TACTIX: 2015 Federal Budget Analysis

Apr, 2015


Budget 2015: The “Election Economic Action Plan”

When the Hon. Joe Oliver was appointed Minister of Finance by Prime Minister Harper on March 29, 2014 West Texas Intermediate (WTI) was trading at just over $101 per barrel. What a difference a year makes! At the time of writing, WTI was priced at slightly under $52 per barrel. This precipitous drop in global oil prices was certainly not factored into the federal government’s original plan as it began preparing its 2015 Economic Action Plan (EAP) last year. The unexpected delay in tabling the Budget until today is testament to that. But, the true test of governing is how a government responds to circumstances completely out of its control, such as the impact of fluctuating commodity markets on its revenues. To that end, Minister Oliver kept the Harper government’s longstanding promise to balance the federal books this spring. In truth, this did not come as a surprise to anyone, even to the most casual of observers, despite the unexpected hit to the government’s revenue base caused by the oil price shock. There was no way on earth that the government would do anything BUT deliver a balanced budget in this, an election year. It is not unreasonable to surmise that Prime Minister Harper would rather walk five miles in tight shoes than miss this politically imperative target.

Election 2015 – The Campaign is On

EAP 2015 essentially reflects the Conservative Party of Canada’s time-tested strategy for winning elections. The Conservatives have won three successive federal elections by following the same strategic game plan:

  • Make policy decisions designed to appeal strongly to their electoral base (i.e., their core voters), thus securing their continuing support, and
  • Introduce policy measures aimed at narrowly identified groups to attract the additional five or six percent of swing voters needed to win elections.

This “narrowcasting” approach to winning elections and governing leads to fiscal measures from earlier budgets such as the Children’s Fitness Tax Credit, the Children’s Arts Tax Credit, enhancing EI benefits to parents of murdered or missing children, the Tradesperson’s Tools Deduction, and the Family Tax Cut (see below for more details). There is a common thread to these earlier budget measures – they put money directly into the pockets of Canadians. This too is a key part of the Conservative Government’s re-election strategy: eliminate government programs that appeal more to non-supporters and endeavour instead to put money in people’s pockets. Today’s Budget also reflects this approach:

  • Doubling the Tax Free Savings Account – As promised in its 2011 election platform, the Harper government has now doubled the amount that can be placed into TFSAs to $10,000, effective January 1, 2015. The TFSA annual contribution limit will no longer be indexed to inflation.
  • Compassionate Care EI Benefits – Employment Insurance compassionate care benefits, available to individuals who are temporarily away from work to care for a gravely ill family member, will be extended from six weeks to six months.
  • Home Accessibility Tax Credit – This new non-refundable credit provides tax relief of 15 percent on up to $10,000 of eligible expenses per year, to a maximum of $10,000 per eligible dwelling. Seniors and persons with disabilities are considered qualifying individuals.
  • Registered Retirement Income Funds – Changes to the minimum withdrawal factors for RRIFs permit holders to preserve more of their savings in order to provide income at older ages.
  • Lifetime Capital Gains Tax Exemption – EAP 2015 increases the Lifetime Capital Gains Exemption to $1M on capital gains realized on the sale of qualified farm or fishing property. This increase was not extended to small business owners.
  • Small Business Tax Rate – Reductions to this tax rate from 11 percent to 9 percent will be phased-in from January 1, 2016 to January 1, 2019.

Pre-Budget Budget Announcements – A Refresher

Readers are reminded that the federal government announced several tax measures last fall that did not wait to be included in today’s EAP. The government wanted to ensure the benefits of these initiatives would be available to taxpayers as they meet the deadline for filing their 2014 personal income tax returns by the end of April. These pre-budget measures included:

  • Family Tax Cut – The so-called “income splitting” tax initiative was announced on October 30, 2014. Effective as of the 2014 taxation year, this non-refundable tax credit allows a spouse to transfer up to $50,000 of taxable income to a spouse in a lower tax bracket, up to a maximum of $2,000. The tax credit is available only to couples with minor-aged children. Both the opposition NDP and Liberal parties have promised to terminate this measure should they form government.
  • Universal Child Care Benefit – A $100 per month increase to the UCCB was made available to parents for each child under the age of six, as of January 1, 2015. Moreover, the scope of the UCCB was expanded to capture children aged six through seventeen, an annual benefit of up to $720 per child, effective in the 2015 tax year.
  • Children’s Fitness Tax Credit – The government also announced that it would double the Children’s Fitness Tax Credit to $1,000 and make it refundable. This enhanced measure is available to parents filing their tax returns for 2014.

This flurry of family-friendly tax initiatives from the fall Economic Update left one wondering if anything would be left over for this year’s Budget. As the new EAP 2015 measures summarized above demonstrate, it turns out that the federal cupboards were not completely bare, although several initiatives announced today will not kick in until next year or thereafter.

Sector-By-Sector Measures

  1. Energy & Resources
  2. Several items from today’s Budget will be of interest to Canada’s energy and natural resources sector:

    • Supporting Consultations and Public Engagement in Federal Environmental Assessment Processes – $34 million over five years, starting in this fiscal year, will be provided to the Canadian Environmental Assessment Agency to continue to support consultations related to projects assessed under the Canadian Environmental Assessment Act, 2012.
    • Contributing to the Safety of Energy Transportation Infrastructure – $80 million over five years, starting in the current fiscal year, will go to the National Energy Board for safety and environmental protection and greater engagement with Canadians.
    • Major Projects Management Office Initiative – $135 million over five years, also starting this fiscal year, will be spent on improving the efficiency and effectiveness of project approvals through the Major Projects Management Office Initiative.
    • Extending Natural Gas Export Licences – The maximum length of natural gas export licences will be extended from 25 years to 40 years to improve regulatory certainty for natural gas exporters.
    • Unlocking Rare Earth Elements and Chromite Production in Canada – $23M over five years, starting this year, will be allocated from Natural Resources Canada to stimulate the technological innovation needed to separate and develop rare earth elements and chromite.

    Moreover, EAP 2015 reiterated the commitment made by Prime Minister Harper in February 2015 to provide Accelerated Capital Cost Allowance treatment for assets used in facilities that liquefy natural gas. It bears noting that the first two items highlighted above are designed to address concerns over public engagement on major resource projects.

  3. Manufacturing
  4. Canada’s manufacturing sector received special attention in today’s Budget. Among the key initiatives aimed at this sector are:

    • Automotive Supplier Innovation Program Provide – $100 million over five years, starting in 2015–16, for the creation of the Automotive Supplier Innovation Program, to help Canadian automotive suppliers gain a competitive edge through new innovative products and processes. Of this amount, $50 million over three years, starting this year, will be reallocated from the Automotive Innovation Fund and new resources of $50 million over two years will be provided starting in 2018–19. The program will help research and development projects to become commercially viable by supporting product development and technology demonstration on a cost-shared basis with participating firms.
    • Factory of the Future – The federal government will invest in the National Research Council’s Factory of the Future project as part of the November 2014 federal infrastructure package to enable companies in the automotive and aerospace sectors to improve the efficiency, flexibility and intelligence of their factories through access to collaborative research and advanced manufacturing techniques, such as 3D printing, at state-of-the-art facilities in Winnipeg, London and Montreal.
    • Accelerated Capital Cost Allowance – To support continued investment in machinery and equipment, EAP 2015 provides manufacturers with an accelerated CCA at a rate of 50 per cent on a declining-balance basis for eligible assets acquired after 2015 and before 2026. Machinery and equipment acquired by a taxpayer after March 18, 2007 and before 2016 primarily for use in Canada for the manufacturing or processing of goods for sale or lease, qualifies for a temporary accelerated capital cost allowance (CCA) rate of 50 per cent calculated on a straight-line basis under Class 29 of Schedule II to the Income Tax Regulations.
  5. Defence and Procurement
  6. EAP 2015 includes additional investments in Canada’s military as well as items of interest to firms engaged in selling goods and services to the Government of Canada:

    • Defence Analytics – $2.5M per year, starting in 2016–17, will be provided to Industry Canada to increase the analytical capacity needed to support the Defence Procurement Strategy.
    • Strengthening the Canadian Armed Forces – $11.8B over 10 years through an increase to the annual escalator for National Defence’s budget to three percent, starting in 2017–18 (the current defence escalator is set at two percent).
    • Combating ISIL – DND will be provided with up to $360.3M in the current fiscal year to counter the threat of the Islamic State of Iraq and the Levant.
    • Ukrainian Security Forces – $7.1M will be provided to enable the Canadian Armed Forces to deliver enhanced training assistance to the Ukrainian Security Forces.
    • Improving Integrity of Federal Procurement – A new government-wide integrity regime for its procurement and real property transactions will be introduced to ensure that the federal government does business with ethical suppliers in Canada and abroad (this will deal with problems arising from the Integrity Framework).

    The defence escalator will be welcome news for many in the Canadian Armed Forces although there will no doubt be grumbling from some quarters that it is not sufficient to meet the military’s ongoing operational needs. The funding for Defence Analytics, while small, is critically important.

  7. Transportation and Infrastructure
  8. The federal government announced an investment of $204M to support enhancements to federally-owned and operated airports as well as improvements to VIA Rail Canada’s rail infrastructure. With regard to infrastructure, EAP 2015 announced the establishment of a Public Transit Fund. This new Fund will provide $750M over 2 years, starting in 2017-18, and $1B per year thereafter to help finance transit projects across Canada. Financial support will be allocated based on merit to projects that will be delivered through alternative financing and funding mechanisms involving the private sector, including P3s.

  9. Financial Services
  10. Of particular importance to Canada’s banking sector is the government’s commitment in EAP 2015 to strengthen financial consumer protection in the Bank Act. This move is necessary to reinforce the federal jurisdiction over banking that was called into question by the Supreme Court of Canada decision in September 2014 in the Marcotte case. The SSC found that Quebec’s consumer protection legislation is applicable to banks. In addition, the federal government used EAP 2015 to confirm that it will release its national strategy this year aimed at strengthening Canadians’ financial literacy.

  11. Charities and Foundations
  12. An important initiative aimed at Canada’s charitable giving community was announced today. At present, donations of private shares and real estate to registered charities and other qualified donees can give rise to taxable capital gains. To help Canadians provide more gifts, EAP2015 proposes to exempt individual and corporate donors from tax on the sale of private shares or real estate to an arm’s length party if the proceeds are donated within 30 days. If a portion of the proceeds is donated, the exemption from capital gains tax would apply to that portion. This measure will apply to donations in respect of dispositions occurring after 2016.

  13. Chemicals
  14. The government’s Chemical Management Plan is being renewed with the provision of $491.8M over five years, starting in 2016-17. This additional investment will enable the federal government to complete its assessment of the remaining 1,700 legacy toxic substances to be examined.

Opposition Reaction

The reaction of NDP leader Thomas Mulcair and Liberal leader Justin Trudeau to today’s Budget reiterates core messaging each has been delivering over the past year – not enough is being done by the Harper government to assist middle class Canadians and those who aspire to join the middle class. Mr. Mulcair paid considerable attention in his post-Budget remarks to the Family Tax Cut , which was announced last fall. He asserted that this tax initiative would provide assistance to only 15 percent of Canadian families, and primarily to wealthier Canadians. He also decried the Harper government’s failure to invest in childcare, pointing to his Party’s election platform which calls for significant investments in childcare. Liberal leader Justin Trudeau continued his “wealthy versus the middle class” narrative, pointing out that doubling the TFSA will help wealthier Canadians. He also repeated his condemnation of the Family Tax Cut which he delivered last fall, sounding similar to Mr. Mulcair in this regard. Moreover, the Liberal leader reinforced key messaging that a Liberal government would make significant new investments in public infrastructure. Interestingly, members of the Liberal caucus with economic credentials have been fanning out across the country in recent days to deliver speeches focusing on the Harper government’s economic track record. This has also been featured recently in Question Period. Clearly, the Liberals are feeling confident that they can steal away from the Conservative government the mantle of sound economic manager the Liberals proudly wore during the Chrétien-Martin years.

In Closing

While the federal government has been deliberately focusing its political and policy messaging over the first quarter of 2015 on public safety, security and the fight against jihadist terrorism, the tabling of EAP 2015 today puts public finances and management of the Canadian economy back at centre stage of the political debate. A firm, steady and reliable hand on the economic tiller is generally thought of as the Conservative Government’s core strength, a key part of its brand as a political entity. Oddly and somewhat unexpectedly, an election campaign shining the light on the government’s economic track record may be exactly where the major opposition parties want it to be. Managing the economy, government ethics (the Senator Duffy trial as Exhibit 1), and public safety and security will almost certainly form the “three-legged stool” of issues upon which the 2015 election campaign will be fought. The outcome of this October’s election raises an interesting question: Who will be delivering Budget 2016? We will find out in six months.

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