge.”

Lack of tax relief

But one common theme among those who spoke to Advisor.ca was the lack of tax relief in this budget. But again, it didn’t come as a surprise.

“We weren’t expecting too much in terms of tax relief which is again unfortunate,” said Golombek. “It’s just disappointing with such high personal tax rates in Canada the government doesn’t see any immediate need to reduce income taxes further.”

“There was no real tax relief for individuals or businesses,” said Fred Pynn, manager of Bissett Canadian Equity Fund. “Given that the federal government is in pretty good shape, you could have looked for some additional reductions in either personal or corporate income tax rates.”

One positive sign Pynn sees for the industry is the phased-in increase to the RRSP contribution limit, capped at $18,000 in 2006, which was announced in the previous federal budget. Pynn says it would have been nice to see an increase in the percentage of income allowed for RRSP contributions, but he points out that higher income Canadians are the ones who usually have the capacity to contribute more.

Lower income investors are often unable to max out their RRSP limits at the current allowable levels, so any increase would not likely have made an impact in the investment industry.

“Increasing the percentage from 18% to 20% or 22% probably would have been better from an equity standpoint, but I don’t think it would make any difference to our industry,” he says.

Income investing

2004
Federal Budget

“There was a strong desire expressed with respect to reducing the debt-to-GDP ratio down to 25% within 10 years,” said Dan Hallett, president of Dan Hallett & Associates Inc. “If successful, this will go a long way toward keeping interest rates low, which is good news for interest-sensitive investment assets like bonds, some income trusts and other yield-oriented securities.”

Hallett points out allowing pensions to invest freely in real estate investment trusts and resource royalty trusts is not much of a concession, since these hold assets many pensions already own themselves.

“It’s proposing that any pension fund that invests in income trusts can be limited to no more than 5% of the units of any particular one income trust,” says Golombek. “Anything above a 5% position in one, even though it might be less than 1% of the assets of that fund, would be subject to a 1% per month penalty tax. I expect to hear a lot about this from the income trust industry on this in the next day.”

The restrictions on business trust ownership will stymie the inflow of pension money many had expected once the liability issue is resolved. Adding more pressure on trusts are the new rules on foreign ownership.

“Non-residents holding trusts which normally pay out tax-deferred distributions will be subject to withholding tax at source for distributions after 2004,” says Hallett, pointing out that many trusts have significant foreign ownership. “Some trusts with significant foreign ownership could see some selling pressure since their worth to such investors may be somewhat diminished.”


What do you think about today’s federal budget? Share your thoughts about Goodale’s offering with your peers in the Talvest Town Hall on Advisor.ca.



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

(03/23/04)

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