The 2018 federal budget: A missed opportunity
February 27, 2018
Heading into federal budget day, there were many priorities the business community was hoping to see the government focus on in the 2018 budget. These priorities include reducing business costs and ensuring Canada remains competitive, addressing concerns over proposals to tax passive investments, outlining a path to budget balance, and encouraging workforce inclusion and productivity.
Let’s take a closer look to see how the federal government scored on meeting these business priorities when the budget was tabled on February 27, 2018.
❌ Falls short on competitiveness
As outlined in our 2018 budget submission, the key priority for Calgary business was creating a tax and policy environment that keeps Canadian businesses competitive and encourages business growth.
Budget 2018 offers little to promote this business priority.
Government policies – from all levels of government – are making it harder for businesses to succeed. In the Chamber’s Fall 2017 Business Leader Market Perceptions survey, more businesses (31%) indicated government regulations and taxes as a challenge they face than any other factor.
In Budget 2018, we saw few measures put in place to reduce business taxes or cost burdens. While the federal government has continued its commitment to reducing the small business tax rate to 9% by 2019 – a Calgary Chamber 2018 budget recommendation – a competitiveness gap has emerged between Canada’s and the United States’ tax systems.
Due to the recently enacted Tax Cuts and Jobs Act south of the border, the U.S. marginal effective tax rate (METR) on new investments – considering corporate income tax rates and deductions, sales taxes on capital purchases, and other capital-related taxes – will decrease significantly.
The U.S. aggregate METR decreased from 34.6% to 18.8%, below Canada’s METR of 20.3%. Our competitive standing could be further reduced should NAFTA negotiations deteriorate, which would make it harder for Canadian companies to access the large American market.
According to the Canadian Association of Petroleum Producers, rising costs from government policies, inefficient regulations, and the lack of infrastructure to move Canadian energy products is negatively affecting our ability to attract the capital needed to create jobs and national prosperity. Around the world, capital investment in the oil and gas sector increased in 2017, while investments in Canada decreased. In fact, total capital spending on Canadian oil and gas in 2017 was down 19% from 2016, and 46% from 2014. In comparison, capital spending on oil and natural gas in the United States last year increased by 38% to $120 billion.
There were some measures within Budget 2018 that will promote business success including the reduction in the small business rate, streamlining the administration of customs tariff legislation to reduce business compliance costs, and greater support to encourage efficient airport screening.
However, the Calgary business community views this budget as a missed opportunity to improve competitiveness, and respond to recent U.S. tax reforms.
✔ Backs away from original proposal to tax passive investment income
In summer 2017, the federal government proposed rules to increase the effective tax rate on passive income held within a corporation.
In October 2017, the federal government updated their initial proposal allowing businesses an annual $50,000 passive income threshold which would be exempt from the higher tax burden. These proposals would have hurt many small business’ ability to save and mitigate economic shocks.
In Budget 2018 the federal government announced they would be stepping back from their proposals to tax passive investments. Instead of subjecting passive income to a higher effective tax rate, the government will restrict access to the small business tax rate. The federal small business rate is a lower rate (9% by 2019) applied to income up to $500,000, for smaller corporations with less than $10 million of taxable capital.
The new rules set out in the budget lay out that once a corporations’ passive income exceeds $50,000, a smaller portion of business income will be eligible for the lower small business rate, and will instead be taxed at the higher general corporate rate of 15%. Once a corporations’ passive income reaches $150,000, their business income will no longer be eligible, at all, for the small business rate.
The new rules for the tax treatment of passive income are simpler than previously proposed and will mitigate negative impacts on savings and investment for most small business owners. While the business community supports the federal government’s decision, compared to the original proposal, it is difficult to consider this announcement a “win” for business, as the business community would be better off had these proposals never been initiated.
❌ No path to budget balance
With the national economy growing, it was disappointing that the government chose not to further address Canada’s fiscal challenges. The budget projected Canada’s deficit for 2018 at $18.1 billion, and failed to outline a path to balance in the near future.
According to the Finance Department’s latest projections, Canadians should expect deficits to persist past 2040.
Balancing the budget should be a top priority for the federal government. A balanced budget signals that Canada is a stable place for investments; continued deficits add to uncertainty about future tax increases to service and repay government debt.
Rather than the three years of modest deficits outlined in the Liberal’s 2015 election platform, Canadians now bear annual deficits of nearly double what was promised.
✔ Encourages workforce inclusion and productivity
In the our 2018 budget submission, we recommended the federal government provide employers with broader tax incentives to offer training programs for their employees, and to help underrepresented groups gain the skills they need to succeed in the modern workplace.
Calgary businesses commend the federal government for taking steps to support female entrepreneurs, and encourage the inclusion of Indigenous Canadians into the workforce. Budget 2018 includes an Apprenticeship Grant for women, along with a Pre-Apprenticeship Program to encourage under-represented groups to explore careers in skilled trades.
Budget 2018 also announced the creation of a new Indigenous Skills and Employment Training Program, additional support to promote women-led businesses, along with the expansion of the Canada Summer Jobs Program and the Youth Employment Strategy.
Helping underrepresented groups join and succeed in the workforce will not only benefit business by increasing their access to skilled labour, but could add benefits for the entire economy. According to the Advisory Council on Economic Growth, bringing the participation rates of Indigenous peoples up to those of other Canadians could contribute an additional $7 billion to Canada’s GDP.
We recognize the federal government’s update to their original passive investment proposals as a step in the right direction, and commend their support for female entrepreneurs and improved workforce participation among underrepresented groups. The business community supports various federal government objectives including improving workforce productivity and inclusion, encouraging innovation, and being stewards of clean growth.
However, we are concerned with the direction the government is taking to achieve these objectives.
Many of these objectives are the result of business success, growth, and reinvestment. The most effective way our government can encourage Canadian businesses to invest in more innovation, productivity enhancing technologies, growing their workforce and benefits, and improved environmental performance is to leave more money in their hands to make those investments.
Unfortunately, Budget 2018 did little to address recent government policy trends that are layering costs on business, which is hampering business’ ability to reinvest in future prosperity.
If Canadian governments continue to ignore competitiveness, drive up costs, and reduce regulatory certainty, other jurisdictions with more attractive policies will encourage talent and investments to shift away from Canada.