With Regard to the 2009 Budget, Only Time Will Tell
Arthur Drache, January 27, 2009
The government had two priorities in bringing down the 2009 Budget. The first and by far the more important to the government was to survive, which meant bringing down a document which did not offend the Liberals too much. This Budget will ensure that this goal will be achieved, though of course at a cost of all their traditional principles. But as Mr. Harper has showed over the past year or two, principles take distant second place to political survival. The second goal was to take steps which would help Canada climb out of what appears to a deep recession bordering on a depression. To this end, the government announced a combination of stimulative spending and modest tax cuts which will add up to a $34 billion dollar deficit in fiscal 2009/10 and another $30 billion in 2010/11. They claim there will be a surplus in 2013-14, a promise only the credulous would buy. The truth is that those who lead us and those who advise us are grasping at straws right now and anybody who says that they know what the impact of the measures announced on January 27 will be is either a fool or a charlatan. The Budget was delivered against a darkening economic background. A week earlier in its latest update on the state of the economy, the Bank of Canada predicted a contraction of 2.3 per cent annualized for the fourth quarter of 2008, followed by a deeper drop of 4.8 per cent for the first three months of 2009 and a drop of one per cent in second quarter of this year. However, the bank sees a rebound to positive activity by the third quarter of the year, when it forecasts two per cent growth and 3.5 per cent expansion in the last three months of the year. Some of us have grave doubts as to the accuracy of the latter part of the forecast. The day of the Budget Statistics Canada reported a whopping increase in the take-up rate for employment insurance. In November, 506,320 Canadians received regular Employment Insurance (EI) benefits, up 15,300 or 3.1% from October, after seasonal adjustment. The number of Canadians receiving regular EI benefits rose by 48,700 between November 2007 and November 2008, a 12.3% increase. The number of men receiving benefits increased 17.1%, and the number of women, 6.1%. The number of regular EI beneficiaries increased in all jurisdictions compared with a year earlier. Ontario (+28.2%), British Columbia (+24.6%), Nunavut (+21.9%) and Yukon (+21.3%) posted the largest year-over-year increases in regular EI beneficiaries. The number of EI regular beneficiaries increased in most census metropolitan areas in the past year, with the largest year-over-year advances occurring in Oshawa (+99.1%), Windsor (+57.9%) and London (+46.5%). The Budget did look at EI issues though some would say that the moves were not dramatic. Premiums were frozen which of course helps both business and works. In addition: . Increasing for two years all regular Employment Insurance benefit entitlements by five extra weeks and increasing the maximum benefit duration to 50 weeks from 45 weeks. . Providing $500 million over two years to extend EI income benefits for Canadians participating in longer-term training, . Extending work-sharing agreements by 14 weeks, to a maximum of 52 weeks, so more Canadians can continue working. . Extending the Wage Earner Protection Program to cover severance and termination pay owed to eligible workers impacted by employers’ bankruptcy. . Consulting with Canadians and developing options to provide self-employed Canadians with access to EI maternity and parental benefits. Don’t get us wrong. We don’t think that the government had a lot of choice. The fundamental errors they made were in the past couple of years in diminishing surpluses with excess spending and politically motivated tax cuts while, during 2008 ignoring what just about every other sentient being saw, namely that the worldwide economy was deteriorating. They blew, through their own stupidity, the chance to start making ameliorating moves in November with an economic statement which ranks with the most feckless in recent decades. Turning to broad-based tax cuts, we have to admit some surprise with the most heralded one, tax cuts for the middle and lower income taxpayers. Most people were anticipating rate decreases, which of course benefit everybody no matter how high their income might be. Instead the government bought in a widening of the two lower brackets which limits the benefits. The budget proposes to increase the basic personal amount and the two lowest personal income tax brackets by 7.5 per cent above their 2008 levels, effective January 1, 2009. As a result of these measures: . the basic personal amount, the spousal and common-law partner amount, and the eligible dependant amount will increase for 2009 to $10,320 from $9,600 in 2008, . the upper limit of the first personal income tax bracket (15-per-cent income tax rate) will increase to $40,726 in 2009 from $37,885 in 2008, and . the upper limit of the second personal income tax bracket (22-per-cent income tax rate) will increase to $81,452 in 2009 from $75,769 in 2008. The impact won’t be felt quickly. Those who will benefit probably will see some help in lower withholding taxes if they are still working but for a lot of people, the benefit will really only be seen when their 2009 tax returns are assessed. In terms of personal tax relief, there are some other minor items. . The income levels on which income-testing of the base benefit under the Canada Child Tax Benefit (CCTB) and the National Child Benefit supplement (NCBS) are based, will be increased in line with the increase in the upper limit of the lowest personal income tax bracket. Specifically, for the 2009-10 benefit year, the income level at which the phase-out of the CCTB begins will increase to $40,726, and the income level at which the phase-out of the NCBs begins will increase by $1,894 such that it is completely phased out by $40,726 for the majority of families. . Budget 2009 proposes to increase the Age Credit, a federal income tax credit for Canadians 65 years of age and older, for the 2009 and subsequent taxation years. For 2009, the amount on which the Age Credit is based will be increased by $1,000 to $6,408, effective January 1, 2009, and indexed thereafter. This increase will help eligible low- and middle-income seniors by providing up to $150 of additional federal income tax relief each year. For 2009, the net income level at which the Age Credit begins to be With this enhancement of the Age Credit amount, the income level at which the Age Credit is fully phased out will increase by over $6,600 to $75,032 from $68,365. The headline grabber for much of the media is the home renovation proposal. . Individuals will be able to claim a 15-per-cent non-refundable tax credit for eligible expenditures made in respect of eligible dwellings. The credit will apply to expenditures in excess of $1,000, but not more than $10,000, resulting in a maximum credit of $1,350 ($9,000 x 15%). The credit will apply only to the 2009 taxation year. Expenditures for work performed, or goods acquired, after January 27, 2009 and before February 1, 2010, will be eligible for the credit. The credit will, however, not be available in respect of expenditures for work performed or goods acquired in that period if the expenditure is made pursuant to an agreement entered into before January 28, 2009. Individuals may claim this credit (including in respect of expenditures made in January 2010) in their 2009 income tax returns. . The $9,000 cap on qualifying expenditures applies to a family unit. In the Department’s example, spouses can only claim a maximum of $9,000 between them, but sisters who jointly own a residential property can each claim the maximum of $9,000. . If the renovations are done to a property that is a mixed use – part residential and part rental, the same allocation that is used for general expenses will also be used to determine the amount that qualifies for the Home Renovation Tax Credit. There will be a lot of fine print associated with this proposal and the short time frame during which it will be available will, we suspect, create logistical problems. It is far from clear how quickly the government agencies will be able to process the claims. . The Budget also proposes to introduce a new non-refundable tax credit based on an amount of $5,000 for first-time home buyers who acquire a qualifying home after January 27, 2009 (i.e. the closing is after that date). The credit for a taxation year will be calculated by reference to the lowest personal income tax rate for the year and is claimable for the taxation year in which the home is acquired. An individual will be considered a first-time home buyer if neither the individual nor the individual’s spouse or common-law partner owned and lived in another home in the calendar year of the home purchase or in any of the four preceding calendar years. A qualifying home is one that is currently eligible for the Home Buyers’ Plan that the individual or individual’s spouse or common-law partner intends to occupy as the principal place of residence not later than one year after its acquisition . For those first time home buyers who have RRSP funds that they can access through the Home Buyers’ Plan, the withdrawal limit will be increased from $20,000 to $25,000 When a taxpayer dies with money in an RRSP or RRIF, the value of the RRSP or RRIF is brought into the taxpayer’s income in the year of death, unless the plans are transferred to a spouse or, in very limited circumstances, to a dependent child. After the death of the taxpayer, any income or loss is generally taxed in the hands of the beneficiary. There is, however, no existing income tax provision to recognize a decrease in the value of RRSP or RRIF investments that occurs after the annuitant’s death and before they are distributed to beneficiaries. Budget 2009 proposes to allow, upon the final distribution of property from a deceased annuitant’s RRSP or RRIF, the amount of post-death decreases in value of the RRSP or RRIF to be carried back and deducted against the year-of-death RRSP/RRIF income inclusion. The amount that may be carried back will generally be calculated as the difference between the amount in respect of the RRSP or RRIF included in the income of the annuitant as a result of the death of the annuitant and the total of all amounts paid out of the RRSP or RRIF after the death of the annuitant. In truth, this budget was never about tax relief and indeed, had the government not raised the issue (again, another ideological decision) we would guess that nothing much would have had to be done. None of the changes which were made are going to put significant funds into taxpayers’ pocket in 2009. The success of this Budget is much more likely to be determined by historians rather than economists. The former will write, either with admiration or scorn, about the government’s attempts to deal with the crisis. We hope to be around to hear how it worked out.