Tuesday, March 28, 2023

Here are the key takeaways in Canada’s budget

Finance Minister Chrystia Freeland released a budget in Ottawa on Tuesday that deepens Canada’s fiscal deficit as the Trudeau government books $43 billion (US$31.6 billion) in new costs over six years. New spending focuses on bolstering the health-care system, keeping up with the U.S. on clean-technology incentives, and helping low-income Canadians cope with inflation. Debt as a proportion of total output will climb as a result, before resuming its downward trajectory. No return to budgetary balance is forecast.
 

Key Takeaways

  • The deficit for the fiscal year ending this week grows to $43 billion, or 1.5 per cent of gross domestic product, from the $36.4 billion Freeland forecast in her November budget update. By 2027-28, the government expects a shortfall of $14 billion, instead of the $4.5 billion surplus it previously projected
  • Federal debt as a proportion of GDP will climb to 43.5 per cent in the fiscal year that begins April 1, from 42.5 per cent this year. It’s expected to decline to 42.2 per cent in 2025-26 and 39.9 per cent by the end of the forecast horizon
  • Revenue projections are down $5.7 billion on average per year from November’s budget update, reflecting a weaker economic outlook. Given still-elevated inflation and the impact of lower commodity prices, risks to the projection are tilted to the downside
  • New spending on health transfers to provinces and expanded dental care totals $31.3 billion over six years, while clean-energy incentives will cost $20.9 billion over the forecast horizon. Targeted inflation relief measures total $5.2 billion
  • Prime Minister Justin Trudeau’s government is aiming to support Canada’s energy transition through a mix of investment tax credits and cash handouts. The budget includes a clean electricity tax credit worth $6.3 billion over six years and one for hydrogen projects worth $5.6 billion. Another investment credit for clean manufacturing, intended to be used for producing electric vehicle batteries or processing critical minerals, is worth $4.5 billion

Debt and Taxes

  • The government plans to issue $172 billion in bonds in 2023-24, down 7 per cent from the current fiscal year. It’s tilting its borrowing further to the short end, with two-year bonds accounting for 44 per cent of total issuance
  • Freeland’s budget changes tax rules for financial institutions that receive dividends from Canadian companies. Payouts will be taxed as business income, raising an expected $3.2 billion over five years
  • The Trudeau government is also changing the alternative minimum tax on high earners. It’s boosting the rate to 20.5 per cent from 15 per cent, while quadrupling the income threshold at which the tax might apply. The measure applies primarily to individuals who earn at least $300,000



Budget 2023: What you missed, from phone

chargers and concert fees to air travel

For Canadians fed up with chargers that don't fit their cellphones, hidden fees, air-travel disruptions and cosmetic testing on animals, the Liberal government says help is on the way. 

Those and others are among the countless measures contained in the federal budget plan unveiled by Finance Minister Chrystia Freeland. 

Here are some of the less-prominent promises being made: 

Common chargers: Tired of trying to find the right charger for your phone? Noting the European Union recently mandated USB-C charging ports for all small handheld devices and laptops by 2024, the government says it will work with international partners and industry to develop a common standard for Canada. It claims the move will save Canadians money and reduce electronic waste. It is also promising to introduce a "targeted framework" for home appliances and electronics in 2024 to make it easier for Canadians to get such items repaired rather than having to replace them.

Right to repair: The budget says the government will work to create a framework outlining a right to repair home appliances and electronics sometime next year.


Fees and loans: The government says it will amend the Competition Act to better protect Canadians from hidden fees such as excessive baggage charges, roaming fees and added costs when buying things like concert tickets. It also promises to reduce the amount of interest lenders are allowed to charge to crack down on predatory loans, limiting the rate to 35 per cent annually. It also says it has secured commitments from Visa and Mastercard to lower their fees for small businesses, with details to come.

Air travel: Following months of complaints and horror stories from frustrated air travellers, the government says it is taking action. The budget promises $1.8 billion over five years to improve airport operations and passenger screening, and to address a backlog of complaints to the Canadian Transportation Agency. It is also proposing to strengthen the rules around compensation for Canadians whose travel plans are disrupted, and to give the CTA more authority to resolve passenger complaints.

Montreal infrastructure: The government says it plans to spend $587 million on redeveloping the Bonaventure Expressway and maintaining infrastructure held by Jacques Cartier and Champlain Bridges Incorporated in Montreal.

Floods: Canadians are seeing more and stronger natural disasters, including devastating floods. In response, the government is setting aside $31.7 million over three years to start work on what it calls a "low-cost flood insurance program" for high-risk households without adequate insurance. It is also promising $15.3 million over three years for an online portal so Canadians can determine their flood risk, and $48.1 million over five years to identify high-risk flood areas and improve the program used by provinces and territories to recoup the cost of natural-disaster response.

Help for asylum seekers: Buried in the budget document is $999 million in spending for the coming fiscal year on temporary lodgings and health-care support for asylum claimants. 

Leave for pregnancy loss: The budget says the government intends to make Canada Labour Code amendments that would create a stand-alone leave for workers in federally regulated sectors who suffer a pregnancy loss. 

Farmers: The budget sets aside $34.1 million over three years to support the adoption of nitrogen management practices for Eastern Canadian farmers. The government notes that Russia’s invasion of Ukraine has led to higher fertilizer prices, and that the money will help farmers optimize its use. 

Space: Canada's space program is getting a boost, with $1.1 billion over 14 years for the country's participation in the International Space Station for the rest of the decade. Ottawa is also earmarking $1.2 billion over 13 years to develop and build a vehicle for astronauts to use when humanity returns to the moon with the Artemis 2 mission – a mission that will include a Canadian.

Protecting animals: They may not vote, but the federal government is nonetheless setting aside $151.9 million over three years to protect endangered whales and their habitats, and $184 million over three years for other species at risk. It is also promising to ban cosmetic testing on animals, and implement a ban on the sale of cosmetics that rely on animals to prove they are safe.

Fitness: The budgets earmarks $10 million over the next two years to fund ParticipACTION’s Let’s Get Moving initiative, which promotes daily exercise. 

This report by The Canadian Press was first published March 28, 2023.



Canada plots tax on banks, raising billions 

with dividend levy

Finance Minister Chrystia Freeland is planning to raise billions of dollars from banks and insurance companies by changing the tax rules for dividends they get from Canadian firms. 

In a measure that officials billed as closing a loophole, Canada will begin treating dividends received by financial institutions from holding domestic shares as business income. It’s expected to bring in $3.2 billion over five years, starting in 2024.

Banks and other financial firms for years have used complex tax planning to effectively exclude these dividends from their income, lowering their overall tax burden. The new tax will apply to shares that are held as mark-to-market property — not to dividends paid from one subsidiary to another.

The change comes as Prime Minister Justin Trudeau’s government faces a deteriorating fiscal outlook and slowing economy, while it ramps up spending to help residents cope with inflation, prop up the health-care system and compete with the U.S. on low-carbon initiatives.

Trudeau and Freeland have targeted the financial sector for new revenue after the federal debt ballooned to pay for income support and other programs in the COVID-19 pandemic. The government previously introduced a corporate tax hike on large banks and life insurers and a one-time windfall tax on financial firms called the Canada Recovery Dividend. Those two measures were projected to raise more than $5 billion over five years, according to a government analysis last year.


Freeland’s new budget, released Tuesday in Ottawa, also proposed changes to an “alternative minimum tax” that will apply to some Canadians earning more than $300,000 annually. The hike in the special tax rate to 20.5 per cent, from 15 per cent — which comes with a fourfold increase in the income level at which it begins to apply - is expected to generate C$3 billion over five years.

“We’re making sure the very wealthy and our biggest corporations pay their fair share of taxes, so we can afford to keep taxes low for middle class families - and invest in our health care system and social safety net,” Freeland, who’s also Canada’s deputy prime minister, said in prepared remarks.

Some of the highest-income Canadians pay little to no personal income tax annually through “excessive use” of deductions and credits, the government said.

The alternative minimum tax, implemented in 1986, was intended to ensure that the wealthiest earners can’t escape taxes. Under the amendments, more than 99 per cent of the AMT paid by individual Canadians would be paid by those who earn more than $300,000 per year, and about 80 per cent of the AMT paid would be by those who earn more than $1 million annually, the government said.

These tax measures followed a 2 per cent tax on share buybacks for public firms announced late last year. The buyback tax will come into effect on Jan. 1, 2024.



Budget 2023: Liberals add foreign 

interference office, new money-laundering 

rules

Prime Minister Justin Trudeau's Liberal government plans to launch a National Counter-Foreign Interference Office, amid ongoing scrutiny of allegations that Beijing interfered in recent federal elections.

Tuesday’s federal budget earmarked $56 million over five years for measures to combat foreign interference, threats and covert activities.

The Mounties are slated to receive most of that money before April 2026 in support of efforts to investigate threats and proactively work with diaspora communities at risk of being targeted by foreign interference.

The budget document says the new office will be created within the Department of Public Safety, but it does not include a timeline for its launch.

The measures come as former governor general David Johnston takes up his role as a special rapporteur, with a mandate to sort out whether Trudeau should call the public inquiry demanded by the three main opposition parties.


The Liberals are also proposing legislative amendments that would task a federal banking watchdog with determining whether large financial institutions "have adequate policies and procedures to protect themselves against threats to their integrity and security, including protection against foreign interference."

The Office of the Superintendent of Financial Institutions would also be given the powers to take control of a bank "where there are national security risks."

Ottawa also plans to beef up its money-laundering regime and policies tackling terrorism funding through a series of proposed amendments.

The changes would follow an internal assessment that found weaknesses in how departments share information, few prosecutions being pursued and gaps how the rules apply to lawyers.

The proposed legislative changes would enact whistleblower protections and crack down on people who avoid reporting requirements by using a series of small transactions.

Ottawa would also compel banks to report on assets held by people who are subject to sanctions, beefing up existing rules that generally only compel such reporting on clients suspected of terrorist financing and money laundering.

The budget says the Liberals plan to implement a Federal Beneficial Ownership Registry by the end of this year, after recently introducing legislation to that effect, with a mandate to be publicly shared by this fall.

The Liberal government also says it aims to update the public this fall on whether Fintrac should be tasked with countering sanctions evasion.

In another measure related to terrorist financing, the budget allocates $16 million over the coming two years to implement proposed legislation aimed at allowing humanitarian groups to work in Afghanistan.

Currently, aid workers cannot operate in that country without paying taxes to the government and therefore running the risk of being prosecuted for financially supporting the Taliban.

The bill proposes a regulatory program to issue exemption permits. Officials said the funding would be needed to assess applications for permits and probe the risk of the exemptions benefiting terror groups.


This report by The Canadian Press was first published March 28, 2023.

Trudeau ramps up spending in race to keep up

with U.S. subsidies

Prime Minister Justin Trudeau’s government is pumping billions of dollars into clean energy subsidies and health care, despite a gloomy forecast of slow economic growth and weaker tax revenue.

The federal budget released Tuesday aims to jump-start an energy transition that will, over time, generate new growth and help offset the steep cost of the subsidies. But Finance Minister Chrystia Freeland is also proposing to run larger deficits at a time many economists are still concerned about high inflation and the prospect of a recession.

The budget adds $43 billion in net new costs over six years, even as the government projects about $34 billion less in revenue compared with forecasts in November. The end result is a significantly higher deficit each year through 2028, and no prospect of a balanced budget in sight.

Weaker growth means income taxes will come in lower than expected, while debt charges are rising amid higher interest rates and elevated borrowing.

The budget outlines large increases to health-care spending, including more cash for provincial governments announced earlier this year, and a $13-billion dental-care plan that Trudeau’s Liberals promised in exchange for support in parliament from the left-leaning New Democratic Party.


Freeland is also rolling out substantial new green incentive programs to compete with the Inflation Reduction Act signed into U.S. law last year by President Joe Biden. The largest new subsidy in the budget is an investment tax credit for clean electricity producers, but it also includes credits for carbon capture systems, hydrogen production, and clean-energy manufacturing.

Overall, the budget promises $31.3 billion in net new health-care spending and $20.9 billion in net new green incentive spending by 2028. On top of that is $4.5 billion in affordability measures, with half of that booked for an extension of a sales tax credit for low-income Canadians.

The spending is partially offset by tax increases on financial institutions and wealthy Canadians, and a pledge to reduce government spending on travel and outside consultants.

Freeland defended the new spending and said the budget remains fiscally responsible even with the increased deficits.

The finance minister told reporters that not swiftly responding to the generous new U.S. green incentives risks “consigning Canada to deindustrialization.”

The deficit for the fiscal year ending March 31 is now projected at $43 billion, up from the $36.4 billion forecast in November’s budget update. It could have been even higher, but the government booked billions in savings this year due to lower spending on COVID supplies such as vaccines, therapeutics and testing kits.

But there is an extra $6 billion in spending on average in each of the next five years, and combined with falling income tax revenue it creates much larger deficits going forward. In last year’s budget, the government forecast a $4.5 billion surplus in 2028; that is now projected to be a $14 billion deficit.

Furthermore, the slowdown in growth means Canada’s debt-to-GDP ratio gets worse next year, despite the government’s reliance on this measure as a fiscal anchor.

Debt-to-GDP will rise from 42.4 per cent this year to 43.5 per cent next year, and is projected to decline very slowly over the next five years.

“It remains an expansionary fiscal plan in a worsening economic environment,” Dominique Lapointe, director of macro strategy for Manulife Investment Management, said in an interview.

He said the most likely scenario lies between the government’s base case and a more pessimistic outlook. “This puts downward pressure on revenue, and could lead to higher-than-expected borrowing,” Lapointe said.


--With assistance from Danielle Bochove and Randy Thanthong-Knight






Budget 2023 to detail crackdown on 'junk  


fees' for consumers: federal source

A federal source says the coming budget will detail how the Liberals plan to go after hidden or unexpected consumer fees, following the United States announcing its own crackdown on these charges.

Often referred to as "junk fees," they can include those tacked on to the initial price of a product or service that hide, and inflate, the total cost.

The government official, who was granted anonymity to discuss matters not yet public in next week's budget, says the Liberals plan to work with regulatory agencies, provinces and territories to cut down such fees.

These agencies would include the Competition Bureau, the Financial Consumer Agency of Canada and the Canadian Radio-television and Telecommunications Commission. 

No legislative changes regarding the charges are expected in the budget, which Finance Minister Chrystia Freeland has said will include "targeted inflation relief" as part of efforts to make life more affordable.


While the budget is expected to provide more detail on the kinds of fees the federal government wants to go after, common examples are phone or internet surcharges or additional fees for flights or event tickets. 

In his State of the Union address last month, U.S. President Joe Biden called on Congress to push back against these surcharges that cause consumers to pay more than they're initially told. 

He also urged Congress to pass the Junk Fee Prevention Act, which would target hidden fees in the entertainment, travel and hospitality industries.

"Junk fees may not matter to the very wealthy, but they matter to most folks in homes like the one I grew up in. They add up to hundreds of dollars a month," Biden said in his address. 

The president said his administration will work with state and local officials to identify ways to reduce junk fees in their jurisdictions.

Biden is scheduled to arrive in Ottawa on Thursday evening for a two-day visit — his first trip to Canada since becoming president in 2021.

This report by The Canadian Press was first published March 23, 2022.



Canada heading into 'mild recession' as

tight monetary policy squeezes growth: 

Report

New research says Canada is heading into a mild recession as elevated borrowing costs, a downturn in the U.S. and persistent inflation dial up the country's economic uncertainty. 

Deloitte Canada's latest economic outlook, released ahead of the federal budget on Tuesday, says tight monetary policy is set to squeeze economic growth this year. 

But the research suggests the recession won't be as deep as previously forecasted thanks to the resiliency of the labour market, which is keeping incomes strong.

The report is forecasting real gross domestic product to fall by 0.5 per cent this year before rebounding with two per cent growth in 2024, while inflation is expected to cool rapidly throughout the rest of this year.

Deloitte says the federal budget, set to be tabled in Ottawa Tuesday afternoon, will likely include affordability measures to help lower-income Canadians, health care support for provinces and incentives to reduce carbon emissions.


The report says these priorities should not have a notable impact on inflation — provided the spending increases are not dramatic.

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