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March 23, 2017

Federal budget aids innovation delays tax changes

Ottawa wants to spend more on creating jobs in innovative industries and training Canadians to do those jobs. Tax changes will come later.

In a wait-and-see budget, Canada’s federal government is putting off any significant tax moves until a clearer picture emerges of what the U.S. government will do in the coming months. In the meantime, Ottawa continues to lay the groundwork for the “economy of tomorrow.”

Finance Minister Bill Morneau titled the 2017 budget book, “Building a Strong Middle Class,” and many of the initiatives announced are aimed at Canadians who are – or aspire to be – part of that segment of society. Much of this middle-class building is planned to happen via investment and training in innovation, as well as several measures intended to help working women and increase female participation in the workforce.

Morneau promised tax changes to come: “Going forward, we will close loopholes that result in unfair tax advantages for some at the expense of others,” he said in his speech to the House of Commons on March 22. “We will eliminate inefficient tax measures, especially those that disproportionately benefit the wealthy. And we will work with the provinces and territories to crack down on those who hide their identity to avoid paying taxes.”

Improving Canada’s technological edge

The budget proposes spending to improve the country’s technological edge in 6 sectors: advanced manufacturing, clean resources, bio-sciences, agri-food, digital and clean technology. “In the realm of digital technology, I know two things to be true,” Morneau said. “One: Canada can be a world leader in digital innovation. And two: we can't afford not to be.”

Morneau’s speech touched briefly on Canada’s relationship with the U.S.:

"Canada and the United States have the most successful economic relationship in the world, supporting millions of middle class jobs on both sides of the border. We're proud of this fact. And as we prepare for the global economy of tomorrow, we will put our best foot forward, always looking to develop strategic partnerships to attract talent and investment."

“This is a pivotal moment in Canada-U.S. relations, that’s for sure,” says Sadiq S. Adatia, Chief Investment Officer for Sun Life Global Investments. “The pressure on our leaders to maintain and even deepen our economic relationship with the U.S. under President Donald Trump is only going to get more intense. Our competitive edge is crucial for economic growth.”

The Finance Minister is projecting a deficit of $28.5 billion for 2017-18 (including a $3 billion cushion against risk), falling to $18.8 billion by 2021-2022. The debt-to-GDP ratio, which some economists consider a truer measure of a country’s economic health, is projected to shrink from 31.5% this year to 30.9% in 2021-22.

Budget highlights include:

  • Parental benefits to be extended to up to 18 months (spreading the current dollar figure over the longer period) and women to be allowed to apply for maternity benefits for up to 12 weeks before their due date
  • Federally regulated businesses (such as banking, transportation and communications) to be required to allow flexible work arrangements
  • $7 billion over 10 years for child care, and the offer to work with the provinces and territories to create up to 40,000 new subsidized child care spaces over the next 3 years
  • A new caregiver tax credit of up to $6,883 to help families care for dependent relatives and $2,150 for dependent spouses
  • Expanded eligibility for Canada Student Loans and Grants for part-time students and for Canada Student Grants for those with dependent children

Potential changes to individual and corporate taxes in the U.S. will have a major influence on government strategy here. “It’s impossible to say what the repercussions on Canada will be until U.S. policy takes better shape,” says Adatia. “The caveat here of course is Trump. Truly, anything could happen.”

For investors in particular, this points to the importance of keeping things in perspective.

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