Budget 2017 – A Step Towards Stronger Potential Growth

NetNewsLedger Business Report

No Change in Capital Gains Taxation and No Hit to Housing

OTTAWA – BUSINESS – Budget 2017 continues the government’s commitment to support the middle class by enhancing Canada’s long-term growth potential. Investments to foster innovation, skills and the ability to attract top talent from around the world are included. An important and growing competitive advantage is Canada’s openness to trade and immigration, having a broader range of free trade agreements than any other G-7 country. This is particularly potent today as the US is aiming to retrench from free trade and even potentially impose trade restrictions and border adjustment taxes. As well, the US has become an unwelcome destination for many talented immigrants. With Canada’s free trade agreement with the EU, for example, American firms might find it more attractive to locate in Canada to conduct their European activities. Similarly, Canada behooves Canada to finalize plans to join the Trans Pacific Partnership, which was rejected by the Trump Administration.

In direct contrast to the US, Canada is encouraging the immigration of talent and improving the temporary foreign worker program that is so important to tech companies. In addition, the budget introduces measures to improve skills and training for adults and children. Preparing for the digital economy will continue as children’s training in science, technology, engineering and mathematics will be enhanced–the same for adults, both employed and unemployed.

Ottawa is also targeting a few high-potential sectors for government support. These targeted areas are advanced manufacturing, agri-food, clean technology (a sector that the Trump Administration might well be abandoning), digital industries, health/bio sciences and clean resources (also very different from proposed US policy), with the hope of enhancing growth and creating jobs.

The budget also takes to heart the recommendations of the Advisory Council on Economic Growth to retool existing innovation programs, eliminating those that aren’t working, redirecting resources and adopting the analytical framework to effectively help Canada to compete globally. Some of these actions include the development of superclusters, coordinating cross fertilization between educational institutions and private business, and the implementation a new Innovation Fund. The Strategic Innovation Fund will be supported by banks, pension funds and other investors as well as government. Funding for venture capital will be promoted by additional capital for the Business Development Bank of Canada. Improvements to Canada’s Intellectual Property regime will also be introduced.

Infrastructure spending will continue, augmented by the Canada Infrastructure Bank. Private funding and expertise will stretch public monies and accelerate public transit spending and other infrastructure plans.

Other measures include encouraging increased international tourism, which is highly attractive given the weakness in the Canadian dollar and the widespread supply of foreign-speaking Canadians to service these tourists. Additional measures to improve long-term growth potential are summarized in the following table. What is not included is any increase in defense spending despite President Trump’s assertion that NATO members are not paying their fair share. Indeed, Canadian defense spending is expected to decline moderately.Fiscal Prudence

Notably, this budget posts deficits as far as the eye can see. However, the good news is that Ottawa re-introduced a contingency reserve to adjust for potential risk of $3.0 billion per year. This reserve fund was a long-standing practice of prior governments and was absent from Budget 2016. Ottawa, however, continues to focus on a reduction in the debt-to-GDP ratio rather than deficit elimination. This will no doubt be criticized by conservatives.

Tax Measures

Basically, there aren’t any major tax measures. Specifically, there is no change in the tax treatment of capital gains, a red-hot issue in the media for the past few weeks. Finance is cracking down on the use of private corporations to sprinkle income among family members to reduce taxes. These private corporations are subject to lower tax rates than personal income tax rates. Similarly, passive investment portfolios held inside private corporations will be audited. Clearly, the Canada Revenue Agency will be scrutinizing these private corporations in the future, to assure tax fairness for the middle class.

Eliminating tax loop holes, evasion (both domestically and internationally) and avoidance is expected to increase revenues by $2.5 billion over five years.

There will also be a renovation to the current caregiver credit system and extension of the eligibility for the tuition tax credit. Measures will also be taken to strengthen the financial services sector, although these are technical and supervisory and do not affect mortgage lending specifically as some in the industry had feared. The details of these tax measures are presented in the table below.

Budget 2017

Housing Initiatives

Many were concerned that the government would take additional action to slow the housing market, particularly in Toronto where it continues to be very strong. No such action was taken. The Budget document does comment on the high level of household debt relative to income and the affordability concerns in Vancouver and Toronto, however the Budget 2017 suggests that “recent government actions (announced in October) will help mitigate risk and ensure a healthy and stable housing market.”

Budget 2017 proposes to invest more than $11.2 billion over 11 years in a variety of initiatives to build, renew and repair Canada’s stock of affordable housing. A new National Housing Fund will be administered through CMHC to expand lending for new rental housing supply and renewal, support innovation in affordable housing, preserve the affordability of social housing and support a strong and sustainable social housing sector. More federal lands will be available for affordable housing. Details to come later this year.

What Budget 2017 does do is to allocate just shy of $40 million to Statistics Canada over five years to develop and implement a new housing data base, the Housing Statistics Framework (HSF). The HSF builds on the money allocated in last year’s budget to collect data on foreign ownership of housing. “The HSF will leverage existing data from provincial-territorial land registries, property assessment programs and administrative records to create a nationwide database of all residential properties in Canada, and provide up-to-date data on purchases and sales. Statistics Canada will begin publishing initial data in the fall of 2017. The HSF will represent a significant jump forward in the quality and type of housing data available and will yield significant ongoing benefits by enhancing the ability of housing participants, commentators and policy-makers to monitor and analyze the housing market.”

Bottom Line: Budget 2017 does no harm. It essentially ignores the impact of potential actions of the Trump Administration on Canada. While the US economic outlook has been upgraded owing to the likelihood of tax cuts, infrastructure spending and energy sector deregulation, there is no assumption about the impact of a NAFTA renegotiation or the threatened implementation of a border tax. Given the uncertainty surrounding these issues, Ottawa’s approach is prudent.

The Canadian economy has improved considerably since last year’s budget. While oil prices, the Canadian dollar and US interest rates are uncertain, it appears that the economy could grow at roughly a 2.3% annual rate with the jobless rate in Canada remaining below 7%. The resilience of the Canadian economy has been supported by government actions in the 2016 budget as well as accommodative monetary policy.

While I would like to see a plan to return to a balanced budget, Canada will have no trouble in funding its debt or maintaining its triple-A credit rating.

Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

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