Jim Flaherty’s eighth federal budget represents a policy document that stresses balance and prudence. In 2008 the Harper government faced twin challenges, a worldwide financial meltdown and an undemocratic usurpation of power by Messrs.’, Ignatieff, Dion and Layton. In response this federal government embarked on an ill-fated foray with Keynesianism. Now almost five years later Mr. Flaherty is on the precipice of a balanced budget. While there is no denying that spending, particularly on an already bloated federal civil service should have been avoided this government has avoided the pork barrel spending that masquerades as “stimulus” south of the border. Canada remains the envy of the G7 with a manageable deficit that is a fraction of that created by the Obama administration.
The budget has been characterized by some as an attack on entrepreneurs because of the changes to the taxation of dividends and the elimination of certain insurance based strategies; this is pure sophistry.
This federal government, and for that matter the government of Paul Martin understood that by reducing corporate taxation the consequences should be an increase in business activity, capital investment and employment. Given that Canada has for the most part stood tall in this global recession I would say that this policy has been vindicated. The unfortunate victim of this policy however, almost completely due to fiscal incompetence demonstrated on the part of certain provincial governments, Mr. McGuinty being the most blatant offender, has torn asunder the concept of integration.
Integration is achieved when there is no tax savings realized on the basis on how one is compensated, either as a shareholder through dividends or as an employee through salary and bonus. What in fact has happened is that in all but PEI, there exists a tangible benefit in being paid through dividends. In Alberta the tax savings on the first $500,000 of profit was only 1.2% while in Dalton’s land of fiscal gluttony it rose to near 4.5%. Accountants and some in the financial media recognized this “integration gap” and drove a truck through it; directing clients to discard salary in favour of an all dividend compensation strategy.
As a conservative and a free market advocate I believe in a transparent and fair tax system in which initiative is rewarded through low rates of both corporate and personal taxation. What has happened in recent years is anything but transparent and fair. A sizeable portion of our entrepreneurial and professional class have simply gamed the system. The result is a loss of revenue and jeopardy for programs such as Canada Pension Plan. The federal budget has now effectively raised taxes on ineligible dividends by some 2%. That should force most to adopt a prudent compensation strategy of using both salary and dividends.
The effective elimination of 10/8 and leverage insured annuities are not unexpected. CRA and Finance have attempted through the judicial and administrative channel to shut them down. While I welcome any attempt to legally and prudently reduce tax, any strategy that could reduce taxation to zero (or close) could not be considered to be unassailable. Those individuals who hung their hat on these strategies still have a wealth of opportunity in helping business owners with succession planning; they will simply have to return to the principals of prudent planning to do it.
All in all, a budget that acknowledges the necessary balance required in the proper stewardship of this economy. Well done Mr. Flaherty I look forward to your ninth budget and hopefully many more.