Tax reduction measures will have little impact on productivity in the short term

Federal Budget

The Conservative government used its first Budget to announced a series of 29 general and targeted corporate tax cuts designed to make Canadian business more productive and competitive. But many of the cuts are not due to take effect immediately and some won't be implemented until 2010, eliciting a mixed reaction from the business community. Bolstered by a strong economy, low inflation and the prospect of future budgetary surpluses, the Budget takes a generalist approach to tax reduction while announcing specific measures for sectors such as forestry, mining and vintners, small brewers and fishers.

The one bright spot for innovative and high-tech firms are changes to the legislation for the scientific research and experimental development (SR&ED) tax credit. The Budget proposes to extend the loss carry-forward period investment tax credits from 10 years to 20 years. The extension of the carry-forward period has long been a recommendation of large innovation-intensive firms like Nortel Networks Corp. The provision also applies to investment tax credits for Atlantic Canada and mineral exploration.

The Budget announced that the taxable income threshold for the 35% SR&ED tax credit for Canadian-controlled private corporations would be extended. from the current $300,000 to $500,000 to $400,000 and $600,000.

The IDA Industry Association representing the investment industry said the Budget's measures would help competitiveness but do little to boost productivity. In particular, it cited the Conservatives' failure to follow through on its election pledge to "eliminate the capital gains tax for individuals on the sale of assets when the proceeds are reinvested within six months" (R$, January 24/06).

"Capital gains tax relief, through deferral mechanisms or lower effective rates, stimulate the savings-investment process and should be central to the government's productivity agenda," stated the IDA, adding that consultations with the community should "proceed immediately".

Canadian Manufacturers & Exporters generally applauded the Budget but noted that the measures fall short of the CME's standard for tax competitiveness.

"We weren't expecting a budget that would make competitiveness a priority, so this is definitely a positive step forward, stated CME president and CEO Perrin Beatty.

The Information Technology Association of Canada was also supportive of the Budget, stating that it laid the basis for "a more strategic and comprehensive approach to stimulating productivity" in the future. It also noted that the Budget's measures to promote apprenticeships in traditional trades "can readily be extended to tackle the shortage of skills faced by the ICT industry".

The general corporate income tax rate is slated to fall 0.5% to 20.5% on January 1/08, another 0.5% one year later and 1% to 19% on January 1/10. The corporate surtax is scheduled for elimination by January 1/08.

Small business will also get a 1% tax cut, from 12% to 11%, which will be phased in over two years beginning in FY08. The rate applies to Canadian-controlled private businesses and the income threshold will be increased from $300,000 to $400,000 on January 1/07.

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