Concerns about massive federal overspending and debt levels are overshadowing several business-friendly tax initiatives in last week’s federal budget, critics say.
And while groups representing Alberta’s business interests are applauding federal Finance Minister John Manley’s moves towards helping small firms access risk capital and eliminating the federal capital tax, they say not enough attention has been paid to the “budget binge.”
“If interest rates rise even a couple of percentage points, debt-servicing costs will wipe out future surpluses and force massive spending and program cutbacks. We may have missed the opportunity to make some real headway in paying down the debt in next year’s budget,” said Maureen McCaw, president of the Edmonton Chamber of Commerce.
Similar concerns were echoed by the Calgary chamber. By outpacing economic growth, federal spending will soon become unsustainable, said chamber president Murray Sigler.
But Calgary chamber chair-elect David Swanson noted several positives for Alberta businesses, including the small business tax exemption, cuts to Employment Insurance premiums, and the hiking of RRSP contribution limits.
“By lowering the overall tax burden through (these) initiatives . . . local business owners and employees are able to further invest in their own futures,” he said.
The budget included several pro-business initiatives, such as:
* A 12-cent cut to Employment Insurance contribution rates to $1.98 per $100 of insurable earnings, the 10th premium cut since 1994. The EI system is now running a surplus of about $8 billion annually, and the federal government says it wants to see premiums paid in more closely matching benefits to the jobless;
* An additional $70 million over two years to sustain the Industrial Research Assistance Program (IRAP), which helps small and medium-sized businesses develop new technology;
* Extending the small business tax rate of 12 per cent to businesses with income between $200,000 and $300,000 over the next four years;
* Elimination of the $2-million limit on the amount of small business investment eligible for the capital gains rollover, which is intended to help small firms access risk capital;
* Phasing out of the federal capital tax, currently levied on all corporations with more than $10 million of capital used in Canada. The first step is to raise the level of capital at which a firm begins to pay tax to $50 million.
* An additional $190 million in equity to expand venture capital by the Business Development Bank of Canada.
With the tax cuts implemented to date, the average federal-provincial corporate tax rate in Canada is now below the average U.S. rate., Manley said last week.
When fully implemented, the elimination of the capital tax will boost Canada’s tax advantage over the U.S. even further – for a 6.6-percentage-point edge in the average corporate tax rate.
“It’s fair to say the decision to eliminate such a harmful form of taxation will boost productivity among Canadian firms – especially those in the manufacturing, oil/gas, mining, financial services and high-tech sectors, which are particularly susceptible to the damaging impact of capital taxation – and removing the tax will also assist in creating growth opportunities and jobs for Canadians,” said Satya Poddar, national director, tax policy services at Ernst & Young. Poddar added it’s unfortunate the government chose an extended phase-in period instead of eliminating the tax outright.
Capital taxes are applied to a company’s capital invested in land, buildings or equipment required to operate the business and to the capital held by the financial institutions to maintain their safety and soundness.
They are also applied to any funds raised to conduct future research and development, negatively impacting high-tech companies.
Dan Kelly, vice-president for Western Canada for the Canadian Federation of Independent Business, said federal moves to pare down the deficit are positive, but many small firms believe that government should achieve a balanced budget through reduced spending, not through tax increases such as the 3.5-cent-per-litre fuel-tax hike and 2.5-per-cent increase in school property taxes.
A total of 84 per cent of the CFIB’s members have said balancing the budget by 2004-05 was a top priority, he added.
“While the government is to be commended for sticking to its target, we are disappointed that there were no further tax reductions announced to offset the government’s tax hikes,” Kelly said.
Meanwhile, the group representing more than 68,000 Canadian chartered accountants also said more attention should have been paid to the federal debt in this budget.
“In our view, too many commitments have been made with this budget, too far down the road, while not enough of the surplus has been assigned to pay down the debt.
“The magnitude of the current debt is this generation’s responsibility to address, we should not be passing it down to our children,” said Pierre Brunet, chair of the Canadian Institute of Chartered Accountants.
“The government is to be commended for its sound fiscal management in producing a surplus – it is unfortunate that the government could not then have followed through and put a greater portion of that surplus towards the debt.”
