Crisis Management, Canadian Style: Federal Budget - January 27, 2009

Boomers and Deficits

Deficit Spending and Debt

Sober Economic Indicators

It's About Financial Literacy

Technical Provisions: Some Highlights

• For Employees And Their Employers:
• For Seniors:
• For Home Buyers
• Business Tax Provisions

What was Missed

Finance Minister Jim Flaherty brought down what some might consider the most important federal budget this century, taking steps to stimulate the economy in unprecedented difficult times. In the midst of what is now called a broad-based recession that began in the fourth quarter of 2008, one that is expected to last at least three quarters, deficit spending is a reality again for the first time in a decade.

Boomers and Deficits. Today's deficits will surely become the taxes of tomorrow. This trend is of particular significance to the ten million or so baby boomers who make up approximately one third of our population and just under 50% of our tax filers.

By the year 2011, the first boomers will reach age 65. According to Infrastructure Canada, those age 65 and over are the most intensive users of the health care system, a financing burden yet to come for Canadian governments. (For more information link here).

At best, this budget will require taxpayers to ask hard questions, not only about the financial state of the nation, but about their own ability to fund retirement income and health care costs, if governments are stretched by new financing costs.

What effects will deficit spending today have on public pensions and the health care system? How will deficits affect taxation on after-tax retirement income or wealth transition in the future? How will incomes of boomer offspring fare on an after-tax basis?

Now is a good time to revisit retirement income plans, family succession and estate plans in an attempt to better understand financial needs for a future, which could certainly include tax increases on income or capital.

Deficits Lead to Accumulated Debt. Canadians are poised to lose the progress they have made in paying down their collective public debt throughout the past decade.

Projected Deficit Spending Per January 27, 2009 Federal Budget:

Spending in the budget has been focused in the following areas to support the fallout of difficult economic circumstances for workers, families and businesses:

SPENDING SUMMARY:

• Infrastructure $12 Billion
• Tax Reductions: $20 Billion
• Housing Construction and Renovations $7.8 Billion
• Financial Security: $200 Billion
• Skills Training $8.3 Billion
• Business Support $7.5 Billion

According to Statistics Canada, in 1995 federal governments had been spending more than they collected for 25 consecutive years leading, with interest costs eating up 26% of the entire budget by that time. This paved the way to the highest net federal debt in our history--$588 Billionóby 1997.

However, with a reduction in program spending and a growing economy, Canada recorded a surplus for the first time in 28 years in 1997/98; and with consecutive surpluses continuing into the new century, the net federal debt had been reduced to $457.6 billion in 2007/08.

Now, the accumulated federal debt will go back up to $542 Billion dollars, close to its 2001 level of $545 Billion. What will be important to watch is the cost of servicing this debt. Should increases in interest rates be part of our future, they will eat more of the revenues Canadian taxpayers can raise, potentially cutting into health care and pension funding ability.

SOBER ECONOMIC INDICATORS. It may be a good time to buy a home or a commercial building; however returns on investments will languish for a while yet.

The Economic Indicators in this budget are also more sober than in prior budgets: The outlook for nominal GDP growth in Canada has been reduced to -1.2 percent from 0.8 percent in November. The tax base for government revenue will be $25 Billion lower in 2009 and $30 Billion lower in 2010 than originally anticipated in the fall.

Short-term interest rates are expected to fall to 0.8 percent in 2009 and 1.7 percent in 2010. The outlook for long-term interest rates has also been revised downward to average 2.8 percent in 2009 and 3.4 percent in 2010, from 3.7 percent and 4.2 percent, respectively, at the time of the November 2008 Economic Statement.

Slower economic growth is expected to increase the unemployment rate in Canada to 7.5 percent in 2009 and 7.7 percent in 2010, compared to 6.9 percent in 2009 and 6.7 percent in 2010 as forecast in the Statement.

PRIVATE SECTOR FORECASTS, JANUARY 27, 2009 FEDERAL BUDGET

IT'S ABOUT FINANCIAL LITERACY.

Financial literacy is the ability to understand personal and broader financial matters, apply that knowledge and assume responsibility for one's financial decisions. The federal budget defined financial literacy as an important life skill that empowers consumers to make the best financial decisions in their particular circumstances.

The government plans to establish an independent task force, which will make recommendations to the Minister of Finance on a cohesive national strategy on financial literacy, to enable Canadians to take better control of their own financial futures.

Financial advisors who themselves work as educators as they manage wealth together with their clients make a significant contribution to the best financial decision-making for the family.

TECHNICAL PROVISIONS. The Notice of Ways and Means Motions detailed changes to amend the Income Tax Act discussed below:

BROAD-BASED TAX RELIEF: The Budget has introduced minor broad based tax changes, meaning they will apply to everyone reaching the following income levels:

• The Basic Personal Amount has been increased to $10,320, retroactive to January 1, 2009.
• The top income threshold for the 15% lowest-tax bracket has increased from $38,832 to $40,726
• The top income threshold of the next tax bracket (22%) has increased to $81,452 from the projected $77,664.
• Normal indexation will apply to the new basic personal amount and bracket thresholds for future years.

TARGETED TAX RELIEF: Targeted tax relief in this budget focuses on employees, seniors and home owners, as well as business owners.

FOR EMPLOYEES AND THEIR EMPLOYERS:

Employment Insurance Benefit Changes. EI premium rates will be frozen at $1.73 per $100 for both 2009 and 2010. This is good news for the plans contributors: employees and employers.

Working Income Tax Benefit Changes. This credit, currently set at $510 maximum for a single taxpayer, is a bridge from welfare to the workforce. The new budget proposes to enhance it to provide a refundable tax credit of 25 percent of each dollar of earned income in excess of $3,000, reaching a maximum benefit of $925 at $6,700 of earned income. Once income exceeds $10,500, the benefit would be reduced at a rate of 15 percent of each additional dollar, until the benefit is fully phased-out at an income of $16,667.

The WITB thereby reduces average effective marginal tax rates on earned income between $3,000 and $10,000. The WITB clawback however, increases these rates on earned income between $10,000 and $20,000, as it is being phased out. Despite this increase, it is the government's hope that the WITB ìstrengthens incentives to find and keep a job, by increasing the net returns from work.î

EI Benefit Changes And Training Initiatives. For those about to lose their jobs, some help from Employment Insurance:

• For the next two years all regular Employment Insurance (EI) benefit entitlements will be increased by five extra weeks to 50 weeks from 45 weeks.

• EI income benefits will be extended for two years to Canadians participating in longer-term training, benefiting up to 10,000 workers.

• Work-sharing agreements will be extended by 14weeks, to a maximum of 52 weeks, so more Canadians can continue working.

• Wage Earner Protection Programs will be extended to cover severance and termination pay owed to eligible workers impacted by employers' bankruptcy. EI is also to be changed to allow earlier access to EI benefits for workers who received severance packages if they use some or all of their severance pay to purchase skills upgrading or training.

• Consultations will begin for the development of options to provide self-employed Canadians with access to EI maternity and parental benefits.

• Increased funding for training delivered through the Employment Insurance program by $1billion over two years.

• $500 million will be invested over two years in a Strategic Training and Transition Fund to support the particular needs of individuals who do not qualify for EI training, such as the self-employed or those who have been out of work for a prolonged period of time.

• $55 million will be provided over two years to help young Canadians find summer jobs.

• Older workers and their families will receive an additional $60 million over three years for the Targeted Initiative for Older Workers and the program will be expanded to include workers in small cities.

• Skilled labour shortages will be addressed with $40 million a year to launch the $2,000 Apprenticeship Completion Grant.

• $50 million will be provided over two years for a national foreign credential recognition framework in partnership with provinces and territories.

• An additional $100 million over three years in the Aboriginal Skills and Employment Partnership (ASEP) initiative, expected to support the creation of 6,000 jobs for Aboriginal Canadians.

• $75 million will be invested in a two-year Aboriginal Skills and Training Strategic Investment Fund.

An additional $87.5 million will be provided over three years to temporarily expand the Canada Graduate Scholarships program. And an additional $3.5 million will be provided over two years to offer an additional 600 graduate internships through the Industrial Research and Development Internship program launched in Budget 2007.

FOR SENIORS: There is some good news in the budget for seniors:

• Age Credit rises for seniors: Seniors aged 65 or more will benefit from a $1,000 increase in the Age Credit, which rises from $5,408 to $6,408, with indexing thereafter.

• Age Credit Clawback: The age credit is phased out at $32,312 (no change from prior rules) and is completely phased out at $75,032, an increase from the prior $68,365.

• RRIF Recontributions. The Government will also be proceeding with the proposal announced in the November 2008 Economic and Fiscal Statement to reduce the required minimum Registered Retirement Income Fund withdrawal for 2008 by 25 percent to recognize the impact of the deterioration in market conditions on retirement savings.

• RRSP or RRIF losses after death. The amount of post-death decreases in value of these plans will be carried back and deducted against the income included in the year of death.

FOR FAMILIES WITH CHILDREN:

Child Tax Benefit Threshold Increases: Low-income families can earn an extra $1,894 and still receive the maximum National Child Benefit supplement, providing additional benefits of up to $436 annually.

FOR HOME BUYERS

First Time Home Buyer's Tax Credit. A new non-refundable tax credit of $5,000 is introduced for the purchase of qualified homes that close after January 27, 2009. This is claimable for the taxation year in which the home is acquired.

Taxpayers qualify as ìfirst time home buyersî if neither the individual or his/her spouse or common-law spouse owned and lived in another home in the calendar year of the purchase or any of the four preceding years, which are the same rules as for the Home Buyer's Plan. The home must be occupied no later than one year after acquisition.

The unused portion of the credit can be transferred to a spouse. In the case of joint buyers of the home, the credits claimable by those individuals must not exceed the maximum amount of the credit claimable by any one individual.

A taxpayer who is eligible for the Disability Tax Credit (DTC) may also claim the credit if that home is being acquired for the disabled person to live in a more accessible dwelling.

Home Renovation Tax Credit (HRTC). In a provision that's sure to ferret out renovations-for-cash contractors, this temporary Home Renovation Tax Credit (HRTC) will apply only to the 2009 tax year.

A new non-refundable tax credit worth a maximum of $1350 (calculated as 15% on home renovation projects between $1,000 and $10,000) will be available for work performed or goods acquired after Budget Day and before Feb. 1, 2010 to personal residences ordinarily inhabited by the individual, spouse or common-law partners and their minor children.

The credit will apply to expenses in the period January 28, 2009 and before February 1, 2010. (If agreements for work were entered into before January 27, the expenditure will not qualify.)

Eligible expenses will include renos that are of an enduring nature and integral to the eligible building, including labour and professional services, building materials, fixtures, equipment rentals and permits.

Not eligible are purchase of tools, routine repairs, appliances, audio-visual electronics, furniture or drapes.

Unused portions of the credit can be transferred between spouses. Families who share ownership of a dwelling can each claim their own credit, but each family's credit will be determined by their respective expenses over $1,000 but not more than $10,000.

Increased Tax Free Withdrawal Under RRSP Home Buyer's Plan. The budget has also increased the HRP withdrawal limit from $20,000 to $25,000 for those using the funds to build or buy a home.

BUSINESS TAX PROVISIONS

Most important amongst the changes is the increase to the annual amount of active business income eligible for the reduced corporate tax rateóthe small business limit. It has been increased as of January 1, 2009 to $500,000 from its current level of $400,000.

Changes have also been announced to enhance Investment Tax Credits, continue on with accelerated capital cost allowance rates and most notably allow for the 100% write off of computers and software after January 27, 2009 and before February 2011. The latter provisions will not be subject to the half year rules.

Technical Details and Explanations for personal, corporate and GST provisions can be found in EverGreen Explanatory Notes.

WHAT WAS MISSED

We tried! Despite broad public budget consultation, the follow provisions, proposed by the Knowledge Bureau were missed is this budget (Oh well, maybe next time?):

Broad-based Tax Relief to Stimulate the Economy:

1. REDUCE WITHHOLDING TAXES: Overpaid taxes takes $178,000 out of lifetime savings for the average Canadian worker (40 years, 30% marginal tax rate, average rate of return on investment 5%)

2. REINTRODUCE GENERAL AVERAGING: Volatile fluctuations in income due to circumstances beyond your control require tax adjustmentóaverage income taxes payable over 5 years

3. ALLOW FAMILY INCOME SPLITTING: Canadians make decisions as an economic unitófamilies should have the benefits of income splitting like pensioners do.

Targeted Tax Relief:

1. Job loss: Reduce taxes on severance packagesóallow rollovers into an RRSP

2. Family Properties: Eliminate capital gains tax on the transfer of family cottages to spouse or next generation

3. Investments: eliminate taxation on interest incomeóit should not cost you to park in these times

4. Students: increase transfer of tuition/education amounts to $10,000

5. Child Care: allow EI benefits as qualifying earned income

6. Volunteering: give a tax credit for hours worked in the community