Budget 2011: Implications for investors and personal finances

A recycled budget? Not exactly.

Finance Minister Jim Flaherty and Prime Minister Stephen Harper make their way to the House of Commons to deliver the budget speech, Monday June 6, 2011 in Ottawa.  (CP/Fred Chartrand)

The Conservatives promised to deliver on June 6, 2011, the same budget that was tabled on March 22 — with a few tweaks. The suggestion that there would be a few changes put some people on their guard: could the Conservatives slip in a few surprises? “As such, the upcoming budget deserves even more scrutiny than its predecessors,” Deloitte Canada cautioned in a release before budget day.

As it turned out, the only new announcement was a minor update to the government’s fiscal outlook to reflect fiscal developments since March. The projected budgetary deficit in 2010-11 was revised down from $40.5 billion to $36.2 billion and in fiscal 2011-12 was revised upward from $29.6 billion to $36.2 billion, for a cumulative reduction of $1.6 billion over the two years. The projections for later years were unchanged.

In fact, the budget document is virtually the same as the one used in March. It has the identical cover and page layout. The only real difference is an extra 25 pages to accommodate material (as bolded in blue) pertaining to the fiscal update and the measures, announced ahead of the budget, dealing with the phasing out of tax allowances for political parties and payments to Quebec for sales tax harmonization.

Fred O`Riordan, a national tax advisor with Ernst & Young, wasn’t surprised by the lack of new measures. The Conservatives wanted to honour their campaign promise to stick with the March budget. “But longer-term, the Conservatives will need to deal with the real issues,”O’Riordan said. “They need to encourage productivity and growth through measures such as broad-based reductions in personal taxes and increased contribution limits for registered plans to encourage savings.”

There had been speculation one or more of the following election promises would be included:
• Increase the annual contribution limit for the TFSA to $10,000;
• Increase the limit for Children’s Fitness Credit to $1,000 (and make it refundable);
• Introduce Adult Fitness Tax Credit of up to $500;
• Permit income splitting of up to $50,000 for couples with children under 18.

They were nowhere to be seen. There is plenty of time to introduce these commitments in future budgets: they came with the proviso they would not be implemented until the budget was balanced, which the Department of Finance forecasts will occur in fiscal 2015-2016. The Conservatives will be conducting a program review this year and they expect the new round of spending cuts (to be included in the next budget) will result in budget balance a year earlier, 2014-2015.

Although the budget was a recycled one, budget reaction was by no means recycled, particularly concerning the decision to keep virtually the same economic projections used in the March budget. The economic landscape since then has clouded over considerably, suggesting that the achievement of a balanced budget by fiscal 2015-2016 could be too rosy an assumption.

Even before recent softening in economic conditions, Fraser Institute economists Niels Veldhuis and Charles Lammam believed the official projection for a balanced budget was overly optimistic. They noted in a jointly issued statement that it “pinned its hopes on revenues growing at a robust average rate of 5.6 per cent over the next five years while holding program spending increases to an average rate of 1.6 per cent.” The Conservatives program review this year will close the gap in expected revenue and spending growth somewhat but will still depend on rather dramatic growth rates in tax revenues.

The consequence of missing the forecasted period, of course, would be a delay in enacting the above-mentioned election promises concerning increasing TFSA contribution limits and so on. The delay could potentially be lengthy if fiscal deficits become chronic due to persistent weakness in the economy.

Impact on personal finances

The June 6 budget delivered the same package of tax cuts targeted at families. These concessions are popular with families but Parliamentary Budget Officer Kevin Page is calling for a review of the government’s use of such “tax expenditures” on the grounds they don’t receive as much review by Parliament as program spending, among other reasons.

Ben Sand and Peter Taylor, analysts at the Winnipeg-based Frontier Centre for Public Policy, cite evidence that the Children’s Fitness Tax Credit, for example, doesn’t encourage more children to play organized sports. Well-off parents enrol their children in sports program regardless of the tax breaks while less well-off parents can’t afford to pay enrolment fees to begin with.

Andrew Dunn, a managing partner at Deloitte Canada, favours broad-based reductions in personal taxes. “Low personal taxes would encourage skilled and talented persons to work in Canada, which would contribute to enhancing productivity and competitiveness,” Dunn argues.

To review, here are the main proposals with a direct bearing on the finances of Canadian families and individuals:

Children’s Arts Tax Credit
Parents can claim a 15% non-refundable credit of up to $500 on artistic, cultural, recreational, and developmental activities in which children under the age of 16 are enrolled. Children eligible for the Disability Tax Credit receive more generous treatment: the age limit is 18 years and an extra $500 credit can be claimed.

Activities must be supervised, contribute to development of the child, not part of a regular school curriculum and ongoing (for example, five consecutive days at a camp). Eligible activities include art, chess, crafts, drama, girl guides, languages, music, painting, public speaking, scouts, and tutoring.

The Children’s Arts Tax Credit amounts to an annual tax reduction of up to $75 per child. Along with the existing Children’s Fitness Tax Credit, a family of four may claim a credit of up to $2,000 per year, or a tax reduction of up to $300, for their two children.

Family Caregiver Tax Credit
Caregivers of infirm dependants (including spouses, common-law partners and minor children) will be able to claim a 15 per cent non-refundable tax on $2,000 (indexed for inflation) if receiving a dependency-related credit such as the Child Tax Credit, Infirm Dependant Credit, or the Caregiver Credit.

EcoENERGY Retrofit program
The federal government will extend the ecoENERGY Retrofit-Homes program into fiscal 2011-12. It provides up to $5,000 toward the cost of improving energy efficiency in the home.

Financial literacy and protection
The federal government’s initiative on financial literacy is being advanced with the appointment of a Financial Literacy Leader. As well, some questionable practices of financial-service providers are being banned. One such case is pre-paid credit cards, which charge high, poorly explained fees. Another is unsolicited credit-card cheques. “They’re insidious because … interest starts accruing as soon as the cheque is cashed … and disclosure is weak,” remarked Ram Balakrishnan, author of the Canadian Capitalist blog on

Other measures include:
• remove rule limiting Child Tax Credit (CTC) to one claimant per household (to allow two or more families sharing a house to claim the CTC);
• repeal $10,000 cap on medical expense tax credit claims made on medical costs incurred for an eligible dependent;
• easier access to funds in Registered Disability Savings Plans for beneficiaries with shortened life spans;
• improved Employment Insurance benefits to parents of gravely ill, murdered, or missing children; and
• enhanced ability to make transfers between individual RESPs, and better access to RESP funds for post-secondary students studying outside Canada.

Impact on investors (and retirees)

Proposals affecting investors and retirees were carried over. The focus was on enhancing the retirement system and closing loopholes exploited by aggressive tax-planning activities.

Improvements to the retirement system
For seniors who subsist mostly on Old Age Security (OAS) benefits and the Guaranteed Income Supplement (GIS), annual payments under the GIS are to be topped up as much as $600 for eligible singles and as much as $840 for eligible couples. About 650,000 seniors will receive more than $300 million a year under this measure.

The federal and provincial governments are in talks to introduce the Pooled Registered Pension Plan (PRPP), which is targeted at self-employed individuals and employees without pension plans at small- to medium-sized businesses. PRPPs are like defined contribution pension plans, or group RRSPs. Malcolm Hamilton, a partner at consulting firm Mercer, thinks there is room for the PRPP as long as the fees are low and the plans offer enough advantages over group RRSPs for employers to adopt them (e.g. much of the administrative burden transferred to the government).

Clamp-down on income splitting via capital gains
The budget proposes to curtail income-splitting based on capital gains realized by a minor on a sale of shares to a non-arm’s length person — if taxable dividends on the shares would have been subject to the tax on split income. Capital gains so realized will be treated as dividends for tax purposes.

Anti-avoidance rules for RRSPs
More forceful actions, including legislative amendments, will be taken to deal with tax planning schemes that claim to enable RRSP holders to make tax-free withdrawals.

Restrictions on Individual Pension Plans (IPPs)
The June 6 budget reiterates a proposal to require a member of an IPP, once they turn 72, to make minimum annual withdraws similar to what’s required for Registered Retirement Income Funds (RRIFs). And contributions for past years’ service will need to be first funded out of a member’s existing RRSP (or require reducing contribution room).

Limits on tax exemption on donations of flow-through shares
The budget proposes to limit the exemption from capital-gains tax on donations of publicly traded flow-through shares. It will be restricted to capital gain resulting from increase in value from the original cost, excluding the gain resulting from the flow-through credits.

Mineral Exploration Tax Credit
The Mineral Exploration Tax Credit, set at 15 per cent of specified mineral exploration expenses renounced on a flow-through basis, is extended by one year.