Retail Therapy for Governments
by: Adam Aptowitzer
Pre-election budgets can be predictable in their spending, but in certain circumstances budgets are predictable because they spend. Budget 2019 falls into this unusual class of retail therapy because government revenues are pouring in yet this is a pre-election budget (and this is a Liberal government). Consequently, extra revenues did not result in tax cuts. but rather in more spending and there are a number of interesting proposals on new spending initiatives that will likely be debated in the course of the election. Nevertheless, there are changes on the taxation side that are not controversial and are mostly associated with Canada’s international obligations, so we assume they will survive an election and even a change in government. We will leave a review of the spending programs for the major media outlets who will likely obsess over them for the next few days.
We have written before about the impact of the Financial Action Task Force’s (the “FATF”) forty recommendations has on Canada’s domestic policy. The international pressure to make Canada’s system more compliant was previously announced in the Fall’s fiscal update with changes to promote beneficial ownership transparency (see here). And this budget, predictably, and without any allocation of funds, committed the government to continue work with the provinces and territories to improve corporate ownership transparency. The Budget also committed major funds to improve the policing surrounding money laundering and the financing of terrorism – and related to that, tax evasion. Listed as a separate program, but in the same vein, the Budget provides financing to further enforce the current rules combatting underreporting and money laundering in the purchase and sale of real estate around the country but primarily in Toronto and Vancouver.
These measures are complemented by an investment to, amongst other things, hire additional auditors and target cryptocurrency transactions and the digital economy, as well as combat non – compliance by non – residents. Interestingly, the Budget documents suggest an investment of $150.8 million over five years will lead to increased revenue of $369 million. With that kind of return, one might ask why more was not invested, but at the very least it becomes clear that more can be expected in future.
In addition to these more pervasive plans, the government proposed changes to elements of the Income Tax Act that have more specific focus. The first of these relates to rules around transfer pricing. The second is intended to synchronize Canada’s employee stock tax option regime with the United States for employees of large, long – established, mature firms. Basically, the proposal is to apply a $200,000 annual cap on employee stock option grants. It is thought that this approach will limit the benefit of preferential tax treatment at more established firms but still make stock options and an attractive alternative compensation model for start ups. Apparently, further details of the stock option measures will be released before the summer of 2019.
Budget 2019 also increased the Guaranteed Income Supplement (the “GIS”) for low – income seniors. By way of reminder the GIS allows a certain amount of tax-free earnings for a low-income senior. When the senior earns more than the basic minimum, the amount received is ‘clawed back’. The proposed increase in the basic minimum would increase the amount of tax-free income from $3500 to $5000 and provide a partial exemption of 50% of up to $10,000 of annual employment income.
Finally, there were also tax measures to:
- provide outreach to Canadians on certain tax benefits;
- provide GST / HST relief for those who seek medical help in combatting infertility, and other GST / HST changes for certain health issues;
- allow a complete deduction in the first year for businesses that purchase zero emission vehicles, up to $55,000; and
- various other changes whose consequences are limited to small numbers of Canadians.
Besides these tax expenditures there were a number of the expected sops to the voters. Budget 2019 included sweeteners for the younger demographic buying their first home and paying their student loans, the environmental set interested in reducing Canada’s carbon emissions, First Nations and Metis, workers changing jobs, improving Internet connectivity and more. And, as written about elsewhere in this newsletter, changes to allow for newspapers to qualify as registered charities. Those journalists will have lots to write about between now and the election.