F1-23-1997-1-eng .

F1-23-1997-1-eng .
Building the Future for Canadians
Budget 1997
Budget Plan
Including Supplementary Information and
Notices of Ways and Means Motions
Tabled in the House of Commons
by the Honourable Paul Martin, P.C., M.P.
Minister of Finance
February 18, 1997
Department of Finance
Canada
Ministère des Finances
Canada
© Her Majesty the Queen in Right of Canada (1997)
All rights reserved
All requests for permission to reproduce these documents
or any part thereof shall be addressed to Public Works
and Government Services Canada.
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Cat No.: F1-23/1997-1E
ISBN 0-660-16864-2
Table of Contents
1
Introduction and Overview .......................................................
Building the Future for Canadians.............................................
Building the Future: Staying the Course
on Restoring Canada’s Fiscal Health........................................
On track for fiscal renewal.....................................................
Deficit targets have been bettered .........................................
… and this progress will continue .........................................
The payoff from fiscal action is emerging ..............................
Staying the fiscal course.........................................................
Building the Future: Supporting Jobs and Growth .....................
Investing in immediate jobs and growth ................................
Investing in long-term job creation and growth ....................
Building the Future: Investing in a Stronger Society ..................
Summary of Fiscal Actions.........................................................
Summary of Fiscal Results to 1998-99 ......................................
Outline of the Budget Plan .......................................................
2
7
7
9
9
10
10
12
14
14
15
16
17
18
19
20
Economic Developments and Prospects:
Assumptions for Fiscal Planning ........................................... 23
Introduction ..............................................................................
Recent Developments and Outlook..........................................
Recent developments............................................................
Stronger growth expected in 1997 and beyond .....................
The Outlook: Updating the Planning Assumptions....................
The external environment.....................................................
The economic assumptions for Canada .................................
3
23
24
24
25
31
31
33
3
4
Building the Future: Staying the Fiscal Course ....................... 41
Introduction .............................................................................
The Fiscal Plan is on Track ........................................................
Deficit below target in 1996-97 ............................................
Deficit targets for 1997-98 and 1998-99 will be met.............
The Strategy to Restore Fiscal Health .......................................
A Fiscal Strategy Complemented by Provincial Action .............
Staying the Fiscal Course...........................................................
An Impressive Turnaround by International Standards................
Detailed Overview of the Fiscal Outlook to 1998-99................
Changes from the 1996 budget forecast for
1996-97 and 1997-98..........................................................
The Revenue Outlook..............................................................
Outlook for Program Spending .................................................
Public Debt Charges..................................................................
Financial Requirements.............................................................
Borrowing Authority.................................................................
41
42
42
44
47
52
55
57
58
Jobs and Growth in a Dynamic Economy .................................
Introduction .............................................................................
Providing the Right Economic Environment ............................
Canada’s Economic Challenge...................................................
Globalization.........................................................................
Technological change............................................................
Youth employment ...............................................................
Investing in Immediate Jobs and Growth ...................................
Canada Infrastructure Works..................................................
Residential Rehabilitation Assistance Program ......................
EI premium reductions and New Hires Program ..................
Facilitating the transition from school to work ......................
Tourism ................................................................................
Rural Canada........................................................................
Support for small businesses...................................................
Facilitating international trade ...............................................
Pursuing sustainable development .........................................
Other measures that affect jobs and growth ...........................
Investing in Long-Term Job Creation and Growth ....................
Investing in higher education and skills .................................
Investing in innovation..........................................................
71
71
73
76
77
78
80
80
80
81
81
82
83
84
85
87
88
91
93
93
97
4
58
60
63
67
68
69
5
Building the Future: Investing in a Stronger Society .............. 101
Introduction .............................................................................. 101
Sustaining and Improving Canada’s Health Care System............ 102
The National Forum on Health ............................................ 103
Towards a National Child Benefit System.................................. 105
Problems with the current Child Benefit System................... 105
Federal-provincial-territorial review of child benefits ............ 106
Action by the Government of Canada .................................. 106
Helping Canadians with Disabilities .......................................... 109
Additional tax assistance to people with disabilities................ 109
Opportunities Fund for persons with disabilities ................... 110
Support for Charitable Giving................................................... 111
Ensuring a Sustainable Retirement Income System ................... 117
A new Seniors Benefit .......................................................... 117
Securing the future of the Canada Pension Plan.................... 118
Pension adjustment reversal ................................................... 119
Annexes
1
The Budgetary Deficit, Financial Requirements,
and the National Accounts Deficit........................................... 121
2
Improved Fiscal Outlook for the Total Government Sector........ 125
3
Fiscal Outlook: Sensitivity to Economic Assumptions................ 135
4
The Government’s Response to the Auditor General’s
1996 Reports and Observations on the
Financial Statements ................................................................ 139
5
Tax Fairness............................................................................... 145
6
Tax Measures: Supplementary Information
and Notices of Ways and Means Motions................................. 173
5
1
Introduction
and Overview
Building the Future for Canadians
Canada is in the midst of an important turnaround in its public
finances – one that will remove the burden of high deficits and rising
debt on the country’s economic potential, thus setting the stage for
stronger job-creating growth. For the federal government, this turnaround was set in train by actions taken in the last three budgets.
This budget continues the progress achieved to date by announcing
that the deficit in 1996-97 will be no higher than $19 billion –
$5.3 billion less than the deficit target of $24.3 billion. It also
ensures that the government remains firmly on track to meet its
1997-98 and 1998-99 targets. At the same time, it proposes key
investments and targeted tax relief to encourage job creation and
to invest in a stronger society.
Canada faced large fiscal, economic and social challenges when
the government took office in the fall of 1993. Federal finances were
deteriorating. The economy was still trying to shake off the effects
of the 1990-1991 recession. While inflation had been reduced to
very low levels, the expected payoff in lower interest rates could not
be fully realized as long as fiscal imbalances went unchecked. High
and rising debt hampered the economy’s performance and threatened Canada’s long-term growth potential – at a time when Canada
needed to position itself as a stronger and more vital player in the
global economy. The prospect of ever-increasing government debt –
with more and more of each tax dollar going to debt servicing – also
threatened the sustainability of valued programs that promote the
health and well-being of Canadians.
7
BUDGET PLAN
The government recognized that restoring financial health would
have to be a central component of any strategy for stronger
job-creating growth. To ignore this imperative would have meant
that the ever-increasing fiscal burden would negate any other
actions taken to encourage economic growth and job creation.
The fiscal actions set in train by the government’s first three
budgets ensure a firm and steady decline in the deficit. Based on
prudent planning assumptions and including the Contingency
Reserve, the deficit will hit a 22-year low of $9 billion in 1998-99,
and financial requirements – net new borrowings in financial
markets – will show a small surplus. The debt-to-GDP ratio will
finally show a meaningful turnaround in 1997-98 and 1998-99,
after more than two decades of virtually uninterrupted increases.
Restored fiscal health, while necessary, is not sufficient to ensure
that Canada achieves its full potential. Nor can it guarantee that
prosperity will benefit all Canadians.
To help secure these broader economic and social objectives,
actions taken to reduce the deficit have been complemented by
targeted investments to address specific structural issues and
enhance fairness. The government has made, and will continue to
make, such investments to further enhance both short-term and
long-term job creation and growth and address priorities in health,
education and other programs that contribute to the well-being of
Canadians. The government has also taken, and will continue to
take, selective tax actions to enhance fairness and to provide additional assistance to individuals and businesses in fulfilling their
potential in the modern economy.
This strategy is working. In this budget, the government is setting
out actions to build on the progress achieved to date in building for
the future by:
■
staying the course on restoring Canada’s fiscal health;
■
investing in immediate jobs and growth;
■
investing in long-term job creation and growth; and
■
investing in a stronger society.
8
INTRODUCTION AND OVERVIEW
This budget:
■ announces that the deficit in 1996-97 will be no higher than
$19 billion, including new spending initiatives;
■ contains no new expenditure cuts;
■ contains no new taxes; and
■ proposes targeted tax relief and strategic investments to encourage
jobs and growth and to build a stronger society.
Building the Future: Staying the Course
on Restoring Canada’s Fiscal Health
On track for fiscal renewal
Restoring Canada’s fiscal health is key to stronger growth and job
creation and to protecting the future of valued programs that
protect the health and well-being of Canadians.
The deficit has been reduced at a measured and orderly pace, in
order to allow the economy, Canadians and the government itself
time to adjust to the effects of reduced government spending. The
government’s fiscal strategy has been deliberate, measured and
responsible, based on two-year rolling deficit targets. The deficit
targets are based on prudent planning assumptions, backed by sizeable Contingency Reserves to guard against unexpected developments. The targets represent the least that will be achieved in any
one year, not the best that can be achieved.
Expenditure reductions have been the overwhelming source of
deficit reduction. They have been based on fundamental reform of
federal government programs. An Expenditure Management
System has been put in place to ensure that tight control of departmental spending will continue. Transfers to individuals have been
reformed, or are in the process of being reformed, to make them
more targeted and sustainable – ensuring that scarce financial
resources assist the most needy in Canada. Transfers to other levels
of government have been restructured to make them more
predictable, affordable and flexible – to allow funds to be better
directed to specific needs and priorities in the provinces. Revenue
measures have been focused on enhancing the fairness of the
tax system.
9
BUDGET PLAN
Deficit targets have been bettered ...
The strategy is working. The deficit outcomes for both 1994-95 and
1995-96 were below the targets (Table 1.1). The 1995-96 deficit
outcome was at that time the single largest annual decline in
over 40 years.
Table 1.1
Deficit targets and outcomes
1994-95
1995-96
1996-97 1997-98 1998-99
(billions of dollars)
Targets
Actual and expected
outcomes
1
39.7
32.7
24.3
37.5
28.6
19.01
17.0
9.0
Estimated to be no greater than $19 billion.
... and this progress will continue
Looking forward, financial results to date indicate that the deficit
for 1996-97 will come in below the target of $24.3 billion. This will
be the third consecutive year that the deficit target will have been
bettered. Current fiscal data suggest that the final deficit outcome,
including this year’s new spending, will be no higher than
$19 billion or 2.4 per cent of gross domestic product. This will be
$5.3 billion below the target of $24.3 billion or 3 per cent of GDP.
It will also be more than $91⁄2 billion lower than the deficit in
1995-96 – the largest year-over-year decline ever. This outcome
means that the federal deficit as a share of GDP will have declined
by more than half from its level in 1993-94 (Chart 1.1).
The greater-than-expected improvement in 1996-97 reflects
the payoff from lower interest rates. Public debt charges are
now expected to be about $2.3 billion lower than estimated in the
1996 budget. Strict control over program spending has also
contributed to this progress; program spending is expected to be at
the same level projected in last year’s budget. As a consequence, the
Contingency Reserve of $2.5 billion will again not be needed.
The government is clearly on track to meet its deficit targets of
$17 billion for 1997-98 and $9 billion for 1998-99. There are no
further expenditure cuts proposed in this budget, nor are there any
new taxes. Indeed, this budget proposes targeted tax relief.
10
INTRODUCTION AND OVERVIEW
Chart 1.1
Public accounts deficit and financial requirements
per cent of GDP
10
8
Deficit
6
4
Financial
requirements
2
0
-2
1969-70
1974-75
1980-81
1986-87
1992-93
1998-99
Projected
The decline in the deficit since 1993-94 is overwhelmingly due
to actions taken in the last three budgets to reduce program
spending. Actions taken by the government since taking office will
have reduced the 1998-99 deficit by $28 billion from what it
otherwise would have been. Of this, 91 per cent is due to expenditure reductions.
As a result, the level of program spending will be $103.5 billion
in 1998-99, $16.5 billion lower than in 1993-94. This represents
a decline of 13.8 per cent in five years. Over this period, the ratio
of program spending-to-GDP will have fallen from 16.8 per cent
to 11.9 per cent – about 5 percentage points – while the revenueto-GDP ratio will have remained largely unchanged.
In the near future, Canada will reach two important fiscal
milestones on the road to achieving a balanced budget.
■ First, financial requirements will be in a small surplus position in
1998-99 (Chart 1.1). This means that the government will not have
to go to private credit markets for new borrowing, other than that
required to roll over the existing stock of debt. Financial requirements are comparable to the way most other major industrialized
countries, including the United States, measure their deficits. In
these countries, achieving zero financial requirements would mean
11
BUDGET PLAN
balancing their budgets. According to international projections, in
1998 Canada will be alone in the Group of Seven (G-7) large industrialized countries in being able to claim this achievement.
■ Second, growth in the debt-to-GDP ratio will slow dramatically
in 1996-97 and will decline in 1997-98. This will be the first meaningful decline in this ratio since 1974-75 (Chart 1.2). More
importantly, it will continue to decline in 1998-99. This improvement in the debt-to-GDP ratio is significant because it means that
the burden of the debt will be falling in relation to the country’s
ability to pay.
Chart 1.2
Federal government net debt
per cent of GDP
80
70
60
50
40
30
20
10
0
1949-50 1955-56 1961-62 1967-68 1973-74 1979-80 1985-86 1991-92
1998-99
Projected
The payoff from fiscal action is emerging
Federal measures to reduce the deficit and put the debt-to-GDP
ratio on a firm downward track have been complemented by
actions by the provinces to put their finances in order. Different
provinces have followed different strategies to achieve this goal, but
the end result is that enhanced federal and provincial fiscal credibility has allowed interest rates to better reflect underlying economic
fundamentals in a way that could not be achieved while fiscal imbalances persisted in the late 1980s and early 1990s.
12
INTRODUCTION AND OVERVIEW
Interest rates have declined dramatically (Chart 1.3) – both in
absolute terms and vis-à-vis the U.S. – in response to continued low
inflation and increased fiscal credibility among all levels of
governments. These declines have benefited consumers, businesses
and governments alike.
Chart 1.3
3-month Treasury bill rates
per cent
9
8
Canada
7
6
5
4
United States
3
2
Differential
1
0
-1
-2
-3
J F M AM J J A S O N D J F M AM J J A S O N D J F M AM J J A S O N D J
1994
1995
1996
Reducing the deficit and putting the debt-to-GDP ratio on a firm
downward track are not ends in themselves. Rather, they are the
means to lower interest rates and restored consumer and business
confidence, on the way to sustained growth in domestic demand
and jobs. The lower interest rates that have resulted from increased
fiscal credibility and the resulting improvements in business and
consumer confidence bode well for demand and job growth.
Chapter 2 describes the strong growth that international forecasters foresee over the next two years – growth strong enough to generate significant job creation. However, this encouraging outlook
depends on staying the course on improving the nation’s finances.
13
BUDGET PLAN
Staying the fiscal course
While significant fiscal progress has been made, the battle to restore
Canada’s fiscal health is not yet over: the federal deficit in 1996-97
will still be as high as $19 billion, with a debt-to-GDP ratio at about
741⁄2 per cent. The last time the deficit was this low was in 1981-82,
but at that time the debt-to-GDP ratio was only about 30 per cent.
The ongoing fiscal policy challenges are:
■
first, to ensure that the deficit targets continue to be met; and
■ second, to ensure that the debt-to-GDP ratio declines to more
manageable levels in a reasonable period of time.
This will require continued firm fiscal management and the
careful setting of priorities.
Staying the course fiscally does not mean standing still on other
priorities. In the last three years, the government has reallocated
resources and carefully set priorities in order to invest in jobs and
support health, education and other valued programs. These investments have been accommodated while keeping the deficit on a firm
downward track. This budget continues on that course.
Building the Future:
Supporting Jobs and Growth
During 1996, economic growth was below potential, job creation
was disappointing and the unemployment rate remained unacceptably high. Direct government job creation clearly cannot solve
Canada’s unemployment problem. Government policies can,
however, support job creation in the private sector by ensuring that
the Canadian economy and Canadians themselves are well
equipped to take full advantage of the international economy.
The government outlined its comprehensive strategy for
economic growth and enhanced job creation in the fall of 1994 in
the document A New Framework for Economic Policy. This strategy has been the foundation for the budgets and other reforms
undertaken since then.
14
INTRODUCTION AND OVERVIEW
Investing in immediate jobs and growth
The economic conditions favourable to healthy private sector
demand and employment growth are now in place. However, low
interest rates have only recently begun to translate into stronger
growth. The government will continue to invest in those areas of
the economy that would provide immediate growth and job
potential, thereby serving as a bridge until the full benefits of lower
interest rates are realized.
To assist job creation in the short term, the government
announced, in November 1996, employment insurance (EI)
premium relief to small firms in 1997 and 1998 through the
New Hires Program. Building on the transitional premium relief
program included in EI reform, this program increases the relief
from $150 million to $465 million over two years for firms that had
paid premiums of less than $60,000 in 1996. This program will
virtually eliminate EI premiums for almost 900,000 eligible small
businesses hiring new employees in 1997. At the same time, the
government announced an additional five-cent reduction in the
EI employee premium rate for 1997, from $2.95 in 1996 to $2.90 in
1997. For planning purposes, a further 10-cent reduction is
assumed for 1998.
In December 1993, the government launched a $6 billion Canada
Infrastructure Works partnership between the federal government
and provincial and municipal governments in response to the widespread need to upgrade and renew municipal infrastructure. Further
support for employment is being provided by a $425 million federal
top-up to the program for 1997-98, announced in January 1997.
This top-up will bring the federal contribution for 1997-98 to
$600 million, levering up to $1.8 billion in new investment.
The Residential Rehabilitation Assistance Program (RRAP) and
related programs have also been extended at a cost of $50 million
for another year.
This budget builds on these measures by proposing additional
actions to promote growth and employment in the near
term including:
15
BUDGET PLAN
■ adding support for tourism by providing incremental funds to
the Canadian Tourism Commission and creating a new tourism
financing facility to be administered by the Business Development
Bank of Canada;
■ increasing support for rural development by raising the funding
of the Community Access Program and expanding the capital of the
Farm Credit Corporation;
strengthening assistance to small business by reducing their paper
burden, expanding activity under the Small Business Loans Act, and
encouraging labour-sponsored venture capital funds to invest in
small businesses; and
■
further support for export promotion through a broadening of
export financing capacity in conjunction with the Export
Development Corporation and the private sector.
■
Investing in long-term job creation and growth
The government is committed to innovative approaches to enhancing the long-term potential of the Canadian economy and ensuring
that Canadians are well positioned to realize their potential in the
new economy. This approach involves the leverage of scarce
resources to expand the impact of government actions through
increased private sector partnerships.
As in the 1996 budget, the initiatives announced in this budget
focus on the strategic areas of education and research and
development through:
■ the provision of additional tax assistance to help students and
their families better cope with the rising costs of higher education
and to assist workers in enhancing their skills; and
the establishment of the Canada Foundation for Innovation – a
new Foundation to be operated independently of government
through a board of directors drawn from the private sector and
research and academic communities – whose purpose will be
to lever private sector funding to enhance education and research
infrastructure at post-secondary institutions and research hospitals.
■
16
INTRODUCTION AND OVERVIEW
Building the Future:
Investing in a Stronger Society
The government has always argued that good economic policy is
good social policy. At the same time, a strong economy must be built
on a strong society. The 1996 budget announced a number of
reforms to secure the future of health, education and other valued
programs. These included stable and more predictable funding for
federal transfers to provinces for health, post-secondary education
and welfare, additional assistance for health research, proposed
changes to the retirement income system and enhanced support for
families and charities.
This budget furthers the government’s agenda to build a stronger
society by:
■ addressing a number of the recommendations of the National
Forum on Health;
■
providing additional support to children in low-income families;
■
improving support for people with disabilities; and
■
taking further steps to encourage charitable giving.
This budget takes immediate steps to strengthen Canada’s health
care system, following up on a number of recommendations made
by the National Forum on Health:
a Health Transition Fund is being established to assist provinces
and territories in developing projects to test ways to improve
Canada’s health care system;
■
■ a new Canada Health Information System will be put in place to
give health care providers access to the best medical information;
and
■ additional funding is being provided to the Community
Action Program for Children to help children at risk, and the
Canada Prenatal Nutrition Program to help mothers at risk have
healthier babies.
A key concern for Canadians is the needs of children in
low-income families. Some programs intended to help these
children create disincentives for their parents to work and trap
families on welfare. The federal government shares with provincial
and territorial governments the objective of moving toward a more
effective and integrated system of child benefits that will:
17
BUDGET PLAN
provide improved children’s services and income support for
low-income families while protecting the income of families on
social assistance; and
■
reduce the financial disincentives for parents to make the transition from welfare to the workforce.
■
The 1996 budget took the first steps in this direction by doubling
the funding for the Working Income Supplement (WIS) to help
increase the financial independence of families. This budget goes
further with a substantial enrichment of the Child Tax Benefit as a
basis for eventual joint federal-provincial-territorial action to better
integrate the system of child benefits and to assist children in lowincome families.
This budget also proposes actions to provide increased assistance
over and above initiatives announced last year to help those with
disabilities and to enhance charitable donations:
■ assistance is being provided through an Opportunities Fund and
additional tax and tariff relief to help the disabled overcome difficulties in participating more fully in the Canadian economy; and
further tax changes will create additional incentives for donations
in support of charitable activities.
■
Summary of Fiscal Actions
The net fiscal impact of initiative announced since the 1996 budget,
including measures announced in this budget, amount to
$765 million in 1996-97, $991 million in 1997-98, $730 million in
1998-99 and $917 million in 1999-2000 (Table 1.2).
These initiatives will be accommodated within a profile for
program spending for each year of this budget’s planning horizon
that is either the same or below the level foreseen in last year’s
budget. It will also mean that through the savings put in train in its
four budgets, the government will have secured over $28 billion in
net fiscal savings in 1998-99. The lower annual deficits that will
have resulted from these actions will mean nearly an $89 billion
dollar reduction in net debt from what it otherwise would have been
in 1998-99.
18
INTRODUCTION AND OVERVIEW
Table 1.2
Summary: fiscal impact of policy initiatives since the 1996 budget
1996-97 1997-98 1998-99 1999-2000
(millions of dollars)
Gross fiscal impact of initiatives
Investing in jobs and growth
Measures announced prior to
1997 budget
Immediate jobs and growth
Long-term job creation
and growth:
Higher education and skills
Research and innovation
735
213
75
65
10
67
47
137
31
202
32
83
108
108
501
4701
600
40
30
90
100
100
100
1198
1076
1219
-82
-201
-202
-25
-45
-35
-100
-100
-100
-35
-207
-346
-302
765
991
730
917
800
Investing in a stronger society
Sustaining and improving
Canada’s health care system
Towards a National Child Benefit
System
Helping Canadians
with disabilities
Support for charitable giving
Total
Reallocations/other
reallocations
Extension of temporary tax
on banks
Tobacco excise tax increase
Nov. 96
Total
Net fiscal impact of initiatives
800
(+) sign indicates an increase in the deficit and net debt.
(-) sign indicates a decrease in the deficit and net debt.
1
assumes a July 1, 1998 start-up. If implemented earlier, total would be larger by up to
$150 million.
Summary of Fiscal Results to 1998-99
Table 1.3 shows the major fiscal results to 1998-99, including
actions from this budget. Including the initiatives announced in this
budget, the deficit for 1996-97 will be about $51⁄2 billion below its
target, while the government is clearly on track to meet its deficit
targets for 1997-98 and 1998-99.
19
BUDGET PLAN
Table 1.3
Summary statement of transactions:
fiscal outlook with budget measures1
1994-95 1995-96 1996-97 1997-98 1998-99
(billions of dollars)
Budgetary revenues
Program spending
Operating balance
Public debt charges
Underlying deficit
123.3
118.7
130.3
112.0
135.5
109.0
137.8
105.8
144.0
103.5
4.6
18.3
26.5
32.0
40.5
42.0
46.9
45.5
46.0
46.5
-37.5
-28.6
-19.0
-14.0
-6.0
3.0
3.0
Contingency Reserve
Deficit
-37.5
-28.6
-19.0
-17.0
-9.0
Net public debt
545.7
574.3
593.3
610.3
619.3
Non-budgetary
transactions
11.6
11.4
13.0
11.0
10.0
-25.8
-17.2
-6.0
-6.0
1.0
16.5
15.9
0.6
5.6
-5.0
16.8
14.4
2.4
6.0
-3.7
17.0
13.7
3.3
5.7
-2.4
16.5
12.7
3.8
5.5
-2.0
16.6
11.9
4.7
5.3
-1.0
-3.5
73.0
-2.2
74.0
-0.8
74.4
-0.7
73.1
0.1
71.2
Financial
requirements/source
Per cent of GDP
Budgetary revenues
Program spending
Operating balance
Public debt charges
Deficit
Financial
requirements/source
Net public debt
1
A positive number indicates a source of funds; a negative number indicates a financial
requirement.
Outline of the Budget Plan
Chapter 2 reviews recent economic developments and prospects for
Canada. It establishes the economic planning assumptions that
underlie the government’s fiscal projections. As in past budgets, a
cautious base for fiscal planning is established using the average of
private sector forecasts, with an added degree of prudence to
interest rates and nominal GDP growth.
20
INTRODUCTION AND OVERVIEW
Chapter 3 describes the fiscal progress achieved to date and the
payoff that is being realized. It sets out why the government must
continue to stay the fiscal course and why it is necessary to ensure
a continuing decline in the debt-to-GDP ratio. The chapter also
summarizes the cost of measures announced in this budget, and the
fiscal outlook based on prudent economic assumptions. The chapter shows that the government will substantially better its deficit
target this year, and meet its fiscal targets for 1997-98 and 1998-99.
Chapter 4 deals with the jobs challenge. It describes the government’s jobs strategy and the actions that have been taken to date to
promote economic growth and job creation. It describes new initiatives taken in this budget to further encourage growth and employment in the near to medium term, as well as strategic investments
in education and innovation to position the Canadian economy for
the 21st century.
Chapter 5 describes how the government is also building for the
future through key investments in a stronger society. The chapter
addresses the challenge of strengthening Canada’s health care
system. It proposes a further enhancement of the Child Tax Benefit
as a step towards a National Child Benefit System. It also proposes
increased assistance for the disabled and actions designed to further
encourage charitable giving.
Annex 1 describes three different measures of the federal fiscal
position: the budget deficit, financial requirements and the national
accounts deficit, and provides a discussion and reconciliation of the
three measures. Annex 2 provides an update of the fiscal situation
of the total government sector in Canada. Annex 3 describes the
fiscal sensitivity to changes in economic growth and interest rates.
Annex 4 describes the government’s response to the 1996 Report
of the Auditor General of Canada and observations on Canada’s
financial statements, and Annex 5 highlights aspects of, and
describes actions taken to improve, the fairness of Canada’s tax
system. Annex 6 provides supplementary information on tax
measures contained in this budget.
21
2
Economic Developments
and Prospects:
Assumptions for
Fiscal Planning1
Introduction
This chapter reviews recent economic developments and presents
the economic assumptions for 1997 and 1998 on which fiscal
planning is based.
Although average growth in 1996 was lower than expected,
owing mainly to slow growth during the first half of the year,
developments in the latter months of 1996 have been very encouraging for 1997 and beyond. Interest rates fell to levels substantially
below expectations at the time of the 1996 budget. Short-term rates
dropped more than 200 basis points during 1996, and have been
below comparable U.S. rates for the longest sustained period in two
decades. The substantial easing of monetary conditions that took
place through last year has laid the foundation for much stronger
growth and job creation in 1997 and 1998.
The decline in interest rates reflects the marked improvement
in the fiscal health of the federal and provincial governments and
the turnaround in economic fundamentals in recent years. Deficits
have been cut sharply and inflation held to a low level, while
Canada’s competitiveness has improved. By mid-year, the current
account had moved into surplus for the first time in 12 years.
These developments have translated into a marked improvement
in confidence in the country. Only a short time ago, investor confidence in Canada was at a low ebb, owing to years of deterioration
in Canada’s public finances. The result was upward pressure on
1
All statistical references as of Wednesday, February 12, 1997.
23
BUDGET PLAN
interest rates at a time when easier monetary conditions were
needed to address slow growth and high unemployment. High interest rates compounded Canada’s fiscal problems. The decisive
measures adopted by governments all across Canada have broken
this vicious cycle, boosting confidence and creating the conditions
for lower interest rates and stronger growth in the years ahead.
Private sector forecasters are now unanimous in forecasting
faster growth and job creation for Canada. Major international
organizations, such as the International Monetary Fund (IMF)
and Organization for Economic Co-operation and Development
(OECD), share this favourable assessment of the Canadian
economy’s growth prospects.
For fiscal planning purposes, the government will continue its
practice of adopting prudent economic assumptions. This approach
was implemented on the advice of the Round Table of private sector
economists held in December 1993, and on the recommendation of
the House of Commons Standing Committee on Finance. They
recommended that budget planning be based on interest rate
assumptions above the average of private sector forecasts and, as a
result, lower nominal gross domestic product (GDP) growth. The
purpose of this approach was to guard against the possibility that
a less favourable economic environment might prevent the government from meeting its fiscal targets – a development that would be
very costly to the economy at a time when fiscal credibility needed
to be re-established.
Recent Developments and Outlook
Recent developments
During the first half of last year, expectations for 1996 growth were
steadily revised down as successive indicators showing continued
weakness in the economy were released. At the time of the 1996
budget, private sector forecasters expected growth to average
1.9 per cent in 1996. It now appears likely that growth for 1996
averaged about 1.4 per cent.
The slower growth recorded for 1996 as a whole mainly reflected
sluggishness during the first half of the year. This stemmed in part
from the need of businesses to reduce inventories, which had risen
to undesirably high levels in early 1995. Growth strengthened in
the second half of last year, however, following the end of the inventory correction and as lower interest rates began to take effect.
24
ECONOMIC DEVELOPMENT AND PROSPECTS
Stronger growth expected in 1997 and beyond
There are good reasons to believe that growth has begun to
strengthen, and that this will continue through 1997 and beyond.
These stronger growth prospects stem from a fundamental improvement in confidence, owing in large measure to the turnaround in
Canada’s fiscal situation and continued low inflation. Federal and
provincial governments have demonstrated their resolve to tackle
their deficit problems. This greatly reduced their borrowing
requirements and subsequent use of private savings so much so
that Canada’s chronic current account deficit (a measure of the
country’s need for foreign savings) has been largely eliminated.
Inflation has been kept within the 1 to 3 per cent target range established jointly by the government and the Bank of Canada, thereby
anchoring expectations for continued low inflation (Chart 2.1).
Chart 2.1
Consumer price index (CPI)
year-over-year per cent change
7
CPI
6
5
4
3
2
Target range
CPI excluding
food and energy
and indirect taxes
1
0
-1
1990
1991
1992
1993
1994
1995
1996
1997
Note: The underlying rate of inflation is well within the official target range
of between 1 and 3 per cent.
The improvement in confidence is clearly illustrated by the
steep decline in interest rates over the last two years. When the
government took office, the poor state of Canada’s public finances
had eroded investor confidence to a degree that Canadians,
25
BUDGET PLAN
including the government, had to borrow at rates well above those
in the U.S. These high interest rates in turn compounded Canada’s
fiscal problems.
The decisive measures adopted by governments all across
Canada have broken this vicious cycle. The improvement in
investor confidence has translated concretely into lower interest
rates across all maturities. Short-term interest rates are now at their
lowest level in close to 35 years. Moreover, interest rate spreads
vis-à-vis key U.S. rates have narrowed sharply across the maturity
spectrum. Canadian rates are now lower than those in the U.S. on
maturities of up to about 10 years (Chart 2.2). Short-term rates
have been below those in the U.S. for the longest sustained period
in two decades. For example, the three-month Treasury bill rate,
which has been below the comparable U.S. rate for almost
12 months, is currently more than 200 basis points below U.S. rates
(Chart 2.3). This large negative interest rate spread stands in
marked contrast to the positive spread of more than 200 basis
points that has prevailed on average over the last 20 years.
Chart 2.2
Canada-U.S. yield curve spreads
per cent
3
2
1
0
-1
Jan 20 1995
Mar 6 1996
Feb 10 1997
-2
-3
3-month
Treasury bill
2-year
bond
5-year
bond
26
10-year
bond
30-year
bond
ECONOMIC DEVELOPMENT AND PROSPECTS
Chart 2.3
3-month Treasury bill rates
per cent
9
8
Canada
7
6
5
4
United States
3
2
Differential
1
0
-1
-2
-3
J F M AM J J A S O N D J F M AM J J A S O N D J F M AM J J A S O N D J
1994
1995
1996
The U.S. Treasury bill rate has been adjusted from a discount basis to a true-yield basis.
Lower government bond yields have passed through to the
interest rates at which businesses and households borrow: the prime
rate is now 4.75 per cent, its lowest level in 40 years; mortgage and
consumer loan rates have also fallen significantly. One-year mortgage rates are currently just over 5 per cent, down nearly 500 basis
points from January 1995, while five-year rates have fallen some
350 basis points to about 71⁄4 per cent. These lower mortgage rates
provide substantial savings in terms of lower mortgage payments.
The decline in the one-year mortgage rate, for example, means that
a homeowner taking out a $100,000 mortgage amortized over
25 years pays about $3,600 less per year than if rates had remained
constant. And lower mortgage rates allow homeowners to pay off
their mortgages faster. When the five-year mortgage rate peaked in
January 1995, a $100,000 mortgage amortized over 25 years cost
almost $950 per month. With current mortgage rates, a homeowner
paying $950 per month could eliminate the same $100,000
mortgage in only 14 years.
27
BUDGET PLAN
Chart 2.4
Developments in late 1996 show a strengthening economy
MLS house resales
thousands, annual rate
450
425
400
375
350
325
300
275
250
225
200
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jun
Jul
Aug
Sep
Housing starts
thousands, annual rate
150
140
130
120
110
100
90
80
70
60
Jan
Feb
Mar
Motor vehicle sales
thousands, annual rate
1,500
1,400
1,300
1,200
1,100
1,000
900
800
Jan
Feb
Mar
Apr
May
28
Oct
Nov
Dec
ECONOMIC DEVELOPMENT AND PROSPECTS
Developments in late 1996 show a strengthening economy
Real consumer spending on goods
$1986 millions, annual rate
184.0
183.0
182.0
181.0
180.0
179.0
178.0
177.0
176.0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Real monthly GDP
$1986 millions, annual rate
560.0
Estimated impact of GM strike
Actual
550.0
540.0
530.0
520.0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Employment
thousands
13800
13750
13700
13650
13600
13550
13500
Jan
Feb
29
BUDGET PLAN
Since the effects of interest rates on economic activity are subject
to considerable lags, the declines in interest rates achieved in 1995
and early 1996 only began to have a marked effect on consumer
spending and investment in the fall of 1996 (Chart 2.4). Naturally,
the effect of low interest rates has appeared first in the most interestsensitive sectors:
■ For example, house resales were soaring in late 1996, reducing
the inventory of unsold houses and boosting housing starts. By
January 1997, housing starts were up nearly 50 per cent from their
mid-1995 low.
■ Business confidence has never been better. Businesses are using
more of their capacity and expect their financial position to improve
over the next six months. As a result, the share of businesses that
think now is a good time to invest has reached its highest level on
record. It is therefore not surprising that business investment
jumped over 20 per cent in the third quarter of 1996.
Consumer confidence rose strongly in the fourth quarter – the
fourth consecutive quarter of improvement. Sales of durable goods
rose strongly in the fourth quarter of 1996; new motor vehicle sales,
for example, increased 8 per cent in the fourth quarter.
■
Job creation has picked up with the economy generating
91,000 additional jobs in the last four months.
■
Much of the very sharp declines in interest rates we have seen in
the past two years only occurred in the second half of 1996. Given
the usual lags in the effects of changing monetary conditions, this
implies that there is significant stimulus to growth and jobs still to
come from declines in interest rates and the substantial improvement in consumer and business confidence.
Stronger demand will fuel the growth needed to get Canadians
back to work. Private sector job creation has been healthy, with
231,000 jobs having been created since the end of 1995. Overall
job creation has been slower, owing to public sector job losses, but
total employment nonetheless expanded by 191,000 over the same
period. Roughly eight out of ten of these jobs are full-time.
Stronger employment growth during 1997 will in turn generate
the income gains and confidence required to fuel the consumption
and residential investment needed to continue the expansion and
make it more balanced.
30
ECONOMIC DEVELOPMENT AND PROSPECTS
The Outlook: Updating the Planning Assumptions
These developments, as well as a more favourable external
environment, have led private sector forecasters to expect stronger
growth in 1997, both relative to the performance in 1996 and
earlier expectations for 1997.
The external environment
The external environment is expected to support stronger economic
growth in Canada and the continuing efforts by all levels of government to put public finances on a strong and sustainable footing.
Major overseas economies
Growth in the major European economies is expected to strengthen
in 1997 and to improve further in 1998. The improvement in
growth prospects reflects the effect of a steady decline in interest
rates over the past several years.
Japan’s economy is expected to slow in 1997, reflecting the
short-run impact of measures required to contain large budget
deficits. However, the outlook is for stronger growth in 1998.
Inflationary pressures are under control in all major overseas
economies, a development which provides monetary authorities
with considerable scope to maintain interest rates at their present
accommodative levels.
Table 2.1
Outlook for economic growth in the major overseas economies
1996
1997
1998
(per cent)
Japan
Germany
France
United Kingdom
Italy
3.6
1.1
1.3
2.4
0.8
Source: OECD Economic Outlook, December 1996.
31
1.6
2.2
2.5
3.3
1.2
3.7
2.6
2.6
3.0
2.1
BUDGET PLAN
The United States
The U.S. economy expanded at a pace somewhat greater than the
growth in its productive capacity during 1996. However, the
consensus among private forecasters and major international
organizations is for 1997 to see the U.S. economy growing at a rate
in line with its productive potential, and for inflation to remain
roughly constant at about 3 per cent. One of the main factors
expected to restrain future growth is the rise in long-term market
interest rates during the first half of 1996. Since changes in interest
rates affect economic activity with lags, the impact of higher
long-term rates will not be felt in full until 1997. This view, together
with the absence of an upward trend in inflation, was likely
behind the Federal Reserve Board’s decision not to raise short-term
interest rates in 1996.
Table 2.2
U.S. economic outlook
1996
1997
1998
(per cent)
Real GDP
Consumer prices
3-month Treasury bill rate
10-year government bond rate
2.5
2.9
5.0
6.4
2.3
2.9
5.2
6.4
2.1
3.0
5.1
6.4
Source: Blue Chip Economic Indicators, January 10, 1997. This is a survey of approximately
50 private sector forecasters. Values for 1996 are actual data. The three-month
Treasury bill rate is on a discount basis.
The fact remains, however, that the U.S. economy has for some
time been operating at, and at times slightly beyond, its long-term
productive capacity. Periods such as this have in the past usually
resulted in inflationary pressures (Chart 2.5). In this environment,
the possible emergence of inflationary pressure will remain a
concern of the authorities, resulting in a balance of risks that is tilted
in the direction of higher U.S. interest rates. In this respect, it is
significant that the rise in long-term interest rates during the first
half of 1996 has since been partially reversed. As a result, many U.S.
analysts believe that the Federal Reserve will need to remain
vigilant, and will need to raise short-term interest rates in 1997 to
ensure that inflationary pressures do not emerge.
32
ECONOMIC DEVELOPMENT AND PROSPECTS
Chart 2.5
U.S. output gap and inflation
per cent
14
12
10
8
CPI inflation
6
4
2
0
-2
-4
Output gap
-6
-8
1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996
Note:
The output gap is calculated as the per cent difference between actual
and potential GDP, as calculated by the Congressional Budget Office.
Data are for U.S. government fiscal years.
The economic assumptions for Canada
Private sector views
The consensus among Canadian private sector forecasters is that
growth will strengthen and become more broadly based in 1997,
expanding from the export sector to domestic demand beginning
with the most interest-sensitive components. Stronger and more
balanced demand will spur faster job creation, a development that
will in turn help generate yet stronger domestic demand. This virtuous circle will operate both directly – through faster growth in
household income – and indirectly – through further improvement
in consumer confidence.
As well, Canada’s strong competitive position, which is steadily
being reinforced by continued fiscal progress and by the government’s success in controlling inflation, will help ensure that
exporters retain the gains they have made in recent years.
The most striking, and encouraging, difference between these
recent private sector forecasts and those presented in the 1996
budget relates to the outlook for interest rates. The consensus
among forecasters is for the three-month Treasury bill rate to average 3.2 per cent in 1997, rising only slightly to 3.7 per cent in 1998.
33
BUDGET PLAN
The expected increase from current rates reflects some expectations
for modest increases in U.S. short-term interest rates and some
narrowing of the present large negative spread between Canadian
and U.S. rates. Nonetheless, this represents a clear contrast with the
situation one year ago, when forecasters expected short-term rates
to average 5.8 per cent in 1997. Canadian 10-year government
bond yields are expected to remain roughly equal to U.S. rates at
around 6.6 per cent in 1997. Again, the progress achieved over the
past year stands out. A year ago, forecasters expected long-term
yields to average 7.4 per cent.
The downward revision to private sector forecasts of interest
rates has been accompanied by an improved outlook for GDP and
employment growth in 1997 (Chart 2.6). Growth is expected to
strengthen to 3.3 per cent in 1997 from an estimated 1.4 per cent
in 1996, compared with the private sector forecast of 2.8 per cent
growth for 1997 presented in the 1996 budget. Employment is
expected to grow by 2.0 per cent in 1997, compared with the
private sector consensus of 1.8 per cent prevailing prior to last year’s
budget. Many private sector forecasters expect that this stronger
growth could generate between 300,000 and 350,000 jobs by the
end of this year.
The consensus among Canadian private sector forecasters is for
Canada’s current account surplus to rise over the next several years,
a development that will help sustain the conditions for continued
low interest rates.
Major international organizations share this favourable
assessment of the Canadian economy’s growth prospects. The
most recent forecasts by the IMF and the OECD project that
Canada, together with the United Kingdom, will achieve the
strongest economic growth among the G-7 economies in 1997,
with the IMF and OECD projecting growth of 3.2 per cent, and
3.3 per cent, respectively.
34
ECONOMIC DEVELOPMENT AND PROSPECTS
Chart 2.6a
Private sector outlook for 1997 and 1998
Growth in real GDP
per cent
5
4.1
4
3.3
2.9
3
2.3
2.2
2
1.4
0.8
1
0
-0.2
-1
-1.8
-2
1990
1991
1992
1993
1994
1995
1996
1997
1.6
1.6
1996
1997
1998
Source: January 1997 survey of private sector forecasters.
Chart 2.6b
Private sector outlook for 1997 and 1998
CPI inflation
per cent
6
5
5.6
4.8
4
3
2.1
2
1.8
1.5
1.8
1
0.2
0
1990
1991
1992
1993
1994
1995
Source: January 1997 survey of private sector forecasters.
35
1998
BUDGET PLAN
Chart 2.6c
Private sector outlook for 1997 and 1998
Employment growth
per cent
3
2.1
2
2.0
2.0
1997
1998
1.6
1.3
1.3
1
0.6
0
-0.6
-1
-1.9
-2
1990
1991
1992
1993
1994
1995
1996
9.5
9.7
Source: January 1997 survey of private sector forecasters.
Chart 2.6d
Private sector outlook for 1997 and 1998
Unemployment rate
per cent
13
12
11.3
11
11.2
10.4
10.4
10
9.3
8.8
9
8
8.1
7
6
5
1990
1991
1992
1993
1994
Source: January 1997 survey of private sector forecasters.
36
1995
1996
1997
1998
ECONOMIC DEVELOPMENT AND PROSPECTS
Table 2.3
Evolution of private sector forecasts since the 1996 budget
1996
1997
1998
Real GDP growth (%)
February 1996
September 1996
January 1997
1.9
1.5
1.4
2.8
3.1
3.3
2.9
CPI inflation rate (%)
February 1996
September 1996
January 1997
1.7
1.5
1.6
2.1
1.7
1.6
1.8
Nominal GDP ($ billion)
February 1996
September 1996
January 1997
809
797
798
846
834
837
876
Employment growth (%)
February 1996
September 1996
January 1997
1.3
1.4
1.3
1.8
1.9
2.0
2.0
Unemployment rate (%)
February 1996
September 1996
January 1997
9.4
9.5
9.7
9.1
9.2
9.3
8.8
3-month Treasury bill rate (%)
February 1996
September 1996
January 1997
5.3
4.5
4.2
5.8
4.5
3.2
3.7
10-year government bond rate (%)
February 1996
September 1996
January 1997
7.2
7.6
7.2
7.4
7.5
6.6
6.6
The February 1996 survey was based on 20 respondents for 1996 and 18 for 1997. The
September 1996 survey was based on 15 respondents for both years. The January 1997
survey was based on forecasters who had updated their forecasts since the release of the
Canadian Income and Expenditure Accounts for the third quarter of 1996. Twenty-one
forecasters provided projections for 1997 and 18 forecasters provided projections for 1998.
The January 1997 survey data for 1996 reflect actual outcomes, with the exception of GDP,
which is a private sector estimate.
37
BUDGET PLAN
Prudent assumptions for fiscal planning
The prudence factors for fiscal planning assumptions at the time of
the October Economic and Fiscal Update were for short-term
interest rates 80 basis points higher than the private sector average
in 1997, and for long-term interest rates 50 basis points higher than
forecast by the private sector. These assumptions were seen as
appropriate by the economists appearing before the House of
Commons Standing Committee on Finance. Accordingly, the 1997
budget will retain these planning assumptions for 1997, and extend
them into 1998.
The reasons supporting the application of these prudence factors
are those identified in the October Economic and Fiscal Update:
■ With the U.S. economy operating at its productive capacity, there
is a risk that stronger economic growth or incipient inflationary
pressure might result in a greater-than-expected increase in interest
rates by the Federal Reserve Board. There is always the risk that
such an increase in U.S. rates could spill over into Canada in the
form of higher Canadian interest rates.
The smaller prudence factor applied to long-term interest rates
reflects the unusual steepness of the Canadian yield curve. As
long-term interest rates are already unusually high compared to
short-term rates, they may not rise commensurately with any future
increase in short rates.
■
The application of these prudence factors results in a level of
nominal GDP that is 0.2 per cent lower in 1997 than forecast by
the private sector and 0.7 per cent lower in 1998.
38
ECONOMIC DEVELOPMENT AND PROSPECTS
Table 2.4
Economic assumptions for the 1997 budget1
1996
1997
1998
Real GDP growth (%)
Private sector average
1997 budget
1.4
1.4
3.3
3.2
2.9
2.6
Nominal GDP growth (%)
Private sector average
1997 budget
2.7
2.7
4.9
4.7
4.7
4.1
Nominal GDP ($ billion)
Private sector average
1997 budget
798
798
837
835
876
870
3-month Treasury bill rate (%)
Private sector average
1997 budget
4.2
4.2
3.2
4.0
3.7
4.5
10-year government bond rate (%)
Private sector average
1997 budget
7.2
7.2
6.6
7.1
6.6
7.1
1
GDP data for 1996 are estimates.
39
BUDGET PLAN
Table 2.5
Change in prudent economic assumptions for budget planning1
1996
1997
1998
Real GDP growth (%)
1996 budget
October update
1997 budget
1.8
1.5
1.4
2.6
3.0
3.2
2.6
Nominal GDP growth (%)
1996 budget
October update
1997 budget
3.3
2.7
2.7
4.3
4.4
4.7
4.1
Nominal GDP ($ billion)
1996 budget
October update
1997 budget
806
797
798
841
832
835
870
3-month Treasury bill rate (%)
1996 budget
October update
1997 budget
5.8
4.5
4.2
6.6
5.3
4.0
4.5
10-year government bond rate (%)
1996 budget
October update
1997 budget
7.7
7.6
7.2
8.2
8.0
7.1
7.1
1
1997 budget GDP data for 1996 are estimates.
40
3
Building the Future:
Staying the Fiscal Course
Introduction
Restored fiscal health is critical to Canada’s economic prosperity
and social well-being.
Entrepreneurial vigour, a vibrant investment climate and confident consumers are the hallmarks of a strong and growing economy. But when the government took office, these essential elements
of Canada’s well-being were threatened by rapidly deteriorating
public finances. The accumulation of debt over the previous
20 years had become an impediment to Canada’s economic performance. It also posed a real threat to the sustainability of public
health care and other valued programs that are the very fabric
of Canada.
The fiscal strategy set out in the last three budgets has changed
this situation. Not only has the fiscal turnaround been significant,
the emphasis on getting government right has been important as
well. The payoff from this fiscal turnaround is emerging, in the form
of lower interest rates, improved confidence, and renewed growth
and employment prospects. For that payoff to be sustained, fiscal
progress must continue.
Restored fiscal health is not an end in itself. The pursuit of deficit
reduction at any cost would have an unduly negative impact on the
economy and on Canadians themselves. The government has
balanced firm and sustained fiscal progress with the need to address
critical economic and social concerns. High priority programs have
41
BUDGET PLAN
been protected relative to others in budget reductions, and reallocations have been undertaken to fund key investments and selective
tax changes.
The Fiscal Plan is on Track
Each of the government’s budgets has built upon its predecessors in
achieving the reforms necessary to secure lasting fiscal health.
The strategy has been successful. The fiscal progress achieved to
date has been significant.
The 1994-95 and 1995-96 deficit targets were both bettered
(Chart 3.1). Last year, the deficit fell to $28.6 billion from
$37.5 billion in 1994-95.
■
■ This left the deficit-to-GDP ratio at 3.7 per cent in 1995-96, its
lowest level since 1976-77.
Deficit below target in 1996-97
Data available to the end of December 1996 (see The Fiscal Monitor
for December 1996) indicate that the deficit target of $24.3 billion
for 1996-97 will be bettered. Based on these results, the deficit will
be no higher than $19 billion – at least $5.3 billion below target
(Table 3.1).
At no more than $19 billion, or 2.4 per cent of gross domestic
product (GDP), the deficit will have been cut by more than half in
three years, and the deficit target will have been bettered three years
in a row (Chart 3.1).
■
42
B U I L D I N G T H E F U T U R E : S T AY I N G T H E F I S C A L C O U R S E
Chart 3.1
Deficit targets and outcomes
billions of dollars
50
Target
Outcome
40
30
Estimate
20
10
0
1994-95
1995-96
1996-97
The better outcome is primarily due to a number of factors:
The decline in interest rates witnessed in 1996 means that public
debt charges will be $2.3 billion lower than forecast in the
1996 budget.
■
■ Program spending is expected to be unchanged from the March
1996 budget level, even after including the proposed one-time
payment of $800 million to the new Canada Foundation for
Innovation.
■ Budgetary revenues are expected to be slightly higher than estimated
in the March 1996 budget, as the impact of slower-than-expected
economic growth in 1996 is more than offset by two special
factors – acceleration of employment insurance (EI) premiums and
the net proceeds from the sale of the air navigation system.
As a result of these developments, the Contingency Reserve of
$2.5 billion will not be required.
■
Final deficit results for 1996-97 will be published in the Annual
Financial Report.
43
BUDGET PLAN
Table 3.1
Summary statement of transactions:
fiscal outlook with budget measures 1
1994-95 1995-96 1996-97 1997-98 1998-99
(billions of dollars)
Budgetary revenues
Program spending
Operating balance
Public debt charges
Underlying deficit
123.3
118.7
130.3
112.0
135.5
109.0
137.8
105.8
144.0
103.5
4.6
18.3
26.5
32.0
40.5
42.0
46.9
45.5
46.0
46.5
-37.5
-28.6
-19.0
-14.0
-6.0
3.0
3.0
Contingency Reserve
Deficit
-37.5
-28.6
-19.0
-17.0
-9.0
Net public debt
545.7
574.3
593.3
610.3
619.3
Non-budgetary
transactions
11.6
11.4
13.0
11.0
10.0
-25.8
-17.2
-6.0
-6.0
1.0
16.5
15.9
0.6
5.6
-5.0
-3.5
73.0
16.8
14.4
2.4
6.0
-3.7
-2.2
74.0
17.0
13.7
3.3
5.7
-2.4
-0.8
74.4
16.5
12.7
3.8
5.5
-2.0
-0.7
73.1
16.6
11.9
4.7
5.3
-1.0
0.1
71.2
Financial requirements/source
Per cent of GDP
Budgetary revenues
Program spending
Operating balance
Public debt charges
Deficit
Financial requirements
Net public debt
1
A positive number indicates a source of funds, a negative number indicates a financial
requirement.
Deficit targets for 1997-98 and 1998-99 will be met
The fiscal projections for 1997-98 and 1998-99 are based on the
prudent economic planning assumptions described in Chapter 2.
The government is backing these planning assumptions with
substantial Contingency Reserves – $3.0 billion in both years.
The fiscal impact of the restraint measures taken in the 1994,
1995 and 1996 budgets continues to grow over the planning period,
exerting incremental downward pressure on program spending.
This, coupled with the revenue flowing from the forecast growth in
the economy, will ensure that the deficit targets for 1997-98 and
1998-99 will clearly be met. If the Contingency Reserves are not
needed, they will not be spent, reducing the deficit in these years
even further.
44
B U I L D I N G T H E F U T U R E : S T AY I N G T H E F I S C A L C O U R S E
■ Staying the course in this budget confirms that the deficit is
clearly on track to achieve the targets of $17 billion for 1997-98
and $9 billion for 1998-99.
Financial requirements – the amount of new money the government has to borrow on credit markets – will be in a small surplus
by 1998-99 (Chart 3.2). The last time financial requirements were
in balance or surplus was in 1969-70.
■
Chart 3.2
Public accounts deficit and financial requirements
per cent of GDP
10
8
Deficit
6
4
Financial
requirements
2
0
-2
1969-70
1974-75
1980-81
1986-87
1992-93
1998-99
Projected
■ Financial requirements is the measure used by most other major
industrialized countries, such as the U.S., to measure their financial
position. On this basis, zero financial requirements would imply a
“balanced” budget. Based on the budget plans of the Group of
Seven (G-7) countries, Canada will be alone in having achieved this
milestone in 1998-99 (Chart 3.3).
The operating balance (revenues less program spending) will be
in a surplus amounting to 3.3 per cent of GDP this year, and this
surplus will reach 4.7 per cent of GDP by 1998-99 – the highest
ratio in 50 years. If it were not for interest costs on the debt, the
federal budget would now be in a large surplus position (Chart 3.4).
■
45
BUDGET PLAN
Chart 3.3
Projected 1998 G-7 financial requirements
(central government)
per cent of GDP
4
3
2
1
0
-1
Canada
United
States
Germany
United
Kingdom
Japan
France
Italy
Source: National budget plans.
Chart 3.4
Evolution of the federal deficit
billions of dollars
60
40
Operating balance
20
0
Interest on
the public debt
-20
-40
Deficit
-60
1969-70
1979-80
1989-90
46
1998-99
Projected
B U I L D I N G T H E F U T U R E : S T AY I N G T H E F I S C A L C O U R S E
For many years, the federal government was caught in a vicious
debt trap. Higher deficits pushed up the debt-to-GDP ratio, which
in turn pushed up interest rates, resulting in even more upward pressure on the deficit. This debt trap has now been broken. Lower debt
servicing charges will now complement measures already put in
place to control spending and increase the operating surplus.
Beginning in 1997-98, economic growth is expected to outpace
the growth in the debt, and the debt-to-GDP ratio will begin to
decline. This decline will continue in 1998-99. The debt-to-GDP
ratio has risen, virtually without interruption, over the last two
decades, because the growth in the debt consistently outstripped the
growth in GDP – the capacity of the economy to carry that debt.
The Strategy to Restore Fiscal Health
Just as important as what has been accomplished is how it has been
accomplished. The government’s strategy to restore fiscal health has
been clear and consistent.
■ The pace of deficit reduction has been deliberate, measured and
responsible – to ensure that the program reforms and savings are
permanent, while allowing Canadians and the economy time to
adapt.
■ Deficit reduction has been pursued using two-year rolling deficit
targets.
■ These targets have been based on prudent economic planning
assumptions backed by a substantial Contingency Reserve.
The Contingency Reserve
The Contingency Reserve is included in the deficit projections primarily to cover risks arising from (i) unavoidable inaccuracies in the models
used to translate economic assumptions into detailed budget forecasts, and (ii) unpredictable events. The Contingency Reser ve also
provides an extra measure of back-up against adverse errors in the
economic forecast. The Contingency Reserve is not a source of funding for new policy initiatives.
47
BUDGET PLAN
■ Budget savings have been secured principally from expenditure
reductions rather than tax increases. This is true whether measured
in terms of budget savings, or in terms of the contributions to deficit
reduction over time from expenditure and revenue growth.
The strong reliance of budget savings on expenditure reductions
rather than tax increases has been critical to the government’s fiscal
strategy.
Research in Canada and elsewhere, such as the International
Monetary Fund, has shown that fiscal restraint arising from expenditure savings is more successful in achieving both growth and a
permanent improvement in the fiscal situation than that arising
from revenue increases.
Program reforms underlying expenditure reduction have
modernized the federal government’s role in the economy. In the
area of economic development, the federal government is focusing
increasingly on framework polices rather than on direct program
delivery. The government is also increasingly delivering services in
partnership with the private sector – using scarce federal resources
to lever additional spending from the private sector – and with the
provinces. The benefits of these reforms go far beyond their direct
financial impacts; these are structural program reforms that will
improve the functioning of the economy.
Actions taken by the government since taking office will have
reduced the 1998-99 deficit by $28.2 billion from what it otherwise
would have been. Of this, 91 per cent is due to expenditure reductions (Table 3.2). The cumulative effect of these actions will be to
lower net debt by almost $89 billion from what it would have been
otherwise.
By 1998-99, program spending is projected to fall to
$103.5 billion from $120.0 billion in 1993-94 – a decline of
13.8 per cent. Given the severity of the fiscal situation, all major
components of program spending have been affected.
48
B U I L D I N G T H E F U T U R E : S T AY I N G T H E F I S C A L C O U R S E
Table 3.2
Direct net budget savings since 1993-94
Cumulative
effect on
1994-95 1995-96 1996-97 1997-98 1998-99 net debt1
(billions of dollars)
1994 budget
1995 budget
1996 budget2
1997 budget3
1.5
8.0
5.0
10.9
10.6
0.0
-0.8
11.9
13.3
0.9
-1.0
12.6
13.8
2.5
-0.7
44.9
42.7
3.4
-2.5
Total
of which:
Program
spending
Revenues
1.5
13.0
20.7
25.1
28.2
88.5
0.7
0.8
10.6
2.4
18.1
2.6
22.8
2.3
25.6
2.6
77.8
10.7
1
Direct fiscal impact only. Does not include savings on public debt charges associated with
lower borrowing requirements.
2
Includes 1996 EI reform. Fiscal impact of the proposed reform of Seniors’ Benefits only
appears after 2001.
3
Includes measures announced since the 1996 budget.
(+) sign indicates a reduction in the deficit and net debt.
(-) sign indicates an increase in the deficit and net debt.
Excluding transfers to persons (seniors and employment insurance benefits) and to other levels of government (mainly the Canada
Health and Social Transfer and Equalization), all other spending is
projected to decline by about 14 per cent over the 1993-94 to
1998-99 period. Through the Program Review exercises, all aspects
of departmental spending were rationalized to ensure that the
government’s resources are directed to the highest priorities and to
those areas where the government is best placed to deliver services.
Transfers to persons and other levels of government accounted
for 54 per cent of program spending in 1993-94. These transfers
were just too large to permit an exemption from overall program
reduction. They, too, needed to be reformed to make them more
sustainable over the longer term as well as more targeted to ensure
that policy objectives were being met.
49
BUDGET PLAN
Transfers to persons are expected to decline by 1.4 per cent in
total over the five-year period. This is solely due to lower employment insurance benefits. The government has reformed the employment insurance program. Benefits have been restructured, thereby
reducing many of the disincentives that had built up in the previous
system, and allowing more resources to be allocated to active labour
market programming. The system of seniors’ benefits is to be
reformed. Under the new Seniors Benefit, which is to take effect at
the turn of the century, the government is proposing a system of
consolidated benefit payments that will be fairer and more targeted
to those most in need. Given the increased costs that will arise from
an ageing population in the decades ahead, it is important that steps
be taken now to put the system of seniors’ benefits on a more
sustainable basis.
■
■ Total transfer entitlements to other levels of government, which
include both tax points and cash transfers – the most appropriate
measure of federal support – are expected to decline by about
10 per cent, over the 1993-94 to 1998-99 period. These transfers
have been restructured and made more sustainable, predictable and
flexible. The introduction of the new block-funded Canada Health
and Social Transfer (CHST) will give provinces more flexibility to
use funds for post-secondary education, health and social assistance
and services in line with their own priorities and program needs.
The major changes to these transfers did not come into effect until
1996-97, thereby providing the provinces and territories two years
to plan for the changes. The 1996 budget put in place a formula to
increase CHST entitlements starting in 2000-01 at a rate linked to
the growth in the economy, and also put in place a floor to ensure
that cash payments, over the period of the current legislated
arrangements, never fall below $11 billion.
To measure the contribution of the major components to the
change in the deficit, it is instructive to remove the effect of the
changes in the economy. For example, revenues typically increase
as the economy expands, as more working Canadians would be
paying taxes. By examining changes in revenue and spending as a
percentage of the economy (GDP), most of the economic effects can
be eliminated, thus clarifying contributions of policy changes.
50
B U I L D I N G T H E F U T U R E : S T AY I N G T H E F I S C A L C O U R S E
Chart 3.5 shows the evolution of program spending and revenues
as a share of GDP. Although budgetary revenues are expected to
increase by $28 billion over the 1993-94 to 1998-99 period, the
revenue-to-GDP ratio is expected to rise only slightly – from
16.3 per cent in 1993-94 to a projected 16.6 per cent in 1998-99.
This implies that most of the $28 billion increase in revenues will
be due to the growth in the economy.
Program spending is expected to decline, in absolute terms, by
$16.5 billion over this period. As a percentage of GDP, it is expected
to fall from 16.8 per cent in 1993-94 to 11.9 per cent by 1998-99.
Table 3.3 shows the contributions of the changes in program
spending and revenues to the reduction in the deficit-to-GDP ratio.
The decline in program spending accounts for nearly all the
improvement in the deficit over the 1993-94 to 1998-99 period.
Chart 3.5
Program spending and revenues
per cent of GDP
20
Program spending
Revenues
15
10
5
0
1993-94
1994-95
1995-96
51
1996-97
1997-98
1998-99
Projected
BUDGET PLAN
Table 3.3
Change in the deficit-to-GDP ratio from 1993-94 to 1998-99
Change
(percentage points of GDP)
Decline in the deficit to-GDP-ratio
4.9
of which:
Decline in program spending
Increase in revenue
4.9
0.3
offset by:
Change in public debt charges
Addition of Contingency Reserve
0.0
0.3
Between 1993-94 and 1998-99, the deficit is projected to fall
from 5.9 per cent of GDP to 1.0 per cent – a decline of 4.9 percentage points. Between 1993-94 and 1998-99, revenues as a share of
GDP are expected to increase only marginally, while program
spending is projected to decline by 4.9 percentage points – equal to
the decline in the deficit over this period. Public debt charges as a
percentage of the economy are projected to be unchanged over this
period, while the inclusion of the Contingency Reserve adds to the
deficit offsetting a small portion of the overall reduction coming
from program spending and revenues.
A Fiscal Strategy Complemented
by Provincial Action
The fiscal turnaround at the federal level is critical to Canada’s
health, but is only one part of a more general improvement in the
overall government fiscal situation in Canada. While different
provinces have adopted different ways of restoring their fiscal
health, the end result is that many are now forecasting balanced
budgets or budgetary surpluses for the 1996-97 fiscal year. Just
three years ago, all provinces were in large deficit positions.
52
B U I L D I N G T H E F U T U R E : S T AY I N G T H E F I S C A L C O U R S E
The aggregate provincial-territorial deficit in 1996-97 is expected
to be $9.0 billion, more than 60 per cent lower than its peak in
1992-93. Like the federal government, the provinces and territories
have benefited from the sharp reduction in interest rates since
early 1995. Provinces that have a larger proportion of their debt in
shorter-term securities have benefited the most (Table 3.4).
Table 3.4
Estimated savings from lower debt charges by province1
(From January 1995 to December 1996)
Millions of dollars
Per cent of
expenditures
16
3
70
45
645
520
70
18
250
175
0.5
0.4
1.5
1.0
1.6
0.9
1.3
0.4
1.8
0.9
1,812
1.2
Newfoundland
Prince Edward Island
Nova Scotia
New Brunswick
Quebec
Ontario
Manitoba
Saskatchewan
Alberta
British Columbia
Total provincial
1
Finance Canada estimates, based on provincial estimated sensitivities to a 100-basis point
change in interest rates. Actual provincial savings may differ due to changes in debt strategies.
The combined federal-provincial-territorial deficit (on a public
accounts basis) is expected to be $28.0 billion in 1996-97 – down
over 57 per cent from its peak in 1992-93. The combined deficit
will be about 3 per cent of GDP in 1997-98, compared with
9.6 per cent in 1992-93 (Chart 3.6). Based on current budget plans,
it is projected to fall to under 2 per cent of GDP in 1998-99 (see
Annex 2 for more details).
Progress in deficit reduction has meant that the net debt-to-GDP
ratio will stabilize or decline in most provinces. Combined with
progress at the federal level, this means that, by 1997-98, the
combined federal-provincial-territorial debt ratio will also be on a
downward track (Chart 3.7).
53
BUDGET PLAN
Chart 3.6
Federal-provincial government deficit
(public accounts basis)
per cent of GDP
12
10
8
6
4
2
0
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
Projected
Chart 3.7
Net debt: federal and provincial governments
(public accounts basis)
per cent of GDP
120
Federal
Provincial
100
80
60
40
20
0
1984-85
1986-87
1988-89
1990-91
54
1992-93 1994-95
1996-97 1998-99
Projected
B U I L D I N G T H E F U T U R E : S T AY I N G T H E F I S C A L C O U R S E
Staying the Fiscal Course
While the actions taken in the government’s first three budgets have
helped the federal fiscal situation turn the corner, it is premature to
declare victory.
The government recognizes that the very credibility that has
contributed to a significant decline in interest rates in recent
months – and renewed confidence both domestically and abroad
about Canada’s economic future – is relatively new and still fragile.
These hard-won gains must be maintained. Fiscal actions that have
already been set in train will reduce the deficit in 1998-99 to about
1 per cent of GDP, but implementation must be assured. This budget
provides that assurance by staying the course on deficit reduction.
The government has focused its fiscal efforts on achieving
and bettering its deficit targets – a necessary step to addressing
Canada’s debt problem. Even though the debt-to-GDP ratio is
projected to decline in 1997-98, however, it will still amount to
nearly 75 per cent of Canada’s GDP and exceed 100 per cent when
provincial governments’ debts are included. Federal debt servicing
costs already account for one-third of every dollar raised in revenues
(Chart 3.8). Such a debt financing burden diverts revenues from
programs and investments that Canadians want and need. In short,
the crux of Canada’s fiscal problem has been, and remains, the high
debt-to-GDP ratio.
The combined debt of all governments in Canada is second only
to Italy in the G-7, in relative terms, and is well above that of our
major trading partners. Although less exposed than a few years ago,
Canada is still vulnerable to unexpected financial market developments. International capital markets are closely integrated and
events such as the Mexican peso crisis in 1995 clearly show that
financial market volatility is greatest in economies with weak fiscal
situations.
The debt-to-GDP ratio is poised for a significant and sustained
decline, but from a high level. The government will need to ensure
that projected fiscal gains are realized and are lasting and that the
debt-to-GDP ratio is reduced to a more manageable level.
55
BUDGET PLAN
Chart 3.8
Interest on the federal debt as a per cent of budgetary revenues
per cent
40
35
30
25
20
15
10
1970-71
1977-78
1981-82
1985-86
1989-90
1993-94
1998-99
Projected
The challenge for the future is thus to maintain sufficient
operating surpluses to keep the debt-to-GDP ratio on a steady
downward track. The operating surplus is forecast to increase to
close to 5 per cent of GDP by 1998-99. For illustrative purposes, if
this surplus was maintained for five years, then the debt-to-GDP
ratio would fall to 62 per cent – back to its 1991-92 level. A steady
reduction in the debt-to-GDP ratio will require careful financial
management for some time to come.
The fiscal strategy must – and will – stay on track. Careful financial management means that now is not the time for a broadly based
tax cut. Under the prudent economic planning assumptions on
which the budget is based, a broadly based tax cut would have to
be paid for in one of two ways – by adding to the deficit, or cutting
government programs even further. Adding to the deficit is not an
option – it would only serve to increase interest rates and diminish
the prospects for jobs and growth that are now emerging. Cutting
spending further would put at risk programs that Canadians
want preserved.
56
B U I L D I N G T H E F U T U R E : S T AY I N G T H E F I S C A L C O U R S E
Economic growth could turn out to be stronger and interest rates
lower than assumed in the budget. But Canada’s new-found
economic and fiscal credibility is too recent to risk on an overly optimistic view of Canada’s economic prospects. To do so would risk
all the fiscal gains that have been made to date.
However, there is limited room for strategic reinvestments. This
budget announces investments and selective tax cuts in critical areas
to enhance jobs and growth, or to invest in a stronger society. The
deficit is clearly on track to meet future targets, even with the
selected initiatives announced in this budget.
An Impressive Turnaround
by International Standards
International fiscal comparisons are made difficult by different
accounting conventions used in various countries. Fiscal data based
on the System of National Accounts, provided by the Organization
for Economic Co-operation and Development (OECD), present a
common basis for international fiscal comparisons and analysis.
Based on OECD data, Canada’s total government sector deficit
is projected to improve sharply relative to other G-7 countries.1
■ In 1992, the combined federal and provincial deficit on a national
accounts basis stood at 7.4 per cent of GDP, almost double the G-7
average of 3.8 per cent and second highest in the G-7 behind Italy.2
■ In 1997, Canada’s total government deficit is forecast to be the
lowest among G-7 countries, at 1.3 per cent of GDP. In 1998,
Canada’s deficit-to-GDP ratio is expected to be roughly in balance,
again the best performance in the G-7 countries.
■ In addition, Canada’s total government debt-to-GDP ratio fell in
1996 for the first time since 1988. The decline in the Canadian
debt-to-GDP ratio between 1997 and 1998 will be the largest of
the G-7 countries.
1
OECD Economic Outlook, December 1996.
2
The total government deficit-to-GDP ratio on a national accounts basis was
7.4 per cent in 1992, corresponding to a public accounts ratio of 9.6 per cent
(see Annex 3 for more details).
57
BUDGET PLAN
Detailed Overview of the
Fiscal Outlook to 1998-99
Changes from the 1996 budget forecast
for 1996-97 and 1997-98
Chapter 2 provided an update of the economic developments in the
past year and the prospects for 1997. Table 3.5 outlines the impact
of these changes, as well as the effect of the policy initiatives
announced since the last budget and other factors, on the deficit
targets for 1996-97 and 1997-98.
Nominal income – the applicable tax base for budgetary
revenues – is expected to be lower than assumed in the 1996 budget
for both 1996 and 1997. As a result, all major components of
budgetary revenues, with the exception of corporate income tax
collections, are expected to be lower than assumed in the 1996
budget. On balance, the effect of the economic developments is
expected to lower budgetary revenues by $2.0 billion in 1996-97
and $2.8 billion in 1997-98.
However, program spending is expected to be $0.8 billion lower
for both 1996-97 and 1997-98 than estimated in the 1996 budget.
Data available to date indicate that benefit payments for both
seniors and employment insurance will come in below the estimated values in the 1996 budget and this is expected to carry
forward into 1997-98. Transfers to other levels of governments
have been revised downward, primarily due to lower Equalization
transfers. Lower provincial revenue growth, reflecting tax reductions in some provinces and the strength of resource sector
revenues in some Equalization-receiving provinces have lowered
the formula-based entitlements. Other spending has been adjusted
up to reflect reprofiles from previous years and the reclassification
of revenues from the air transport tax, which are no longer netted
against program spending.
In addition, the decline in interest rates witnessed during 1996
has resulted in much lower-than-expected public debt charges.
Short-term rates in 1996 were 160 basis points on average lower
than those assumed for planning purposes in the 1996 budget, while
long-term rates averaged 50 basis points lower. Although rates are
assumed to rise in 1997 from current levels, mainly due to the
prudence factors built into these rates for planning purposes, they
are still expected to be below the levels projected in the 1996 budget.
58
B U I L D I N G T H E F U T U R E : S T AY I N G T H E F I S C A L C O U R S E
As a result, public debt charges are expected to be $2.3 billion lower
in 1996-97 and $3.0 billion lower in 1997-98 than assumed in the
1996 budget.
The net impact of these economic developments is to lower the
deficit by about $1 billion per year in both 1996-97 and 1997-98.
Table 3.5
The fiscal outlook – changes since 1996 budget
1996-97
1997-98
(billions of dollars)
1996 budget deficit track
24.3
17.0
Impact of economic factors
Revenues:
Personal income tax
Corporate income tax
Sales and excise taxes
Employment insurance premiums
Other revenues
0.2
-0.7
1.3
0.2
1.0
0.5
-0.1
1.3
0.0
1.1
2.0
2.8
-1.0
-1.3
-0.4
0.6
-0.8
1.3
-0.8
-0.8
Public debt charges
-2.3
-3.0
Net impact of economic
factors
-1.1
-1.0
Impact of one-time factors
Sale of air navigation system
EI premium acceleration
-1.5
-1.0
Total
Program spending:
Major transfers to persons
Major transfers to other levels of
government
Other spending
Total
Total
-2.5
Contingency Reserve
-2.5
Net impact of policy changes since
1996 budget
0.8
1.0
Net changes since 1996 budget
-5.3
0.0
1997 budget deficit track
19.0
17.0
Note: (-) indicates a reduction in the deficit, (+) indicates an increase in the deficit.
59
BUDGET PLAN
There were two notable one-time factors that lowered the
1996-97 deficit by $2.5 billion. Net proceeds from the sale of the
air navigation system amounted to $1.5 billion. In addition, as part
of the reform of the employment insurance program, premiums,
effective January 1, 1997, are based on hours worked rather than
on number of weeks worked. This results in an acceleration of
premium revenues from the latter half of the calendar year to the
first half for higher-income employees and their employers.
Although this has no effect on employee/employer EI liability for
the calendar year as a whole, the acceleration of premiums does
result in a one-time gain on a fiscal year basis. Neither of these
initiatives were included in the 1996 budget estimate for 1996-97,
given the uncertainty of the timing of the sale and of the estimates
of the impact of the EI change.
The financial results to the end of December 1996 clearly indicate that the deficit for 1996-97 will be lower than the target of
$24.3 billion and that the Contingency Reserve will not be required.
The Contingency Reserve has been removed for 1996-97, thereby
lowering the deficit accordingly. The reserve remains at $3.0 billion
for 1997-98.
Finally, the net fiscal impact of the initiatives undertaken since
the 1996 budget, including the measures proposed in this budget,
amount to $0.8 billion in 1996-97 and just under $1.0 billion
in 1997-98.
As a result of these developments, the deficit for 1996-97 is
expected to be no greater than $19.0 billion, while the deficit target
for 1997-98 remains clearly on track.
The Revenue Outlook
The revenue outlook to 1998-99 is summarized in Table 3.6.
Based on the financial results for the first nine months of
1996-97, budgetary revenues are now estimated at $135.5 billion
– up $5.2 billion or 4.0 per cent from 1995-96. About half of this
increase is attributable to one-time factors: the sale of Transport
Canada’s air navigation assets to NavCan – a private non-profit
corporation – and the change in the timing of EI premiums.
Excluding the impact of these factors, the revenue-to-GDP ratio is
virtually unchanged from 1995-96.
60
B U I L D I N G T H E F U T U R E : S T AY I N G T H E F I S C A L C O U R S E
Table 3.6
The revenue outlook
1994-95 1995-96 1996-97 1997-98 1998-99
(billions of dollars)
Personal income tax
Corporate income tax
Employment insurance
contributions
Excise taxes and duties
Goods and services tax
Customs import duties
Other excise taxes
Other tax revenues
56.3
11.6
60.2
16.0
63.3
15.8
66.5
16.2
70.4
17.1
18.9
18.5
19.6
19.3
19.7
16.8
3.6
6.7
1.8
16.4
3.0
7.3
2.1
16.9
2.3
7.8
2.1
17.5
2.1
8.1
2.1
18.4
1.9
8.3
2.0
Total tax revenues
115.7
123.3
127.8
131.7
137.7
Non-tax revenues
7.6
7.0
7.7
6.1
6.3
123.3
130.3
135.5
137.8
144.0
16.5
16.8
17.0
16.5
16.6
Total budgetary revenues
Per cent of GDP
Numbers may not add due to rounding.
These special factors also dampen the overall growth rate of
revenues between 1996-97 and 1997-98. For 1997-98, budgetary
revenues are expected to increase by only 1.7 per cent. Excluding
the impact of these factors, the gain is 3.5 per cent. In 1998-99,
budgetary revenues are expected to increase more in line with the
growth in the economy.
Personal income tax – the single largest source of federal
revenue – is expected to increase $3.1 billion, or 5.2 per cent, in
1996-97. This mainly reflects developments relating to the 1995
taxation year: higher payments on filing, higher payments relating
to arrears and higher quarterly instalment payments. These revenue
sources reflect to a large extent economic developments in 1995.
During 1996-97, taxfilers were required to remit larger quarterly
instalments on income not subject to withholding. This represents
an acceleration of payments from 1997-98 to 1996-97, which could
result in lower taxes paid on filing in 1997-98. Withholdings from
employment income advanced at a slower pace during the year,
broadly in line with employment and wage growth. In both
1997-98 and 1998-99, personal income tax collections are expected
61
BUDGET PLAN
to grow slightly faster than the economy, due to the progressivity
of the tax system, with higher marginal tax rates at higher levels of
taxable income. In addition, with inflation expected to be well
within the target range, there will be no indexation of the personal
income tax parameters.
Corporate income tax revenues are expected to decline slightly
in 1996-97 to $15.8 billion. Over the first nine months of 1996-97,
corporate income tax revenues increased 12.6 per cent from the
same period a year earlier. This growth is a reflection of the remittance procedures for large corporations as corporate profits are
expected to be unchanged from 1995. Corporations are required to
file monthly instalments on either last year’s tax liability or the
current year’s estimated liability. Corporations have 60 days after
their year end to file, with any amounts outstanding due at that
time. As a result, over 30 per cent of corporate income tax collections are received in the months of February and March – the settlement period. In 1995-96, settlement payments were very strong
reflecting relatively low instalments during the year. As corporate
profits are expected to be little changed from last year, settlement
payments are not expected to show the same strength as last year.
Corporate income tax revenues are expected to pick up in both
1997-98 and 1998-99, as corporate profit growth resumes. The
surtax on the capital of banks and other large deposit-taking institutions, first introduced in the 1995 budget, is being extended for
one more year.
The increase in EI premiums in 1996-97 primarily reflects the
changes to the base on which premiums are levied, from weekly
maximum insurable earnings to annual maximum insurable earnings. The impact of this is a one-time increase in receipts from EI
premiums in the January-to-March period of 1996-97. This change
does not affect the annual amount paid. Those earning up to annual
maximum insurable earnings will see no change in their annual
contributions, while those earning more than annual maximum
insurable earnings will pay more of their contributions earlier in the
year. Premium contributions are expected to decline slightly in
1997-98, as the impact of lower premium rates (the employee rate
fell by five cents in 1997), coupled with the costs of the New Hires
Program offsets the effects of increases in employment. For planning purposes, the employee rate is assumed to decline by 10 cents
in 1998.
62
B U I L D I N G T H E F U T U R E : S T AY I N G T H E F I S C A L C O U R S E
Goods and services tax revenues are expected to grow broadly
in line with growth in final consumer demand over the forecast
period. Customs import duties are expected to continue to decline
over the forecast period, as the effect of tariff reductions under the
various trade agreements more than offsets the growth in imports.
The increase in other excise taxes reflects the impact of the increase
in taxes on tobacco products announced in November 1996.
Non-tax revenues include return on investments, most notably
Bank of Canada profits and Exchange Fund earnings, and other
non-tax revenues, such as user fees and charges. The large increase
in 1996-97 is due to the proceeds from the sale of Transport
Canada’s air navigation assets.
Outlook for Program Spending
Table 3.7 provides the major elements of program spending through
to 1998-99.
By 1998-99, program spending will have declined for six consecutive years, falling from its peak of $122.6 billion in 1992-93 to
$103.5 billion in 1998-99. As a share of GDP, program spending is
projected to decline to 11.9 per cent by 1998-99, the lowest ratio
since 1949-50. This decline primarily reflects the impact of the
restraint measures introduced in each of the last three budgets. All
major components of program spending contribute to this absolute
decline in total program spending, with the exception of major
transfers to persons.
Major transfers to persons consist of seniors’ benefits, including
old age security, the guaranteed income supplement, spouses’
allowances and employment insurance benefits. The increases in
seniors’ benefits reflect growth in the seniors’ population and
increases in maximum benefits, which are indexed to changes in the
consumer price index. The proposed Seniors Benefit is scheduled to
come into effect in 2001. Reforms to the EI system, coupled with
growth in employment, have significantly restrained the growth in
benefits. From a peak of $19.1 billion in 1992-93, benefits are
expected to fall to $13.1 billion in 1996-97. Over the next two
years, benefit payments are expected to rise, even as the economy
improves, since the number of beneficiaries relative to the number
of unemployed typically increases during economic upturns.
63
BUDGET PLAN
Table 3.7
The outlook for program spending
1994-95 1995-96 1996-97 1997-98 1998-99
(billions of dollars)
Major transfers to persons
Elderly benefits
Employment insurance
Total
Major cash transfers to
other levels of government
CHST1
Equalization
Transfers to territories
Other fiscal transfers
Alternative Payments for
Standing Programs
Total
Subsidies and other transfers
Business subsidies
Indian and Inuit
International assistance
Science and technology
Canada Infrastructure
Works
Other
Total
Crown corporations
Defence
20.5
14.8
21.0
13.5
21.6
13.1
22.3
13.5
22.9
14.1
35.3
34.5
34.7
35.8
37.0
19.3
8.5
1.2
-0.4
18.6
8.8
1.2
-0.2
14.9
8.5
1.1
0.1
12.5
8.3
1.1
0.0
11.8
8.4
1.1
0.0
-1.8
-1.9
-2.0
-2.1
-2.2
26.7
26.5
22.6
19.8
19.1
3.7
3.7
2.9
1.0
2.3
4.1
2.2
0.9
2.3
4.3
2.2
1.7
1.8
4.4
2.1
0.9
1.5
4.4
1.9
0.8
0.4
8.3
0.9
7.8
0.5
7.3
0.6
6.8
0.0
5.9
20.0
18.2
18.3
16.5
14.5
5.0
4.3
4.3
3.9
3.8
10.7
9.9
9.6
9.0
8.5
Other
21.0
18.6
19.5
20.8
20.7
Total
118.7
112.0
109.0
105.8
103.5
Numbers may not add due to rounding.
1
Through to 1995-96 includes Established Programs Financing (EPF) and Canada Assistance
Plan (CAP). Beginning in 1996-97, refers to the Canada Health and Social Transfer (CHST).
Entitlements under the EPF/CAP and CHST are as follows:
29.3
29.6
26.9
25.1
25.1
Total entitlements (both tax and cash) for major transfer to other levels of government (CHST,
Equalization and transfers to the territories) are as follows.
38.2
38.7
35.7
33.6
33.7
Cash transfers to other levels of government are projected to fall
from $26.7 billion in 1994-95 to $19.1 billion by 1998-99. This
decline is largely due to reductions in entitlements through to
64
B U I L D I N G T H E F U T U R E : S T AY I N G T H E F I S C A L C O U R S E
1997-98 under the CHST – the block-funded transfer introduced
in the February 1995 budget, which has replaced transfers under
the Established Programs Financing (EPF) and the Canada
Assistance Plan (CAP). Like EPF, the CHST entitlement takes the
form of tax point transfers and cash transfers. A tax point transfer
involves the transfer of federal “tax room” to provinces, which
allows the provinces to raise their tax rates by an equivalent
amount, with no impact on taxpayers. The cash transfer is the
difference between the entitlement and the value of the tax point
transfer. Only the cash transfer affects program spending. In the
1995 budget, total entitlements were set at $26.9 billion for
1996-97 and $25.1 billion for 1997-98. The 1996 budget legislated
a five-year CHST funding arrangement, covering the years 1998-99
to 2002-03. For 1998-99 and 1999-2000, CHST entitlements will
be maintained at their 1997-98 level of $25.1 billion. For 2000-01
to 2002-03, entitlements will grow at an increasing pace – 2 per cent
less than the growth rate of GDP in 2000-01, 1.5 per cent less in
2001-02, and 1 per cent less than the growth rate of GDP in
2002-03. In addition, the legislation provides a guarantee that, over
this five-year period, cash transfers will never fall below $11 billion.
Another key transfer to provinces is Equalization. Lower provincial revenue growth, due primarily to tax reductions in some
provinces, the strength of resource revenues in some of the
Equalization-receiving provinces and population changes between
Equalization-receiving and non-Equalization-receiving provinces
have significantly restrained the growth in the formula-based entitlements. Transfers to the territories are also expected to remain flat
over the 1994-95 to 1998-99 period.
The Alternative Payments for Standing Programs represent
recoveries of federal tax point abatements under the contracting-out
arrangements. Under these arrangements, any province could
assume the administrative and financial authority for certain
federal-provincial programs. Under such arrangements, the federal
government would reduce the federal personal income tax rates in
that province, so that province could increase its rate by an equivalent amount. The value of these additional tax points under
contracting-out arrangements are recovered from the cash transfers.
Quebec was the only province to choose these arrangements when
they were offered in the mid-1960s. The recoveries have no impact
on net federal transfers or on Quebec’s net receipts.
65
BUDGET PLAN
The reduction in subsidies and other transfer payments between
1994-95 and 1998-99 reflects the impact of the restraint measures
introduced in each of the last three budgets.
■ Business subsidies are expected to decline by sharply reflecting
substantial reductions in transportation subsidies (the elimination
of the Western Grain Transportation Act payments and other railway subsidies), agricultural subsidies and funding to the regional
agencies.
Funding for international assistance is budgeted to decline by
$1 billion.
■
■ Grants in respect of science and technology – direct grants made
by the National Research Council and university research granting
councils – will be relatively unchanged over the forecast period.
■ The rate of growth in transfers under the Indian and Inuit
programs (Department of Indian and Northern Affairs and the
aboriginal health programs administrated by Health Canada) is
being restrained.
■ Within the remaining component, reductions have been made to
labour market and cultural programs, while veterans’ allowances
and pensions are expected to be relatively stable.
The measures announced in the last three budgets will also result
in significantly lower Crown corporation expenditures, as well as
on defence.
All other spending includes departmental operating costs and
centrally held funds to assist departments in managing unavoidable
cost pressures arising during the fiscal year.
■ The 1994, 1995 and 1996 budgets introduced measures that
significantly reduced the operating costs of departments. The wage
freeze was extended to 1996-97. Certain government activities were
privatized or commercialized. The actions taken will result in the
elimination of about 55,000 positions from the federal public
service, once they are fully implemented.
■ In the 1995 budget, the government introduced the Expenditure
Management System, to ensure that departmental spending would
be strictly controlled on an ongoing basis.
66
B U I L D I N G T H E F U T U R E : S T AY I N G T H E F I S C A L C O U R S E
Public Debt Charges
Public debt charges represent the largest component of total federal
government spending, representing about 30 per cent of total
spending. Nearly one-third of each revenue dollar goes to paying
interest on the public debt.
The significant decline in interest rates in 1996 halted the
dramatic rise in public debt charges over the last few years. They
are expected to be no higher than $45.5 billion in 1996-97, down
$1.4 billion from 1995-96 (Table 3.8). Over the next two years,
public debt charges are expected to increase somewhat, as higher
new borrowings offset the decline in average effective interest rate
on the debt. By 1998-99, the government is not expected to borrow
any new funds from the market. Interest rates declined significantly
throughout 1995 and 1996 and although some increase from
current levels is assumed for planning purposes over the forecast
period, the average effective interest rate on government debt
should continue to decline as instruments are refinanced at the
lower rates.
Table 3.8
Public debt charges
1994-95
1995-96
1996-97 1997-98 1998-99
(billions of dollars)
Public debt charges
42.0
46.9
45.5
46.0
46.5
As noted in Annex 3, the high stock of debt makes the fiscal situation extremely sensitive to changes in interest rates. As the debt
has grown, so has the importance and complexity of managing that
debt effectively. The objective of the government’s debt management strategy is to raise funds at stable and low costs. One key
element of this strategy has been to reduce the share of debt held in
short-term floating rate instruments. By doing so, the government
has significantly reduced its exposure to unexpected changes in
interest rates. Further information on the government’s debt
management strategy are contained in Annex 3 and in the Debt
Operations Report, Department of Finance, November 1996.
67
BUDGET PLAN
Financial Requirements
Financial requirements provide a measure of net new borrowing
required in credit markets – that is, borrowing over and above that
needed to replace maturing debt issues. Financial requirements are
projected to be eliminated by 1998-99 (Table 3.9).
Table 3.9
Deficit, non-budgetary transactions, and financial
requirements/source
1994-95
1995-96
1996-97
1997-98
1998-99
(billions of dollars)
Deficit
-37.5
-28.6
-19.0
-17.0
-9.0
Non-budgetary transactions
Loans, investments
and advances
-0.1
Specified purpose accounts 8.7
Other transactions
3.0
2.7
7.6
1.1
1.1
7.7
4.3
0.9
8.0
2.1
1.0
8.5
0.6
Total non-budgetary
transactions
11.6
11.4
13.0
11.0
10.0
Financial requirements/
source
-25.8
-17.2
-6.0
-6.0
1.0
Numbers may not add due to rounding.
(-) implies a requirement for funds/(+) implies a source of funds.
The difference between financial requirements and the deficit is
due to a number of non-budgetary transactions that provide funds
to the government. The largest of these is the government’s employees’ pension accounts. Other smaller sources of funds include loans,
investments and advances, cash in transit and accounts payable.
Non-budgetary transactions also include accounting adjustments
to certain transactions that are reported on an accrual basis to
reflect the impact of these on a cash basis. One important adjustment is for restructuring charges. Although restructuring charges
adversely affect the deficit in the year in which the liability is
incurred, they only affect financial requirements when payments
are actually made.
Non-budgetary transactions are estimated at $13.0 billion in
1996-97, up $1.6 billion from 1995-96. The 1996-97 results are
affected by extraordinary receipts made during the course of the
year. Final instalment payments relating to the 1995 sale of CNR
68
B U I L D I N G T H E F U T U R E : S T AY I N G T H E F I S C A L C O U R S E
and shares in Petro-Canada will result in the receipt of about
$2 billion in 1996-97. Under the government’s accounting practices,
the deficit impact of these sales was recorded in 1995-96, when the
sales occurred. These final payments, therefore, had no effect on the
1996-97 deficit but did provide additional cash during the year. The
net source of funds is expected to decline in both 1997-98 and
1998-99, primarily reflecting developments in “other transactions”,
relating to the lower amortization adjustments in an environment
of a falling stock of short-term debt and the fact that no extraordinary receipts are expected in those years.
Financial requirements are expected to be no higher than
$6 billion in 1996-97, a decline of $11.2 billion from 1995-96, of
which $9.6 billion is attributable to the decline in the deficit, with
the remainder due to the higher net funds resulting from
non-budgetary transactions. Financial requirements are expected to
be unchanged in 1997-98, despite the decline in the deficit, given
the lower net funds from non-budgetary transactions. However, in
1998-99, there is expected to be a net financial source of $1 billion.
This means that the government will not be going to the market for
new borrowings – only to refinance the existing stock of debt. In
fact, with a financial source, the government will be repaying part
of the existing debt.
Borrowing Authority
The amount of borrowing authority requested from Parliament for
a fiscal year has traditionally been tied to financial requirements for
that year, adjusted for estimated Exchange Fund earnings.
Borrowing authority to cover Exchange Fund earnings is sought
because these earnings, although reported as part of budgetary
revenues, remain in the Exchange Fund Account and are not available to finance the ongoing operations of government. In addition,
a non-lapsing amount of $4 billion is requested, which can either
be used during the course of the year to manage contingencies, such
as unexpected foreign exchange requirements, or be carried forward
temporarily into the next fiscal year. Any borrowing authority
remaining above that amount at the end of the fiscal year lapses.
The government will be introducing legislation seeking appropriate borrowing authority, consisting of financial requirements of
no more than $6 billion, expected Exchange Fund earnings of
$0.8 billion and $4 billion of non-lapsing authority.
69
4
Jobs and Growth in a
Dynamic Economy1
Introduction
Many Canadians are anxious about the job market and their place
in it:
While the unemployment rate has fallen over the past three years,
it still remains unacceptably high.
■
Many currently employed workers worry that they could lose
their jobs and have difficulty finding new ones.
■
Some people have given up looking for jobs while others have
been forced to take part-time work when they want full-time jobs.
■
■
Many workers are seeing their wages grow only slowly, if at all.
Parents are worried that their children will not be able to find
good jobs.
■
The government shares these concerns and has made creating
more and better jobs for Canadians its top economic priority. The
government’s strategy is based on the recognition that there are two
types of problems that must be addressed:
First, the pace of economic growth has not been sufficient to
generate enough new jobs, particularly at a time when the public
sector has been contracting.
■
■ Second, some individuals and businesses need help adapting to
the profound economic changes that are occurring due to globalization and technological change.
1
All statistical references as of Wednesday, February 12, 1997.
71
BUDGET PLAN
All the industrial world has been buffeted by the dramatic
changes in the economic environment of recent years. And many
countries have recently been forced to confront the consequences
of their past inattention to fiscal responsibility. As a result, many
industrial economies have seen disappointing job growth. Although
no one should be satisfied with the pace of job creation in Canada,
the fact is that employment growth in Canada has been faster than
in any other Group of Seven (G-7) country except the U.S. since the
fourth quarter of 1993 (Chart 4.1).
Chart 4.1
Growth in employment1 in G-7 countries from the fourth quarter
of 1993 to the third quarter of 1996
per cent change
6
4
2
0
-2
-4
United
States2
Canada
United
Kingdom
France3
Japan
Italy
Germany4
1 Employment
series may not be strictly comparable among countries because of differences in
definitions. Comparisons of per cent changes, rather than level changes, are therefore more reliable.
2 Household Employment Survey.
3 Employment in all sectors except agriculture, public administration, education and social services.
The sub-sector comprises around two-thirds of total civilian employment.
4 Not seasonally adjusted.
Most industrial countries face similar challenges. In responding to
these challenges, the government has been pursuing a four-pronged
strategy for jobs and growth in a stronger society:
■ Staying the fiscal course to create the right economic environment for strong and sustained job creation.
72
JOBS AND GROWTH IN A DYNAMIC ECONOMY
■ Promoting job creation in the short- and medium-term through
programs that have both immediate and lasting benefits.
■ Making strategic investments that will strengthen job creation
in the long term by helping Canadians undertake the higher
education, training and innovation needed to make the most of the
opportunities provided by globalization and technological change.
■ Building a stronger society by making investments that promote
the health and well-being of Canadians.
The previous chapter explained how the government is staying
the fiscal course. This chapter details the government’s investments
in immediate jobs and growth, and its investments in long-term job
creation and growth. The next chapter details the government’s
investments in a stronger society.
Providing the Right Economic Environment
The key to generating faster employment growth in the short- and
medium-term is to determine why employment growth has often
been slow in recent years, and to fix those problems. The chain of
causation reaches all the way back to the massive level of debt that
this government inherited when it took office.
Developments in 1994 illustrate the problem well. Canadian
interest rates began to rise in 1994, driven initially by events outside
Canada – the increase in U.S. interest rates that began early in 1994
and then the Mexican peso crisis that began late in 1994. Both
events dramatically affected Canadian interest rates because
Canada lacked credibility with investors, both foreign and
domestic. Investors were concerned about:
the ability of all levels of government in Canada to meet their
financial commitments as they piled up debt – at a rate well in excess
of the growth of the economy – by running high deficits;
■
■ whether Canada would remain committed to keeping inflation
low; and
■ the rapid growth in Canada’s foreign debt, driven by massive
government borrowing, record interest payments to foreigners, and
years of importing more than the economy exported.
Investors’ lack of confidence in Canada could be seen in the
recommendations of many investment advisors to avoid Canadian
assets, and in the fact that Canadian interest rates were well above
73
BUDGET PLAN
U.S. interest rates despite Canada’s consistently superior inflation
performance since the beginning of 1992.
The jumps in interest rates in early 1994 and again in early 1995
hit the Canadian economy just as it was shifting into higher gear.
High interest rates discouraged consumers from spending and businesses from investing, which in turn discouraged firms from hiring,
which only further discouraged consumers.
This period of high interest rates is now past. Canada’s federal,
provincial and territorial governments have made determined
efforts to cut their fiscal deficits, bringing about the dramatic
improvement in Canada’s fiscal situation detailed in Chapter 3.
As well, Canada’s commitment to low inflation has been reaffirmed and adhered to. Since the government and the Bank of
Canada jointly extended the inflation control targets in late 1993,
the core inflation rate (consumer price inflation excluding food,
energy and the effect of indirect taxes) has been well within the
target range of 1 to 3 per cent. Consumer price inflation over that
period has been at its lowest sustained level in three decades, and
less than one-quarter of the average inflation rate during the 1980s.
Fiscal responsibility and continued low inflation have led to a
sharp turnaround in investor confidence. Investment advisors who
had been counselling their clients to avoid Canadian assets in 1994
have since been enthusiastically recommending Canada. The result
has been a dramatic downward trend in interest rates since
early 1995, albeit temporarily interrupted by the uncertainty stemming from the Quebec referendum in the autumn of 1995.
Short-term interest rates are now at their lowest levels in close to
35 years, and more than 200 basis points below comparable U.S.
rates. This is the first sustained period in more than 20 years that
Canadian short-term rates have been below U.S. rates. Indeed, interest rate spreads vis-à-vis key U.S. rates have shrunk across the maturity spectrum and Canadian rates are now lower than those in the
U.S. on maturities of up to 10 years.
Moreover, reduced government borrowing and improvements in
Canada’s international competitiveness have led to a dramatic
reduction in borrowing from abroad (Chart 4.2). That has made it
possible for interest rates to fall without causing a sharp drop in the
Canadian dollar.
74
JOBS AND GROWTH IN A DYNAMIC ECONOMY
Chart 4.2
Sources and uses of saving: 1993 and 1996
Foreign
borrowing
$29 B
Foreign
borrowing
$0 B
Government
borrowing
$52 B
Government
$19 B
Private
investment
$114 B
Uses
Domestic
saving
$ 137 B
Private
investment
$120 B
Sources
Uses
1993
1
Domestic
saving
$139 B
19961
Sources
First three quarters of the year at annual rates.
Because it takes some time before a change in interest rates exerts
its full effect on economic growth and job creation, the Canadian
economy has yet to enjoy the full positive effect of the reductions
in interest rates that began in 1995. However, some of the impact
is already clearly evident. As discussed in Chapter 2, resales of existing houses have reached their highest level in more than 15 years,
helping to boost housing starts to their highest level in two years.
In the fourth quarter of 1996, new motor vehicle sales reached their
highest level in more than five years. And business investment
jumped over 20 per cent at an annual rate in the third quarter
of 1996.
These positive developments have led to the creation of
231,000 net new jobs in the private sector since the end of 1995.
The expected improvement in job growth in 1997 will generate
income gains and further improve consumer and business confidence which will further stimulate economic expansion and job
creation.
It must be recognized that government spending cuts themselves
have tended to restrain economic and job growth in the short run.
However, many more jobs have been created in the private sector
than have disappeared in the public sector (Chart 4.3). Many of
those new private sector jobs would not exist without the reduction
in interest rates made possible by the government’s fiscal efforts.
75
BUDGET PLAN
The interest rate declines since 1995 will support further job
creation in the private sector in 1997 and 1998.
Chart 4.3
Cumulative employment growth since January 1995 by sector
thousands
400
300
Total
Private sector
200
100
0
-100
Public sector
-200
Jan 95
May 95
Sep 95
Jan 96
May 96
Sep 96
Jan 97
Canada’s Economic Challenge
Healthy economic conditions can only go part of the way towards
reducing unemployment and improving labour market conditions
in the long run. Individuals and firms who have been unable to
adjust to the profound changes that are taking place in the world
economy have seen the value of their skills and assets deteriorate,
resulting in unemployment, underemployment and declining
incomes. In the words of the Organization for Economic Cooperation and Development (OECD) Jobs Study, in the long run,
“... the single most important cause of rising unemployment, as
well as a growing incidence of low-wage jobs, is the growing gap
between the need for OECD economies to adapt and to innovate
and their capacity, and even their will, to do so.”2
Individuals and firms must seize on the opportunities that arise
from globalization and technological change. Here government also
has an important role to play: to encourage innovation, and to
design policies that help workers and firms adapt to and take advantage of these new opportunities.
2
OECD, Jobs Study: Facts, Analysis, Strategies, June 1994, p. 41.
76
JOBS AND GROWTH IN A DYNAMIC ECONOMY
Globalization
Declines in the costs of communications and transportation and the
need for increased expenditures on research and development have
led many businesses to produce for and from a global market rather
than a national one. The end result has been a significant restructuring of business activity towards greater specialization. Firms that
have moved quickly towards globalization have typically reduced
their costs of production, quickly expanded markets, and enjoyed
rapid growth in output and employment.
Canada has been well placed to take advantage of globalization.
Canada has long been one of the most trade-oriented of the major
industrialized countries, with well-developed and expanding links
with firms around the world, particularly in the world’s richest
market, the U.S.
Over the past three years, Canada has benefited substantially
from the increased movement of goods, services, R&D and investment around the world. The volume of Canada’s exports has
increased by 50 per cent since 1992. During that period, export
growth has been the largest single contributor to Canada’s
economic growth and job creation (see Chart 4.4).
Chart 4.4
Employment by trade orientation
index, 1993:1 = 1.00
1.20
1.15
Export-oriented
industries
1.10
1.05
Non-export-oriented
industries
1.00
0.95
1993
1994
1995
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1996
BUDGET PLAN
However, restructuring by firms and increased import penetration have also had profound effects on those Canadian businesses
and workers who have had difficulties adjusting. While OECD
analyses suggest that the negative impacts are small relative to the
job gains in skilled work created by globalization, one of the roles
of government is to ensure that some of the economy’s gains from
globalization are used to help those who are having difficulty adapting so they too can benefit.
Technological change
The need to adapt to globalization is deeply intertwined with pervasive technological change, especially as new information technologies have appeared. All industries can benefit from technological
improvements, not only those that are commonly regarded as
“high-tech”.
Technological change has created additional demand for
high-skilled workers throughout the economy. At the same time, it
has slowed the demand for lower-skilled workers. This shift in
demand is evident in the trend decline in employment of individuals with less than high school education, in contrast to continued
steady employment growth for those with some post-secondary
education (Chart 4.5).
Chart 4.5
Employment by level of education
index, 1976 = 1.0
2.6
2.4
2.2
2.0
More than
high school
1.8
1.6
1.4
1.2
High school
or less
1.0
0.8
1976
1981
1986
78
1991
1996
JOBS AND GROWTH IN A DYNAMIC ECONOMY
For every low-education job lost over the past two decades,
about 15 higher-education jobs have been created. As Chart 4.5
demonstrates, this divergent pattern has been underway since 1981,
but accelerated in the 1990s.
Technological progress has been accompanied not only by higher
output and productivity, but also by higher overall employment.
While technological progress has increased productivity and output
in all sectors of economic activity, in traditional as well as non-traditional industries, its positive effects on employment have been
particularly evident in those industries that rely more intensively on
high technology. Over the last 20 years, employment in Canadian
industries that use high technology inputs intensively grew more
than twice as fast as employment in low technology industries and
60 per cent faster than employment in medium technology industries (Chart 4.6). Similarly, wages tend to be higher, and grow faster,
in plants that use more advanced technologies.
Chart 4.6
Employment1 by level of input technology
index, 1976 = 1.0
1.7
1.6
1.5
High technology
industries
1.4
Medium technology
industries
1.3
1.2
Low technology
industries
1.1
1.0
1976
1981
1986
1991
1996
1
Business-sector employment.
Industries are classified by measuring the high tech proportion of their non-labour inputs.
Improvements in technology enable a myriad of new products,
new services and higher incomes. To fully enjoy those benefits, businesses must be prepared to develop and adopt new products and
techniques, and workers must be prepared to upgrade their skills.
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BUDGET PLAN
Youth employment
Technological change is increasing the advantage that young people
can gain from higher education. As a result, young people are staying in school longer. However, just as technological change has
increased the value of education, it has also increased the value of
on-the-job experience. This has made it particularly difficult for
young people, who increasingly lack work experience, to find and
keep permanent jobs.
This has created a vicious circle: lacking work experience, young
people find it difficult to obtain stable employment, which keeps
them from gaining work experience even as the premium placed on
that experience is rising.
Investing in Immediate Jobs and Growth
The economic conditions favourable to healthy private sector job
creation are now in place. However, low interest rates have only
begun to translate into stronger economic growth and job creation.
Thus while the foundations for robust job creation are in place,
far too many Canadians remain unemployed. To help bridge the
gap to stronger growth, the government is helping the private sector
to create jobs in the near term through programs that will also leave
lasting benefits.
Canada Infrastructure Works
Three years ago, the federal government committed $2 billion, in
partnership with provincial and municipal governments, to launch
a $6 billion program to renew and enhance Canada’s infrastructure
while supporting employment in 12,000 construction projects
across Canada.
The government recently extended the Canada Infrastructure
Works program by allocating an additional $425 million to that
program in 1997-98, bringing its total funding to $600 million in
that year. This funding, together with provincial and municipal
contributions, will help support a total of $1.8 billion in infrastructure projects across the country in 1997-98.
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JOBS AND GROWTH IN A DYNAMIC ECONOMY
In meeting Canada’s infrastructure needs, it will be important to
apply the virtues of partnership and innovation. Innovative
public-private partnership financing arrangements – including the
“BOOT” (build, own, operate, transfer) concept recommended by
the Standing Committee on Transport – offer potential advantages
in terms of more efficient and lower cost delivery of infrastructure
services in some situations, and warrant serious examination and
encouragement at all levels of government in Canada.
Residential Rehabilitation Assistance Program
The federal government recently announced that it has allocated
$50 million to extend the Residential Rehabilitation Assistance
Program (RRAP) and related housing programs for one year. These
measures support home renovation for low-income Canadians,
allow seniors to adapt their homes, and aid victims of family
violence by upgrading transition shelters. Half of the $50 million
cost will be funded by internal reallocation within the Canada
Mortgage and Housing Corporation.
EI premium reductions and New Hires Program
Improved labour market conditions and employment insurance (EI)
reforms have allowed EI premiums to come down in recent years
and will allow them to come down further in the future. The reduction in the EI premium rate in 1997 was the third successive
decrease in as many years. The EI premium rate for workers has
been reduced from $3.07 in 1994 to $2.90 in 1997, and the rate for
employers reduced from $4.30 to $4.06 in the same period. Further,
the annual maximum insurable earnings have been rolled back to
$39,000 in 1996 and frozen at that level, providing further
premium relief.
The New Hires Program announced in November 1996 will
provide employment insurance premium relief to small firms that
create new jobs in 1997 and 1998. By reducing the cost of new
workers, this program will encourage small firms to accelerate their
job creation plans while the stimulative effect of lower interest rates
continues to build. Legislation to implement this program will be
introduced shortly.
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BUDGET PLAN
The New Hires Program builds on the transitional premium relief
program included in EI reform, increasing the relief from
$150 million to $465 million over two years for firms which had
paid EI premiums of less than $60,000 in 1996. Depending on the
wages their employees earn, this means that firms with up to about
100 full-time employees could be eligible – a total of about 900,000
businesses. Under the program, eligible employers will pay virtually
no premiums for new jobs created in 1997, and will benefit from a
25-per-cent reduction for new jobs created in 1998.
The New Hires Program, combined with recent premium reductions and other EI changes, will save employers and workers about
$1.7 billion in 1997 relative to what they would have paid without
these changes. This brings the cumulative savings from EI premium
reductions and other changes since 1994 to $4 billion.
Facilitating the transition from school to work
While unemployment is of concern to all Canadians, young people
often find it particularly difficult to find that critical first job that
bridges the gap between school and work. This, in turn, hinders
their ability to develop on-the-job skills which are becoming
increasingly important to employers.
To help young Canadians bridge the gap between school and
work, the Minister of Human Resources Development recently
announced the details of a $255 million Youth Employment
Strategy covering the next two years. Funds for this strategy were
provided in the 1996 budget. The strategy will support 120,000
summer career placements over 1997-98 and 1998-99 as well as the
creation of new internship programs in partnership with the private
sector, volunteer organizations and government agencies. There are
three components to the internships: science and technology,
international, and aboriginal youth, both on Indian reserves and in
Inuit communities. These internships will provide 19,300 young
Canadians over two years with real work experience.
Existing youth programming (Youth Internship Canada and
Youth Services Canada) will be refocused on “at risk” youth who
face barriers to full labour market participation, including limited
education, problems with the law, disabilities and single teenage
parenthood. The exact nature of these program changes will be
determined in consultation with the provinces and territories.
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JOBS AND GROWTH IN A DYNAMIC ECONOMY
The government will reallocate resources to expand the national
youth volunteer service, Katimavik, and place it under the responsibility of the Minister of Canadian Heritage. Katimavik invests in
the lasting personal development of hundreds of participants,
increasing their knowledge of Canada and contributing to mutual
understanding among young Canadians.
Tourism
The tourism sector has a proven track record of creating jobs in all
regions of the country. Canada’s travel account deficit with the rest
of the world has declined by more than 50 per cent, from
$6.4 billion in 1992 to $3.0 billion in 1995. The co-ordinated
efforts of the partners of the Canadian Tourism Commission (CTC)
contributed to this impressive improvement.
When the CTC was created in 1995, the federal government
tripled its funding for tourism promotion from $15 million to
$50 million per year. The CTC has also attracted about 1,400 partners who are expected to contribute over $65 million this year. This
surpasses the $50 million challenge issued following the creation of
the CTC.
Incremental funds for the Canadian Tourism Commission
This budget proposes that the Canadian Tourism Commission’s
budget be increased by $15 million a year over the next three years.
Most of these incremental funds will be used for promotion in foreign
markets to ensure that Canada’s tourism potential is fully realized
over the coming years. As in the past, partners in the private sector
will be asked to match this federal contribution dollar for dollar.
Equity injection for Business Development Bank
The government is also creating a new tourism financing vehicle to
be administered by the Business Development Bank of Canada
(BDC), and financed through a $50 million equity injection involving the purchase of dividend-paying preferred shares. The vehicle
will operate on a commercial basis and will make possible some
$250 million in new BDC loans for expansions or upgrades of
mid-range tourism facilities outside major urban centres.
Partnerships with private sector financial institutions could bring
the total incremental financing available for tourism investments to
$500 million.
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BUDGET PLAN
Visitor’s Rebate Program
With the introduction of the Goods and Services Tax (GST), the
Visitors’ Rebate Program was established to minimize the impact
of the GST on the tourism industry. Rebates are available to
non-residents of Canada on short-term accommodation, certain
goods exported from Canada and other goods and services used in
the course of a convention. The program both encourages exports
and promotes Canada as an attractive destination for vacations,
trade shows and conventions.
The government is proposing a review of the Visitors’ Rebate
Program to determine whether the current design and administration can be improved to target resources more effectively to
promote Canada as a tourist destination and support the tourism
industry in the creation of employment.
Rural Canada
Nearly one-quarter of all Canadians live in rural Canada and they,
like other Canadians, are experiencing the challenge of economic
adjustment. This budget looks to the future, to helping Canadians
in rural Canada to take advantage of new opportunities, particularly the substantial scope which exists for economic diversification.
Farm Credit Corporation
Consistent with the commitment to rural Canada in the
1996 Speech from the Throne, this budget will take steps to
promote opportunities for growth and diversification in rural
Canada in a manner which is tailored to the unique needs of rural
Canadians. As part of this, the budget will provide the Farm Credit
Corporation (FCC) with $50 million in additional capital.
Consideration will be given to the development of new equity
instruments as potential financial tools to augment existing loan
programs for farmers. The government will also continue to seek
creative approaches to ensure that its Crown financial agencies
work better together to promote the economic development of rural
Canada, particularly the agri-business sector. The government will
also pursue opportunities for more partnerships, syndications, joint
ventures and other means of co-operation and risk-sharing with
private sector financial institutions and/or Crown financial corporations to improve the range of appropriate financial products and
services available in rural Canada.
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JOBS AND GROWTH IN A DYNAMIC ECONOMY
Community Access Program
The rapid changes which are taking place in information technology present new opportunities for learning, interaction and
economic development. Business and local development possibilities are becoming less dependent on location and more on access to
information technologies.
Industry Canada’s Community Access Program is playing an
important role in linking Canadian communities to the information
highway. The last budget provided funding to assist the process of
linking 1,500 rural, remote or disadvantaged communities.
In this budget a further $30 million will be made available over
the next three years to expand the interconnection of rural
Canadian communities. This expansion could lead to the interconnection of some 5,000 communities to the Internet – virtually all
communities between 400 and 50,000 in population. The government will also work with community leaders to develop multiple
access points within communities so that individuals, businesses and
voluntary groups are connected to each other as well as to other
communities. These initiatives will complement the government’s
Computers for Schools Program, which aims to provide
100,000 computers to schools across Canada by the year 2000.
Support for small businesses
Small- and medium-sized businesses (SMEs) are a critical source of
employment growth. However, small firms may have difficulties in
accessing international markets, or in adopting and developing new
technologies. To help SMEs overcome those obstacles, the federal
government provides assistance to that sector through a variety of
programs including the Small Business Loans Act, the Business
Development Bank of Canada, the Canada Community Investment
Plan, Canada Business Services Centres, and a number of provisions
in the tax system, as well as the recently announced New
Hires Program.
Reducing the regulatory burden
Since 1994, the federal government has worked closely with the
business community to find ways to reduce the regulatory burden
on small businesses through the Joint Forum to Reduce Paper
Burden on Small Business. The government heard that, for many
small businesses, the monthly remittance of withholding amounts
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BUDGET PLAN
from their employees’ pay, which include income tax, employment
insurance premiums and Canada Pension Plan contributions,
imposes a significant burden because they do not have the in-house
resources that larger businesses have. The Joint Forum recommended reducing the frequency of remittances for small businesses.
The government is accepting their recommendation. In order to
reduce the burden arising from the remittance of withholding
amounts, the budget proposes allowing employers with average
monthly remittances of less than $1,000 to remit on a quarterly
basis. Participation would be optional and only those with perfect
compliance records over the preceding 12-month period would be
eligible. Perfect compliance records for both withholdings and GST
remittances will be required. Quarterly remittances would reduce
the time spent by small businesses on the administration of payroll
deductions. As many as 650,000 small businesses could benefit
from this measure.
Moving to quarterly remittances for small businesses would have
a one-time impact on the deficit of $180 million in 1997-98 because
withholding amounts for January and February 1998 would not be
remitted to the government until April, the beginning of the
1998-99 fiscal year. There would also be ongoing annual costs of
$5 million.
Small Business Loans Act
The Small Business Loans Act (SBLA) assists new and existing
small businesses to obtain term loans from chartered banks and
other lenders to finance the purchase and improvement of fixed
assets. Since 1995, the SBLA has been operating on a cost recovery
basis. This budget proposes that the ceiling for this program be
raised from $12 billion to $14 billion.
Encouraging LSVCCs to invest in small business
Labour-sponsored venture capital corporations (LSVCCs) are funds
sponsored by labour organizations to help improve access to capital for SMEs. Federal and provincial tax credits have helped
LSVCCs accumulate over $3 billion in assets. This has enabled
LSVCCs to help many SMEs create and maintain jobs.
Nevertheless, some smaller businesses continue to have difficulty
finding the equity financing they need to expand and create jobs.
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JOBS AND GROWTH IN A DYNAMIC ECONOMY
The budget proposes changes to LSVCC rules to encourage
LSVCCs to invest more actively in smaller businesses, thereby helping them create jobs. Information on these and other changes of a
more technical nature related to LSVCCs is included in the supplementary notes.
Facilitating international trade
Export-oriented industries have seen the healthiest rate of job
creation in recent years. To not only preserve but further exploit this
key source of growth and job creation, the government supports
exporters in a variety of ways: pursuing trade liberalization through
multilateral and bilateral trade agreements, implementing measures
to assist companies develop and expand their export business, and
bolstering awareness of Canada’s advantages as a location
for investment.
Team Canada trade missions
A key expression of the government’s focus on trade is the Team
Canada trade missions. The demonstration of interest provided by
the presence of Canada’s government leaders on the Team Canada
missions gives Canadian business leaders unparalleled access to
their counterparts in the host countries. Canadian businesses have
announced 549 business arrangements worth an estimated
$22 billion during the various Team Canada missions since 1994.
These announcements include contracts and agreements in principle (such as memoranda of understanding and joint ventures). As a
result of this success, more Team Canada missions are planned for
the future.
Innovative sources of export financing
Access to competitive export financing often determines whether a
firm can win export contracts. The government is working with the
Export Development Corporation (EDC) and commercial lenders to
develop innovative means for institutional and retail investors in capital markets to participate in the financing of exports through securitization. Securitization involves the packaging of export finance loans
into marketable investment grade securities. It is a vehicle which can
help expand and diversify the sources of financing available to
Canadian exporters. It is envisaged that the government could
provide up to $20 million in capital to facilitate this initiative.
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BUDGET PLAN
Simplified Customs Tariff
For businesses in Canada to compete effectively, they need access
to inputs at the lowest possible cost. The government is helping to
ensure this. To date, action by this government has resulted in
customs tariff reductions for businesses and consumers estimated
to be worth approximately $600 million in 1996.
A process to simplify the tariff system and ensure it is responsive
to the competitive pressures facing Canadian businesses was
launched in the 1994 budget and has included detailed study of a
wide range of issues and extensive consultations with all interested
parties on various proposals. One set of measures, which reduced
tariffs on a broad range of manufacturing inputs, was implemented
in June 1995. The resulting decline in the cost of producing in
Canada has already helped businesses improve their competitive
position in the marketplace.
New legislation will be tabled shortly to introduce a new simplified Customs Tariff to come into effect on January 1, 1998, coinciding with the full implementation of tariff elimination under the
Canada-U.S. Free Trade Agreement. The new simplified Tariff will
continue to improve the competitiveness of Canadian manufacturers by providing industry with a less costly, more predictable and
more transparent tariff environment for making production and
investment decisions.
International financial market stability
The success of Canadian firms doing business abroad also depends
on the existence of well-functioning international financial markets.
To help maintain the stability of the international financial system,
Canada must stand ready to participate in international efforts to
manage systemic shocks should they occur. Amendments will
be proposed to the Bretton Woods and Related Agreements
Act to facilitate the government’s participation in internationally coordinated bridge loans which address such situations.
Pursuing sustainable development
Canada’s abundant natural resources are a significant source of
employment and well-being for many Canadians, especially those
in regions far removed from urban communities. It is important that
the development and use of these resources be carried out in a
sustainable manner to ensure long-term economic security, while
respecting Canada’s environmental endowment.
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JOBS AND GROWTH IN A DYNAMIC ECONOMY
Movement towards the integration of economic and environmental goals is fundamental to ensuring the continued prosperity
of Canadians and to safeguarding Canada’s natural heritage for
future generations. The government has sought opportunities to
integrate economic and environmental policy decision-making
involving various government departments. The government is
proceeding with a number of initiatives that are consistent with this
objective and that are part of its ongoing work of removing barriers
and disincentives to sound environmental practices.
Steady progress has been made through previous budgets to
advance environmental objectives through conservation and protection measures dealing with mine reclamation trusts, donations of
ecologically sensitive lands, energy efficiency and renewable energy.
This budget proposes further steps which build on this progress and
the government’s ongoing commitment to sustainable development.
Environmental trusts and ecologically sensitive land
As a measure to enhance the protection of Canada’s natural heritage,
this budget proposes improvements to the income tax treatment of
contributions to environmental trusts. The existing rules providing
for deductions for contributions to mine reclamation trusts will be
extended to the waste disposal and aggregates sectors. This budget
also proposes a new method of valuation to encourage donations of
easements and covenants of ecologically sensitive land. By encouraging the protection of ecologically sensitive land, this measure will
build on the government’s broader commitment made through such
key pieces of environmental legislation as the Canada Endangered
Species Protection Act. Annex 6 provides further details on
these initiatives.
Incentives to invest in renewable energy and energy conservation
The 1996 budget announced several measures to improve access to
financing for the renewable energy and energy conservation sector
and to create a more level playing field between renewable and
non-renewable energy investments. The most important initiative
was the creation of Canadian Renewable and Conservation
Expenses (CRCEs), a new category of fully deductible expenses.
This new category for renewable energy investments provides a
more comparable income tax treatment with that provided to oil
and gas exploration and development expenses since all new CRCE
costs can be renounced using flow-through share (FTS) agreements.
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BUDGET PLAN
In December 1996, detailed descriptions of this new category were
released. Based on stakeholder consultations following the release
of these draft regulations, this budget proposes additional modifications to improve these provisions and thereby build on the
1996 budget commitment to create a level playing field for renewable energy investments. The details of these modifications are
provided in Annex 6.
Energy efficiency investments
The 1996 budget highlighted the importance of energy efficiency
investments. In order to identify impediments to such investments,
consultations were held on the treatment of energy efficiency investments and investments providing heating and cooling from renewable energy sources. One impediment identified by stakeholders is a
lack of information and awareness about the economic and
environmental benefits of technologies and practices to improve
energy efficiency. Accordingly, attention is drawn to the considerable progress that has been made in the development of recognized
standards for buildings and houses (National Energy Code for
Buildings and the National Energy Code for Houses) and in the
design and testing of the Canadian Home Energy Efficiency Rating
System. These codes represent Canada’s first comprehensive energy
efficiency standards.
A number of representations were also received suggesting that
the tax system be used to provide an incentive for energy efficient
buildings. Proposals were varied in nature with some focusing on
those new commercial buildings meeting very high energy efficiency
standards, while others suggested incentives to encourage energy
efficient retrofits of the existing building stock. Still other suggestions were received supporting a greater use of renewable energy to
meet the energy needs of buildings. Several proponents suggested
that any new tax incentives should not be technology-specific but
instead be tied to overall performance criteria such as embodied in
the new National Energy Codes for Buildings and Houses. These
codes will be published in final form in the next several months.
The government is prepared to examine the appropriateness of
using some tax or other mechanism to promote energy efficiency
investments linked to the National Energy Code for Buildings. To
this end, the government will be examining various alternatives and
will set aside $20 million per year for three years beginning in 1998
to promote investments in both energy efficiency and renewable
energy for new and existing commercial buildings.
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JOBS AND GROWTH IN A DYNAMIC ECONOMY
Infrastructure
The extended Canada Infrastructure Works program will continue
to contribute to job creation and help meet local priorities such as
the renewal of physical infrastructure, including water and sewage
treatment plants. A continuing objective of this program is to
enhance the quality of the environment and contribute to environmental sustainability.
Other measures that affect jobs and growth
The government is seeking to ensure that all its programs contribute
the maximum possible to job creation and skills development while
serving other needs.
Aboriginal economic development
The development of opportunities benefiting aboriginal communities represents a particularly important challenge. There has been
some significant increase in recent years in activity of this type:
financial institutions have become increasingly active in aboriginal
communities; the First Nations Bank of Canada was established
in December 1996 and the community-owned Aboriginal
Capital Corporations have become a major source of funding for
aboriginal-owned small businesses. While progress has been impressive, much remains to be done.
One suggestion that has been put forward is the extension of tax
credits to investors in aboriginal venture capital corporations.
Further discussion with aboriginal organizations will be undertaken
on this idea.
Aboriginal governments may also wish to generate funds to
support economic and social development in their communities.
The government has indicated its commitment to discussing with
First Nations their interests, aspirations and concerns with respect
to taxation. To further this process, the government is expressing
its willingness to put into effect taxation arrangements with First
Nations that indicate an interest in exercising taxation powers.
Clearly, the initiative for such arrangements will rest with individual First Nations.
Prior to reaching such agreements, the government and interested
First Nations will have to deal with a number of potentially difficult issues, such as the co-ordination of taxes and the special
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BUDGET PLAN
position of potential taxpayers who are not members of the First
Nations. These issues are discussed in the draft A Working Paper
on Indian Government Taxation released by the Department of
Finance in 1993.
Broadcasting initiatives
Canada’s cultural industries are not only an important expression
of Canadian sovereignty, they are important employers. The
$200 million Canadian Television and Cable Production Fund
launched last September will not only enhance Canadian content
on television, it will also support job creation and skills development in Canadian broadcasting.
An additional $10 million per year has been allocated directly to
the Canadian Broadcasting Corporation’s (CBC) radio networks,
recognizing the unique voice they provide and the fact that they
have not benefited from the Production Fund.
The government is also committing to a stable five-year financial
framework for the CBC; the annual appropriation will not fall
below the level currently planned for 1998-99.
Transfer pricing
Transfer pricing refers to the pricing of transactions undertaken by
parties that do not deal at arm’s length and that are situated in
different countries. Since transfer prices affect the profits and, thus,
the income tax base of taxpayers who are members of multinational
groups, the Income Tax Act includes rules that ensure that transfer
prices are consistent with prices that would have been charged on
similar transactions among parties dealing with each other at arm’s
length. A number of developments have affected transfer pricing
rules in other countries as well as international principles set out by
the Organization for Economic Co-operation and Development, on
which Canadian practices are based.
As a result of these developments, the government will be updating its current practices in the area of transfer pricing. In particular,
new documentation requirements will be introduced, together with
new penalty provisions, to ensure taxpayer compliance and facilitate administration by Revenue Canada. Moreover, additional
resources will be committed towards administration and enforcement of the new rules in order to ensure their effective application
and protect the Canadian tax base.
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JOBS AND GROWTH IN A DYNAMIC ECONOMY
Investing in Long-Term Job Creation and Growth
Meeting the economic challenge posed by globalization and technological change also requires investments that will pay off in the
long run. To neglect the long term in favour of the present would
be short-sighted policy. Instead, the government is continuing to
expand its long-term strategic investments in Canada’s technological
capability and in higher education and skills training.
Investing in higher education and skills
The new and better-paying jobs that are the result of innovation and
economic restructuring require increasing levels of skill among the
workforce. Without a qualified workforce, it is hard to create or
use the latest in technology. As a result, attaining higher levels of
education and skills is critical to the ability of Canadians to secure
their own and Canada’s future. But at the same time, the costs of
higher education, including both tuition fees and other related costs,
are rising.
The 1996 budget provided an $80 million increase in direct
federal tax assistance for higher education. The amount on which
the education credit is based was increased from $80 to $100 per
month; the limit on the transfer of tuition and education amounts
from students to parents was raised from $4,000 to $5,000 per year;
the annual limit on registered education savings plan (RESP) contributions was increased from $1,500 to $2,000, and the lifetime limit
for RESP contributions was increased from $31,500 to $42,000.
This budget proposes a substantial further enrichment of federal
assistance provided to higher education and skills enhancement.
The budget provides additional resources to help students and their
families better cope with the rising costs of education, to help workers to enhance their skills, to help students facing higher debt loads
after graduation, and to encourage parents to save for their
children’s education. The proposed measures will increase federal
support in this area by $137 million in 1998-99, growing to
$202 million in 1999-2000, and to about $275 million annually
when the measures are mature.
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BUDGET PLAN
Additional tax assistance to students
To help students enrolled in post-secondary education, the budget
proposes the following measures:
■ The amount used to establish the education credit will increase
to $150 per month immediately, and to $200 per month for 1998
and subsequent years.
■ As tuition fees rise, the amount of assistance provided by the tuition
fee credit increases automatically. However, students also have to pay
a number of ancillary fees. The budget proposes to extend the tuition
tax credit to cover mandatory ancillary fees imposed by universities
to cover the cost of education. This extension will not apply to fees
levied by student bodies for non-educational purposes.
Students or their parents may not have enough tax payable in a
given year to benefit fully from the tuition and education credits.
To ensure that all students can use these credits fully, students will
now be allowed to carry forward all unused portions of these
credits, to be applied against any future tax liability. This measure
will also benefit workers who are returning to school.
■
As a result of these budget measures, by 1998 a student in
full-time attendance at a post-secondary institution for eight
months, will be able to claim an education amount of $1,600. Such
a student also facing tuition fees of $2,800 and ancillary fees of
$300, will thus receive over $1,200 in tax assistance per year. This
total reflects a federal credit rate of 17 per cent and a combined
federal and provincial credit rate of about 26 per cent. Therefore,
total tax assistance will increase by more than 30 per cent from the
$900 in assistance available to this student in 1995.
Helping students to repay their loans
Through the Canada Student Loans Program, the federal government provides financial assistance to students who need help to
pursue post-secondary education. Provinces deliver both the Canada
Student Loans Program and their own complementary programs.
Students are expected to start repaying their Canada Student Loans
six months after graduation. Some students may face difficulties
because they cannot find work quickly or, for other reasons, do not
have sufficient income to meet their payments. For this reason,
students facing hardship are allowed to defer making payments on
their loans for up to 18 months. The federal government pays interest accruing on the student’s loan during this period.
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JOBS AND GROWTH IN A DYNAMIC ECONOMY
This provides considerable help but, as a post-secondary education coalition recently pointed out, it still leaves some students
unable to meet their obligations. To better recognize students’
capacity to repay their loans, the federal government, in response,
will extend to 30 months the period of time that students will be
permitted to defer making payments. The government will pay the
interest that the students would have paid over this extended period.
Combined with the initial six months after graduation when no
payments are required, this means that students will have up to
three years of help in dealing with their loans.
This measure will be effective August 1, 1997. It is projected
that it will provide an additional $20 million a year in assistance
to students.
In addition, the federal government is ready to pursue with interested provinces, lenders and other groups an additional option for
repaying student loans. Students would be able to choose between
the current type of repayment arrangements and a repayment schedule tied directly to the individual’s income. The individual would be
expected to repay the whole of the loan over time, without any
interest relief or subsidy during the repayment period.
Enhancement of registered education savings plans (RESPs)
This budget also proposes measures that will help parents save for
their children’s education:
■ Annual contribution limits to RESPs will be doubled to $4,000.
This will assist parents who are not able to start saving for their
children’s education when they are young, and therefore have fewer
years to make contributions. It will also provide major incentives
for increased savings for education.
Under current RESP provisions, all RESP income must go for
educational purposes, so that the family loses the investment income
in their plan if their child does not pursue higher education. Since
this can discourage parents from starting an RESP, two measures
are proposed to address this problem. First, individuals winding up
an RESP will now be allowed to transfer all or part of their RESP
income into their registered retirement savings plan (RRSP),
provided they have unused RRSP room. Alternatively, individuals
without available RRSP room, or who do not wish to make RRSP
contributions, will be allowed to receive the investment income
directly, subject to an appropriate charge. This charge will ensure
■
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that assistance is not provided for those who might use RESPs for
tax-deferral purposes unrelated to either education or retirement
savings.
Helping Canadians enhance their skills
The vast majority of people who will be in the Canadian workforce
in the year 2005 have passed through the education system and are
already in the labour force. Given the rapid pace of technological
change, many of these workers will need further education and
skills upgrading. In many cases, the best way for them to acquire
the necessary skills will be through on-the-job training.
Because the chances to find, get and keep jobs are directly related
to levels of literacy, the government will increase support for literacy activities, especially in the workplace, by increasing the budget
of the National Literacy Secretariat from $22.3 million to
$29.3 million commencing in 1997-98, a 31 per cent increase.
This increased support will assist Canadians in their transition
to the new knowledge-based economy by building a strong foundation of basic literacy and communications skills. By improving
individuals’ literacy skills, it will increase their access to learning
opportunities. Increased literacy for all Canadians is at the heart of
the lifelong learning needed for individuals and organizations to
adapt in the changing global economy.
Special priority will be placed on fostering literacy in the workplace and in the family. The 1995 International Adult Literacy
Survey demonstrated that the strength of individuals’ literacy skills
at home and on the job is key to full participation in the nation’s
economic, social and cultural life. These two priorities complement
the commitment of the government last fall to provide a full rebate
of the GST on books to educational institutions, public libraries,
municipalities and qualifying charities and non-profit organizations
which promote literacy.
Employment insurance reform is an important part of the government’s jobs and growth strategy. EI reform focuses on helping people
get back to work as quickly as possible by reinvesting $800 million
in savings in a results-oriented set of employment benefits. It also reinforces the value of work by providing a better match between the
amount of earnings from work and the benefits received.
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JOBS AND GROWTH IN A DYNAMIC ECONOMY
Led by the Minister of Human Resources Development, the
federal government is working closely with provinces and territories to provide integrated active employment measures to better
enable Canadians to prepare for, find and keep jobs. The government is prepared to negotiate agreements with all provinces and
territories to enable them to respond more effectively to local conditions in providing results-oriented measures to assist EI clients to
get back to work. These measures could include wage subsidies,
earnings supplements, self-employment assistance, job creation
partnerships, and skills loans and grants.
Agreements have already been signed with Alberta and New
Brunswick. Negotiations with the remaining provinces and territories are continuing. Provinces and territories will have access to
almost $2 billion for active employment measures. These active
measures will provide up to 400,000 unemployed Canadians with
additional help to prepare for, find and keep jobs.
Investing in innovation
The future economic prosperity of Canadians, as well as health and
environmental quality of life, will increasingly depend on innovation – on the generation of new knowledge and the ability to put it
into productive use.
Innovation is critical to creating the leading edge technologies on
which future growth and job creation depend. It is important not
only to the emergence of new high technology industry sectors, but
also to the future growth and competitiveness of many of Canada’s
more traditional industry sectors. Investing in Canada’s capacity to
innovate is therefore an important component of the government’s
strategy for creating the conditions for long-term job creation and
economic growth.
The ability to innovate successfully in the future will increasingly depend on individuals with the knowledge to create new
ideas. It also requires individuals who can understand new technologies and put them into effective use in the form of new products and new processes.
Canada’s post-secondary educational institutions and research
institutions are an integral part of the “root system” which feeds
the country’s knowledge base. They provide scientists and
researchers who are engaged in developing new ideas and new technologies. They also generate the trained graduates who will be
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BUDGET PLAN
expected to meet the demands of a more technologically oriented
marketplace. Excellence in higher education for Canadian young
people and global competitiveness for Canadian companies go hand
in hand.
Canada Foundation for Innovation
The ability of Canadians to carry out leading edge research and technology development will depend not only on their research skills,
but also on increasingly sophisticated infrastructure. However, the
research facilities at many Canadian universities and research hospitals have not been keeping pace with the demands of world-class
research and higher education, and require new investment.
Modernizing research infrastructure will help to encourage
young researchers to pursue their careers in Canada. It will help to
produce graduates who understand and can apply developments in
science and technology. Integrated systems of research and research
infrastructure among universities, research hospitals and the private
sector also help to attract skills and investment, and generate local
economic activity.
In this budget, the government is therefore proposing to create
the Canada Foundation for Innovation. The purpose of the Foundation will be to provide financial support for the modernization
of research infrastructure at Canadian universities and colleges, in
research hospitals, and in associated not-for-profit research institutions and organizations in the areas of health, environment, science
and engineering.
The Foundation represents an entirely new approach by the
government to the support of research and development. It will be
an independent corporation at arm’s length from government and
drawn primarily from members of the research community and the
private sector. They, not the government, will be responsible for
assessing projects and making spending decisions.
■
The Foundation will be funded by an up-front investment by the
federal government of $800 million, which will allow the
Foundation to provide about $180 million annually over five years.
■
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JOBS AND GROWTH IN A DYNAMIC ECONOMY
∑ The success of the Foundation will depend on the willingness
of Canadians to take on the challenge of enhancing Canada’s
research infrastructure through partnerships – among
post-secondary educational institutions and research hospitals, the
business community, the voluntary sector, individuals and, to the
extent they wish to participate, provincial governments. Through
partnerships, the Foundation has the potential to trigger about
$2 billion in investment in research infrastructure.
• The Foundation will not support projects of government departments, agencies or Crown corporations.
Networks of Centres of Excellence
Successful innovation increasingly involves the development of
partnerships between the research community and companies seeking to develop new technologies. The Networks of Centres of
Excellence (NCEs), which link researchers in various locations
across the country in areas as diverse as robotics, genetic diseases
and pulp and paper, have been a superb means of capitalizing on
the advantages of collaboration.
To help expand these vital research partnerships, the government is renewing this program with a commitment of $47 million
annually, funded through a combination of existing resources
and reallocation of $19 million from Industry Canada and the
Granting Councils.
Industrial Research Assistance Program
The Industrial Research Assistance Program (IRAP), which
promotes the diffusion of technology, is a valuable national
program for small businesses. The government will maintain IRAP
funding at the current level of $96.5 million per year funded
through a combination of existing resources and $13 million to be
reallocated from within the Industry Canada portfolio.
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BUDGET PLAN
Table 4.1
Investing in jobs and growth since the 1996 budget
1996-97 1997-98 1998-99 1999-2000
(millions of dollars)
Investing in immediate jobs
and growth
Measures announced prior to
the 1997 budget
Canada Infrastructure Works
Extension of RRAP1
New Hires Program
CBC radio
425
50
250
10
65
10
10
Subtotal
735
75
10
15
10
15
10
15
10
180
–
5
25
5
25
8
10
12
213
65
67
Measures proposed in the
1997 budget2
Canadian Tourism Commission
Community Access Program
Quarterly remittances for
small business
Environmental initiatives
Revenue Canada costs for
transfer pricing initiative
Subtotal
Investing in long-term job creation
and growth
Investing in higher education and skills
Increase education credit
Extend tuition credit to ancillary fees
Carry-forward of unused tuition
and education credits
Student loan interest relief
RESP3 measures
National Literacy Secretariat
5
5
45
30
80
30
20
10
7
10
20
25
7
25
20
40
7
Subtotal
47
137
202
18
13
19
13
31
32
308
311
Investing in innovation
Canada Foundation for Innovation
Networks of Centres of Excellence
IRAP4
800
Subtotal
800
Total
800
995
1
Residential Rehabilitation Assistance Program.
2
Equity injections in Business Development Bank of Canada and Farm Credit Corporation
are non-budgetary.
3
Registered Education Savings Plans.
4
Industrial Research Assistance Program.
– Less than $5 million.
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5
Building the Future:
Investing in a
Stronger Society
Introduction
Canadians recognize that good economic policy is good social
policy. Reducing the deficit and controlling the debt burden are
essential if programs that support the well-being of Canadians are
to be sustained. Strong and sustained economic growth is vital to
the creation of well-paying jobs and a prosperity that is widely
shared among Canadians. Well-functioning markets, proper incentives and the removal of barriers to labour market participation are
essential if all Canadians are to be able to participate fully in the
growing economy. And good social policy is, as well, a key
ingredient of a strong economy.
Good programs are those that are affordable, sustainable and
meet Canadians’ needs. They should give Canadians the tools and
opportunities to share in Canada’s prosperity.
The government’s last three budgets took important steps in this
direction. These included the new employment insurance program,
the reform of federal transfers to provinces in support of health care,
post-secondary education and social assistance, and the proposed
new Seniors Benefit. Also included were measures to assist families
and the most vulnerable in Canada.
Building a strong society also demands partnerships – among
governments and with various groups in society. The shared focus
of federal and provincial governments on efficient and effective
programs has opened the door for increased federal-provincial
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BUDGET PLAN
co-operation in a wide variety of areas. This budget continues this
process – especially in the approach to improving support to children in low-income families. The government is also committed to
strong partnerships with non-profit and voluntary organizations
that provide much-needed services to enhance the quality of life
for Canadians.
The challenges confronting Canadian society and communities
in the face of rapid change demand that Canada become more
aware of the economic contribution and potential of the social
sector. Social needs are met not merely through income support.
They are also met through services delivered in the social economy
by people such as caregivers, social workers and volunteers. In the
process, jobs and opportunities for skills development are generated. Government can play its part by supporting these important
social activities as resources permit. The measures in this budget are
a significant contribution in this regard. Charities, non-profit organizations, co-operatives and other community-based organizations
must be front and centre in this effort to enhance Canada’s well
being through a collective initiative.
This budget invests in a stronger society through initiatives that:
■
improve Canada’s health care system;
■ increase support for children in low-income families by moving
forward with the provinces to design an integrated child
benefit system;
■
enhance support for persons with disabilities; and
increase the ability of charitable organizations in Canada to
finance their activities.
■
This chapter also lays out the actions being taken by the government to ensure a sustainable retirement income system.
Sustaining and Improving Canada’s
Health Care System
Canadians want their publicly funded health care system preserved
because they know it has served them and their families well.
Canadians expect their governments to uphold universal access to
health care, yet are concerned that recent developments may impede
accessibility and affect the quality of care. The federal government
remains unequivocally committed to the principles underlying
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BUILDING THE FUTURE: INVESTING IN A STRONGER SOCIETY
medicare and to ensuring that Canada’s publicly funded health care
system is maintained. Provincial health ministers recently released
a report in which they reaffirmed their commitment to maintain and
protect the integrity of Canada’s national health system and the
principles of medicare.
At the same time, the federal government is well aware that
changes are needed. It has already taken some important steps to
facilitate changes that will strengthen medicare:
■ The 1996 budget allocated $65 million to launch a new Health
Services Research Fund which funds practical research on the
delivery and the quality of care provided to Canadians.
Under legislation enacted last year, the provinces are provided
with predictable and assured funding under the new Canada Health
and Social Transfer (CHST). CHST entitlements will be maintained
at a stable level of over $25 billion, and then grow at a rate linked
to the growth of the economy. A floor provision guarantees that the
cash portion of the transfer will never be less than $11 billion
through the period of the current legislated arrangement. The
federal government also provides over $8 billion in Equalization
payments to seven provinces which can be used to support provincial services such as health care.
■
In addition, the government has fulfilled a number of commitments in health, including the Centres of Excellence for Women’s
Health, the Aboriginal Head Start Program and the Canada
Prenatal Nutrition Program, and has moved ahead in critical areas
such as new and more effective tobacco legislation and steps to
enhance the safety of the blood system.
■
The National Forum on Health
The National Forum on Health was created by the Prime Minister
to develop a vision of the health system that will meet the health
needs of Canadians into the 21st century. In its recent report, the
Forum concludes that Canada’s health care system is fundamentally
sound and adequately funded, but that there is ample evidence that
resources could be used more effectively and efficiently.
It calls for funds to be made available for a limited period to aid
in the transition to new and better ways of meeting Canadians’
health needs, including ways of ensuring that doctors and other
caregivers have the best possible information readily available to
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them when they make decisions on how to treat patients. In their
recent report on health, provincial health ministers also called for
measures to support evidence-based decision-making.
The National Forum on Health emphasizes that the health of
Canadians depends on many factors outside the health care system.
In its words, “ there is more to health than health care”. For example, the Forum calls attention to the harm caused by deprivation
during early childhood.
This budget responds to these calls. The government will
allocate $300 million over the next three years to additional
health initiatives.
Health Transition Fund
The federal government will provide $150 million over the next
three years for a Health Transition Fund to help provinces launch
pilot projects to investigate new and better approaches to health
care. Projects could include, for example, better ways to provide
medically necessary drugs and home care services. These funds will
be allocated to provinces and territories on an equal-per-capita
basis, with decisions regarding expenditures to be made jointly by
Canada’s ministers of health.
Canada Health Information System
Providers of medical care should have access to the best medical
information, including the latest developments regarding medical
treatments. The government has allocated $50 million over
the next three years to put in place a new Canada Health
Information System.
The Community Action Program for Children
and the Canada Prenatal Nutrition Program
The Community Action Program for Children and the Canada
Prenatal Nutrition Program are two existing federal programs that
help prevent health problems from developing. The Community
Action Program for Children funds community groups that deliver
services to address the developmental needs of young children who
are at risk. Services include infant stimulation, parent/family
resource centres, child development centres and parenting education. The Canada Prenatal Nutrition Program addresses the
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BUILDING THE FUTURE: INVESTING IN A STRONGER SOCIETY
problem of low birth weight babies among high risk groups such as
pregnant adolescents and women who abuse alcohol and drugs.
The government will increase funding for these programs by
$100 million over the next three years. The Minister of Health will
consult his provincial colleagues in setting priorities.
Towards a National Child Benefit System
Too many Canadian children who are growing up in low-income
families are not getting the start they need to become healthy,
happy, educated and productive adults who can contribute to
tomorrow’s society.
Problems with the current Child Benefit System
Through the federal Child Tax Benefit and provincial and territorial programs, governments provide substantial support to
low-income families with children. But there is a growing consensus that governments can do more, and do better.
Some families on social assistance are better off than families
where parents work in low-paying jobs. For example, parents who
leave welfare to enter the workforce lose child allowances under
social assistance (which can be $3,000 or more for a two-child
family) as well as access to benefits such as subsidized drugs and
dental care. Families must also pay a range of taxes they would
otherwise not have to pay. This loss is only partially offset by the
Working Income Supplement (WIS) under the Child Tax Benefit
and provincial measures that assist low-income working families.
The drop in services and support encountered by parents who
leave social assistance for a job is unfair. It creates a barrier that
keeps families on welfare. Parents should not be put in the position
of having to penalize their children in order to take a job. By working together to reform child benefits, governments can create a fairer
system and take an important step in combating child poverty.
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BUDGET PLAN
Federal-provincial-territorial
review of child benefits
At their meeting in June 1996, first ministers identified investment
in children as a national priority. Since then, the federal, provincial
and territorial governments have been working together to find
ways of improving the assistance provided to children in
low-income families.
Different methods of doing so have been examined. A single
uniform benefit would be the simplest and least expensive to administer. On the other hand, benefits that vary by province can better
reflect regional differences in wages and prices, fiscal capacities and
in design objectives. Variation also favours innovation in design and
delivery.
Based on these considerations, the National Child Benefit System
should have two parts: a federal foundation for all eligible Canadian
families – to be called the Canada Child Tax Benefit – and provincial supplements that will vary in amount and design across the
country. Some provinces, including British Columbia, Alberta,
Saskatchewan, Quebec and New Brunswick, have already
introduced or announced such supplements. The Canada Child
Tax Benefit will provide a stronger platform for supplementary
provincial benefits.
This approach should assist lower-income families with children
by allowing each order of government to focus on what it can do
best. The federal government is best positioned to run large-scale
programs through the tax system. Provinces and territories are
better placed to run programs that include regional variations and
that respond quickly to changes in the needs and circumstances of
individual families.
Action by the Government of Canada
Today, families with net income under $25,921 receive a federal
basic Child Tax Benefit of $1,020 a year per child, an additional
$75 for the third and subsequent children in the family, and a
further supplement of $213 for each child under age seven when no
child care expenses are claimed. Families with earned income can
also receive a Working Income Supplement of up to $500 per family.
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BUILDING THE FUTURE: INVESTING IN A STRONGER SOCIETY
In the 1996 budget, the federal government moved to help
children by proposing a reform of Canada’s child support system
that included a change in the tax treatment of child support, the
introduction of guidelines for child support award levels, new
measures to improve the enforcement of support orders, and a
two-step doubling to $1,000 of the WIS under the Child Tax
Benefit. The budget also made the child care expense deduction
available to parents with children up to age 16 and to parents
attending school full-time.
To complement the child support reform announced in the 1996
budget, this budget announces the intention of the government to
support the provinces in establishing and expanding unified family
courts, which play a key role in dealing effectively with family law
disputes, including the issues of support, custody and access.
New Canada Child Tax Benefit
In this budget, the federal government is proposing to allocate
$850 million to increase the existing federal annual spending of over
$5.1 billion under the Child Tax Benefit. This includes $600 million
in new funds as of July 1998, in addition to the $250 million
increase in child benefits announced in the 1996 budget. This means
that $6 billion will be provided annually to Canadian families under
the new Canada Child Tax Benefit.
Consistent with recent discussions, the federal government and
the provinces are suggesting a restructuring of the Child Tax Benefit.
Additional federal resources would be used to create an enriched
and simplified child benefit for all low-income families to be
complemented by supplementary provincial benefits to low-income
working families. A possible design for the federal platform would
be to replace the existing Child Tax Benefit and WIS by the new
Canada Child Tax Benefit with a maximum of $1,625 for the first
child and $1,425 for each additional child, with these maximums
applying to all families with family net income up to $20,921. (The
supplement of $213 per child for children under age seven in families not claiming child care expenses would be retained.)
Changes to federal-provincial child benefits should reduce
current benefit disparities by increasing assistance to low-income
working families while ensuring that total support for families on
social assistance is not reduced. To accomplish this, an enriched
federal benefit to all low-income families will require that most
provinces adjust social assistance benefits and reallocate the savings
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BUDGET PLAN
to assist children in low-income working families. Possible reallocations could include: the extension of in-kind benefits or services
(e.g., pharmacare, dental care or child care) to low-income families
not receiving social assistance, a child credit for low-income families (such as the British Columbia Family Bonus or the Quebec
Integrated Child Allowance), or an earned income credit (such as
the Alberta Family Employment Tax Credit).
The Minister of Human Resources Development will continue
to work with the provinces and territories to define the design of
complementary federal and provincial changes that serve to reduce
child poverty and barriers to work. The federal government will
work with First Nations, provinces and territories to ensure that
First Nations’ children, on reserve, benefit like other Canadian
children from these initiatives.
The federal government is firmly committed to providing
additional assistance to children in low-income families, and will
put forward later this year a final proposal to enrich and simplify
the Child Tax Benefit. The new Canada Child Tax Benefit
is proposed to take effect by July 1, 1998, or earlier if that should
prove possible.
Modified Working Income Supplement
As a first step to the creation of a National Child Benefit System,
the federal government proposes to restructure the Working Income
Supplement by moving it from a family basis to a per-child basis,
and to further increase the assistance it provides. This will bring it
closer into line with the structure of the basic Child Tax Benefit and
child allowances under social assistance. Legislation will be introduced to implement the modified Working Income Supplement
shortly, with a proposed effective date of July 1997. The change will
enrich the WIS by about $195 million, $70 million more than the
$125 million increase proposed for July 1997 in the 1996 budget.
This will result in higher costs of $50 million in 1997-98 and
$20 million in 1998-99. For July 1997 to June 1998, the
federal government proposes to pay a maximum Working Income
Supplement of $605 to one-child families and $1,010 to
two-children families. The maximum amount will be increased by
$330 for each additional child.
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BUILDING THE FUTURE: INVESTING IN A STRONGER SOCIETY
Helping Canadians with Disabilities
Canadians with disabilities face many barriers in everyday life. The
federal government is committed to helping persons with disabilities participate as fully as possible in Canadian society. Measures
have already been taken to assist persons with disabilities. The
1996 budget doubled the assistance provided through the tax credit
for those who provide in-home care for family members with
disabilities and promised a review of measures – including those in
the tax system – for people with disabilities.
A federal task force, chaired by Andy Scott M.P., was appointed
to consult with the disability community and has provided policy
recommendations. As a result, the Vocational Rehabilitation of
Disabled Persons Program – which improves the employment
prospects of the disabled who want to join the workforce – has been
extended for one year while a replacement program is developed in
co-operation with the provinces. In addition, the Minister of
Human Resources Development has announced that funding of
voluntary and non-governmental groups helping persons with
disabilities will be maintained at 1996-97 levels.
Additional tax assistance to people with disabilities
The task force emphasized the need to reduce the disability-related
costs that currently stand in the way of full participation of
Canadians with disabilities in Canadian society. The following tax
measures are being proposed to this effect:
The list of expenses eligible for the medical expense tax credit
will be broadened to include: 50 per cent of the cost of an air conditioner necessary to help an individual in coping with a severe
chronic ailment, disease or disorder to a maximum of $1,000;
20 per cent of the cost of a van that is adapted or will be adapted
within six months for the transportation of an individual using a
wheelchair to a maximum of $5,000; expenses incurred for moving
to accessible housing; sign language interpreter fees; reasonable
expenses relating to alterations of the driveway of the principal
place of residence of an individual with severe and prolonged mobility impairment, to facilitate the individual’s access to a bus; and an
increase in the limit on part-time attendant care expenses from
$5,000 to $10,000.
■
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BUDGET PLAN
The $5,000 limit on the deduction for attendant care expenses
that is currently available for disabled earners will be eliminated.
■
Audiologists will be allowed to certify eligibility for the disability tax credit.
■
The definition of a preferred beneficiary of a trust will be broadened to include adults who are dependent on others by reason of
mental or physical infirmity.
■
■ The Customs Tariff will be amended to provide duty-free entry
for all goods designed for the use of persons with disabilities. This
new provision was developed in the context of the tariff simplification review that was launched by the government in 1994.
Canadians with disabilities who enter the labour force often face
additional costs and the potential loss of benefits provided by
income security programs. In response to this, the budget proposes
to introduce a refundable credit for low-income working Canadians
with high medical expenses.
The refundable credit will supplement assistance provided
through the existing medical expense tax credit. The maximum
credit will be the lesser of $500 and 25 per cent of eligible medical
expenses. Individuals must have at least $2,500 in earnings to
qualify. To target assistance to those with low incomes, the basic
benefit will be reduced by 5 per cent of family net income in excess
of $16,069.
These measures will increase tax assistance to Canadians facing
significant medical costs by $70 million annually.
Opportunities Fund for persons with disabilities
A significant number of Canadians with disabilities who are not in
the labour force could work either part-time or full-time, if they
were provided assistance to prepare for, find and keep jobs. Many
who are currently relying on social assistance would rather work
and be financially self-sufficient. Therefore, the government is introducing an Opportunities Fund of $30 million a year over three years
to promote the development of strategies to reduce barriers to
participation. The Fund will assist these Canadians in integrating
into the economic life of their communities and increasing their
independence.
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BUILDING THE FUTURE: INVESTING IN A STRONGER SOCIETY
The Fund’s primary objective will be to generate innovative
projects that demonstrate best practices that can be shared across
the country. The federal government will build on strong partnerships already in place with disability groups and the private sector
to provide opportunities for persons with disabilities within a
results-based accountability framework. These projects will be
developed by the partners in conjunction with the provincial
governments and the appropriate authorities in each province.
What is learned from the projects supported by the Fund will assist
all levels of government and the private sector to apply new knowledge in programming for persons with disabilities. During its third
year, the activities of the Fund will be evaluated in order to
determine future directions and federal involvement.
The federal government will continue to work with groups representing persons with disabilities to ensure the effectiveness of its
assistance to disabled persons.
Support for Charitable Giving
Millions of Canadians participate in the improvement of their
communities through volunteer work and charitable donations. In
this regard, the government fully recognizes the increasingly important role the charitable sector is playing in meeting the needs of
Canadians. It is thus important to ensure that charities are able to
raise sufficient funds to finance their activities.
To support this, generous incentives are provided in the tax
system. Corporate donors are allowed to deduct charitable gifts up
to the applicable net income limit in calculating their taxable
income, producing federal and provincial tax assistance of up to
43 per cent of the value of the donation.
For individual donors, a federal tax credit at the rate of
17 per cent is provided on the first $200 of donations each year. A
federal tax credit of 29 per cent is available for the portion of donations exceeding $200 up to the applicable net income limit. The
federal tax credit also reduces surtaxes and provincial taxes, which
typically bring tax assistance to a maximum of 52 per cent of the
value of the donation (as shown in Table 5.1). In other words, there
is roughly a 50/50 partnership between the donor and governments.
111
BUDGET PLAN
Table 5.1
Maximum tax assistance for donations by individuals
Per cent
Federal charitable donations tax credit
Impact on federal surtaxes
29
2
Typical impact on provincial taxes and surtaxes
21
Total tax assistance
52
The government has taken steps in each of the last three budgets
to make it easier for Canadians to contribute to charities. These
measures have particularly helped charities attract donations from
modest-income donors. For example, the threshold for the higher
29-per-cent credit was lowered from $250 to $200, and the amount
of donations eligible for the credit was increased significantly.
The 1996 budget also indicated that more could be done.
Following a thorough review of a number of proposals for improving tax assistance and consultations with the charitable sector, the
government is proposing further enhancements to assist the
charitable sector in raising funds.
Increased tax incentives for charitable giving
This budget proposes further measures to help all charities attract
donations from modest-income Canadians. The government
proposes to adopt a common limit of 75 per cent of net income for
donations to all charities by individuals and corporations for the
1997 and subsequent taxation years – raising the limit for most
charities from 50 per cent, and lowering the limit for donations to
the Crown and Crown foundations from 100 per cent. With this
proposal, all charities would be able to attract donations on a level
playing field, as donors giving to different charities would receive
equal tax assistance in almost all circumstances. For donations to
charities other than the Crown, these proposals would result in the
limit being raised from 20 per cent prior to the 1996 budget to
75 per cent.
Representations made by charitable groups, notably before the
House of Commons Standing Committee on Finance, repeatedly
stressed the need to facilitate large transfers of capital from individuals and corporations to charitable organizations. In this regard,
many groups have noted that donations of appreciated capital
property are not treated as generously as in the United States.
112
BUILDING THE FUTURE: INVESTING IN A STRONGER SOCIETY
Tax assistance for charitable
donations in Canada and the U.S.
Many have made comparisons between the donation patterns in the
United States and Canada and the relationship this may have to the
respective tax treatments of donations. Canada has a much more
generous scheme for cash donations than the United States. In
Canada, all taxpayers are able to benefit from charitable donations tax
credits. In the United States, approximately 70 per cent of taxfilers
elect to use a standard deduction, and therefore do not claim any
deduction for charitable donations.
In Canada, for donations above $200, donors receive combined
federal and provincial tax relief up to 52 per cent of the value of the
donation. In the United States, for the 30 per cent of taxpayers who do
not claim the standard deduction, the maximum tax relief reaches
43 per cent of the donation, but only for very high income earners. At
more modest-income levels, the gap in favour of greater generosity
from the tax system in Canada is even more marked: tax assistance
for a modest-income donor is only slightly lower, while it falls to only
32 per cent in the U.S.
Further, a number of initiatives in this and recent budgets encourage greater giving from Canadians with modest incomes: the increases
in the net income limits for most donations from 20 to 75 per cent, as
well as the reduction in the threshold for claiming the 29-per-cent credit
from $250 to $200, will largely benefit donors of more modest
incomes.
There is, however, a marked distinction in giving patterns between
the two countries for larger donations of appreciated capital property.
Donations of this type are much more important in the United States
than in Canada. Many representations attribute this gap to the preferential treatment provided in the U.S. to donations of appreciated capital
property through an exemption from capital gains tax.
The tax assistance accruing to donations of appreciated capital
property depends on both the rates of tax credits or deductions, the
rate at which any capital gains are included in income, and the length
of time that the asset is held.
Experience in the U.S. indicates that the typical capital gain realized
on the donation of appreciated capital property represents about
60 per cent of the value. For such a donation, the exemption from the
32-per-cent maximum tax on capital gains in a typical state thus
produces tax assistance of 19 per cent in addition to the 43-per-cent
tax assistance from the charitable donations deduction. This results in
tax assistance on typical donations of property of up to 62 per cent in
the U.S.
113
BUDGET PLAN
In addition to a further increase in the net income limit,
this budget addresses the differential tax treatment of donations of
capital between Canada and the United States. It is for this type of
donation that the giving patterns are most different between the
two countries, and where a change in Canada’s tax system can have
the largest impact on overall donations to charities.
This budget proposes to reduce the income inclusion rate on capital gains arising from certain donations to charities (other than
private charitable foundations) by individuals and corporations
from 75 to 371⁄2 per cent. Donations that will be eligible will be
those of securities – such as shares, bonds, bills, warrants and
futures – that are listed on a prescribed stock exchange, where the
donation is made between budget day and the end of the calendar
year 2001. (Prescribed stock exchanges are listed in the Income Tax
Regulations.) This substantial reduction in the income inclusion rate
will facilitate the transfer of capital to charities. The restrictions of
property to securities listed on prescribed stock exchanges will
avoid potential problems associated with the valuation of properties. After five years, this provision will be terminated if it has not
been effective in both increasing donations and distributing the
additional donations fairly among charities.
This initiative will give Canadian charities access to the sort of
large donations of securities that U.S. charities raise by providing a
level of tax assistance for these donations that is comparable to that
in the U.S. As Table 5.2 shows, for a donation of a security worth
$100, a full exemption from capital gains tax is not needed to
achieve the same level of tax incentive as in the U.S.
Thus, with the reduction in the income inclusion rate, the
Canadian system of tax incentives will be slightly more generous
than the U.S. system for donations of publicly listed securities.
Combined federal-provincial tax assistance on a typical donation
of publicly listed securities in Canada will rise to as much as
64 per cent, compared to combined federal and state tax assistance
of 62 per cent in a typical U.S. state. It is much more generous than
the U.S. system for donations of cash. As a result, Canadian charities now have a powerful set of tools for raising the funds they need
to meet the needs of Canadians.
114
BUILDING THE FUTURE: INVESTING IN A STRONGER SOCIETY
Table 5.2
Comparison of treatment of donations of securities
Fair market value of donation
Top marginal tax rate for high-income earners1 (%)
Value of donations tax credit/deduction
Typical cost base of donation
Capital gains tax if not donated2
Additional tax assistance for donations
of securities3
Total tax assistance
Canada
U.S.
100
52
52
100
43
43
40
24
40
19
12
64
19
62
1
Combined typical federal-provincial-state tax rates.
2
In Canada, only 75 per cent of capital gains are included in income. In the U.S., the maximum
federal-state tax rate on capital gains is about 32 per cent.
3
Total of donations tax credit/deduction, and reduction in capital gains tax (additional
371⁄2 -per-cent exclusion in Canada, full exemption in the U.S.).
Proposals to increase incentives for cash donations
The government received many representations to implement further
incentives for cash donations, notably a “stretch” proposal that would
provide a higher tax credit for donations by an individual that exceed
his or her historical giving level. The principal reason that further incentives for cash donations are not proposed in this budget is that the
Canadian tax system is already very generous for cash donations by
donors at all income levels – far more generous than the U.S. system.
There is already generally a 50/50 partnership between governments
and the donor on donations over $200. Also, these proposals would
have increased complexity in the tax system, and resulted in revenue
costs that could exceed the increase in donations.
A “stretch” incentive would notably create opportunities for taxpayers to maximize their credits by rearranging their donation patterns without actually giving more over time – e.g., by “bunching” donations in
one year or by combining donations with a spouse. It would also create
a significant increase in the complexity of the tax system for taxpayers
to the point where the intended effect of the additional incentive could
be largely lost as many taxpayers would not understand how the incentive works.
On balance, the government believes the goal of increasing overall
donations to charities is best accomplished by directing the additional
resources available for tax assistance at closing the gap with the U.S.
with respect to large donations of securities.
115
BUDGET PLAN
Further changes are proposed to encourage donations of easements and covenants of ecologically sensitive land, and donations
of depreciable capital property.
Increasing Canadians’ confidence in the charitable sector
A number of changes are also proposed in this budget in order to
ensure donors that they can continue to be confident that their
donations are being put to good use. Notably, Revenue Canada will
be given additional resources in order to improve its ability to
ensure that charities comply with the provisions of the Income Tax
Act. Revenue Canada will also provide information to charities on
how to broaden the understanding of the tax assistance available
for charitable donations, and will provide more information on
charities to the public.
Strong incentives and a predictable framework
Together, these measures provide significant new resources worth
$95 million annually in additional federal tax assistance to encourage charitable donations. With this new assistance, the tax treatment of charitable donations becomes considerably more generous
in Canada than in the United States, and provides charitable organizations a predictable framework under which to work over the
coming years. This will benefit all parts of the charitable sector,
including social service organizations, universities, hospitals, arts
organizations and registered amateur athletic associations.
The measures proposed in this budget represent the government’s
response to a thorough and exhaustive review of the tax provisions
relating to charities. The measures introduced in this and the past
three budgets result in a comprehensive package of enhancements
that make Canada’s system of tax incentives for charitable donations very generous and provide additional resources to strengthen
the integrity of the sector. With these measures, Canadians can be
confident that, for the next five years, the charitable sector will have
the tools to raise funds from modest donations and from larger
donations of securities, both of which are essential to assist the
charitable sector in meeting the needs of Canadians.
116
BUILDING THE FUTURE: INVESTING IN A STRONGER SOCIETY
Ensuring a Sustainable
Retirement Income System
Canada’s balanced system of public and private pensions is widely
seen as one of the best in the world. The government remains determined to put in place the changes that are needed to ensure that the
public pension system can be sustained in the face of escalating costs
as Canadians live longer, the population ages and the baby-boom
generation retires. To this end, the government proposed in the
1996 budget a new Seniors Benefit, and has consulted provinces on
changes to the Canada Pension Plan (CPP) to make it sustainable,
affordable and fair across generations of Canadians.
A new Seniors Benefit
The Seniors Benefit, which will begin in 2001, will help to make the
public pension system more financially sustainable and thereby
preserve benefits for future generations. By creating a fairer and
more targeted system of assistance for seniors, the Seniors Benefit
will slow the growth in costs of public pensions.
The legislation to be put before Parliament will implement the
proposals outlined in the 1996 budget:
■ The new benefit will be implemented in a manner that meets the
government’s commitment to today’s seniors that their old age security and guaranteed income supplement (GIS) payments will not be
reduced and broadens this commitment to apply to everyone
age 60 and over as of December 31, 1995.
■ Under the Seniors Benefit, the vast majority of seniors – those
with incomes up to about $40,000 – will be as well or better off;
75 per cent of single seniors and senior couples will receive the same
or higher benefits. Nine out of 10 single senior women will be
better off.
Those most in need will be protected. Indeed, GIS recipients will
receive an additional $120 a year.
■
■ The benefit levels and threshold will be fully indexed to inflation.
This is an improvement over the current system where the
thresholds are not fully indexed.
For couples, the amount of the payment will be determined on
the basis of the combined income of spouses, as is the case now with
the GIS.
■
117
BUDGET PLAN
The new Benefit will be completely tax free and will incorporate
the existing age and pension income tax credits.
■
The benefits will be delivered in a single monthly payment which,
for couples, will be made in separate and equal cheques to
each spouse.
■
The Spouse’s Allowance Program will remain in place and
payments will be increased by $120 per year.
■
The legislation to implement the Seniors Benefit will also include
three small changes to the GIS to improve the operation of the
program until the Seniors Benefit is introduced in 2001. These
changes are expected to take effect in 1998. The main proposed
change is a shift in the annual renewal date for GIS from April to
July. Providing more time for the processing of renewal applications
and allowing benefits to be calculated from the income tax return
will ensure that payments to seniors will not be interrupted by
processing delays. The other changes will adapt the GIS formula
to modern computerized calculations and harmonize income
definitions more closely with income tax provisions.
Securing the future of the Canada Pension Plan
The federal government and the provinces are joint stewards of the
Canada Pension Plan. Any changes to it require the agreement of
the federal government and two-thirds of the provinces with twothirds of Canada’s population.
The federal government has been working with provinces and
territories over the past year to find ways of ensuring that the CPP
is sustainable for future generations. Based on a joint paper, public
consultations were held last spring in every province and territory
and a report was released summarizing what Canadians told their
governments about how to fix the CPP.
The report indicated that Canadians value the CPP and want it
preserved and protected as a key pillar of the retirement income
system. They urged governments to move quickly to put the CPP
on a sound financial footing and to ensure that it will be there for
them when they need it.
All governments have endorsed principles to guide changes to the
CPP. The principles are:
■ The CPP is a key pillar of Canada’s retirement income system
that is worth saving.
118
BUILDING THE FUTURE: INVESTING IN A STRONGER SOCIETY
The CPP is an earnings-related program. Its fundamental role is
to help replace earnings upon retirement or disability, or the death
of a spouse – not to redistribute income. The income redistribution
role is the responsibility of the income tax system – the Old Age
Security/Guaranteed Income Supplement/Seniors Benefit, and other
income-tested programs paid from general tax revenues.
■
The solutions to the CPP’s problems must be fair across generations and between men and women.
■
The CPP must be affordable and sustainable for future generations. This requires fuller funding and a contribution rate no higher
than the already legislated future rate of 10.1 per cent. In deciding
how quickly to move to this rate, governments must take economic
and fiscal impacts into account.
■
Governments must tighten administration as the first step
towards controlling costs.
■
Disability and survivor benefits are important features of the
CPP. However, they must be designed and administered in a way
that does not jeopardize the security of retirement pensions.
■
■
Any future benefit improvements must be fully funded.
■ CPP funds must be invested in the best interests of plan members,
and maintain a proper balance between returns and investment risk.
Governance structures must be created to ensure sound fund
management.
Governments must monitor changing economic, demographic
and other circumstances which can affect the CPP, and act to
respond to these changing conditions. Annually, ministers of finance
should provide Canadians with the appropriate information so they
can judge for themselves that the integrity and security of the CPP
is being protected.
■
Pension adjustment reversal
Individuals who leave pension plans before retirement often receive
termination benefits that are low in relation to the benefits promised
under the plan. The result is a loss of savings that makes it more
difficult for such individuals to accumulate adequate levels of retirement income. This is a particular problem for individuals who
might have several employers over their career and women leaving
the workforce on a temporary basis to raise children.
119
BUDGET PLAN
The budget proposes to restore savings opportunities for such
individuals by introducing a pension adjustment reversal (PAR).
The PAR will restore lost registered retirement savings plan (RRSP)
room when an individual receives a termination benefit from a
pension plan that is low relative to the RRSP room given up while
a plan member. The PAR will make the retirement savings system
fairer and more effective in helping Canadians build adequate
retirement incomes.
Table 5.3
Investing in a stronger society
1997-98 1998-99
1999-2000
(millions of dollars)
Sustaining and improving Canada’s
health care system
Health Transition Fund/Canada
Health Information System
Community Action Program for
Children and Canada Prenatal
Nutrition Program
Subtotal
Toward a National
Child Benefit System
Canada Child Tax Benefit
Helping Canadians with disabilities
Broadening the medical expense
tax credit/removing limit on
attendant care deduction
Refundable medical expense
supplement for earners
Opportunities Fund
Subtotal
Support for charitable giving
Reduced inclusion rate on
capital gains
Net income limit/CCA
recapture changes
Increased resources for
Revenue Canada
Subtotal
Total
1
50
75
75
33
33
33
83
108
108
501
4701
600
5
30
30
5
30
30
30
40
30
40
90
100
20
90
90
5
5
5
5
5
5
30
100
100
203
768
908
Assumes a July 1, 1998 start-up. If implemented earlier, total would be larger by up
to $150 million.
120
Annex 1
The Budgetary Deficit,
Financial Requirements,
and the National
Accounts Deficit
There are three basic measures of the federal government’s
fiscal position in Canada – two measures based on the public
accounts (the budgetary deficit or surplus and financial requirements or sources) and one based on the System of National
Accounts, as prepared by Statistics Canada. Corresponding to
each measure are indicators of the net debt position of the federal
government.
Differences in the measures arise because the accounting frameworks are designed for different purposes.
The fundamental purpose of the first two measures (budgetary
deficits or surpluses and financial requirements or sources – public
accounts measures) is to provide information to Parliament on the
government’s financial activities as required under the Financial
Administration Act. The purpose of the public accounts is to permit
parliamentary control of public funds into and out of the
Consolidated Revenue Fund. It measures the difference between
cash revenues in a year and obligations incurred by the Government
of Canada in that year, excluding those in respect of the Canada
Pension Plan (CPP). The results are based on generally accepted
accounting principles for the public sector and are audited by the
Auditor General of Canada.
Financial requirements measure the amount by which cash going
out from the government exceeds cash coming in. It is equal to the
amount of money that the government has to borrow in credit
markets. The budgetary deficit or surplus includes all transactions
121
BUDGET PLAN
with outside parties that enter into the calculation of the deficit or
surplus of the government. The budgetary deficit or surplus is a
more comprehensive measure as it includes liabilities incurred
during the year for which no cash payment has been made and only
those revenues and program spending over which Parliament has
given it control.
The main difference between the budgetary deficit and financial
requirements relates to the treatment of federal government
employees’ pension accounts. The budgetary deficit includes the
total annual pension-related obligations (the government’s contribution as an employer for current service costs plus interest on its
borrowings from the pension accounts) while financial requirements include only the benefits paid out in that year less employee
premiums paid.
■
■ In addition, the budgetary deficit or surplus includes all the
federal government’s obligations incurred during the course of the
year while financial requirements only include the actual cash
outlay related to these obligations.
Most industrialized countries present their budgets on a basis
that is more comparable to the financial requirements approach
than to the public accounts measure of the budgetary deficit.
Financial requirements correspond closely to the Unified Budget
Balance in the United States.
The primary objective of the national accounts is to measure
economic production and income. Thus, the government sector is
treated on the same basis as other sectors of the economy. The
primary objective of measuring economic activity means that
certain transactions are recorded on an accrual basis in order to
measure when revenues and expenditures are incurred. In addition,
the current national accounts treatment of the transactions of
federal government employees’ pension accounts is similar to that
in the public accounts measure of financial requirements.
The national accounts deficits or surpluses are largely used for
international fiscal comparisons by the Organization for Economic
Co-operation and Development (OECD) and the International
Monetary Fund (IMF).
■
The national accounts also provide a consistent framework for
aggregation and comparison of the fiscal positions of the various
levels of government in Canada.
■
122
ANNEX 1
Each measure provides important complementary perspectives
on the government’s fiscal position.
■ Although the levels are different, the trends are broadly similar
(Table A1.1).
Financial requirements and the national accounts deficit are
currently broadly similar in level and both are considerably lower
than the public accounts deficit, reflecting the inclusion of the net
amount of federal government employees’ pension funds.
■
As the deficits or surpluses derived from these three measures are
different, so are the measures of debt (Table A1.2). The accumulation of annual budgetary deficits and surpluses since Confederation
is the net public debt. For financial requirements, the relevant
measure is unmatured debt – the stock of market debt that the
government has outstanding. The national accounts debt represents
the government’s total liabilities minus its financial assets.
Table A1.1
Alternative measures of the federal budget balance
1980-81 to 1995-96 (fiscal years)
Budgetary surplus
or deficit (-)
Year
Millions
of dollars
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
-14,556
-15,674
-29,049
-32,877
-38,437
-34,595
-30,742
-27,794
-28,773
-28,930
-32,000
-34,357
-41,021
-42,012
-37,462
-28,617
Per cent
of GDP
-4.7
-4.4
-7.8
-8.1
-8.6
-7.2
-6.1
-5.0
-4.7
-4.4
-4.8
-5.1
-5.9
-5.9
-5.0
-3.7
Financial requirements
(excluding foreign
exchange transactions)
Millions
of dollars
-9,917
-9,264
-23,819
-25,219
-29,824
-30,510
-22,918
-18,849
-22,424
-20,530
-24,538
-31,800
-34,497
-29,850
-25,842
-17,183
123
Per cent
of GDP
-3.2
-2.6
-6.4
-6.2
-6.7
-6.4
-4.5
-3.4
-3.7
-3.2
-3.7
-4.7
-5.0
-4.2
-3.5
-2.2
National
accounts surplus
or deficit (-)
Millions Per cent
of dollars of GDP
-9,604
-9,062
-23,486
-25,957
-32,584
-27,872
-24,089
-19,510
-20,592
-22,253
-27,416
-28,702
-31,060
-35,077
-28,561
-25,437
-3.1
-2.5
-6.3
-6.4
-7.3
-5.8
-4.8
-3.5
-3.4
-3.4
-4.1
-4.2
-4.5
-4.9
-3.8
-3.3
BUDGET PLAN
Table A1.2
Alternative measures of the federal debt
1980-81 to 1995-96 (fiscal years)
Net debt
Unmatured debt
National accounts debt1
Year
Millions Per cent
of dollars of GDP
Millions
of dollars
Per cent
of GDP
Millions
of dollars
Per cent
of GDP
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
91,948
107,622
136,671
169,549
207,986
242,581
273,323
301,117
329,890
358,820
390,820
425,177
466,198
508,210
545,672
574,289
83,138
93,167
116,562
142,901
172,719
201,229
228,611
250,809
276,301
294,562
323,903
351,885
382,741
413,975
440,998
469,547
26.8
26.2
31.1
35.2
38.8
42.1
45.2
45.5
45.6
45.3
48.4
52.0
55.5
58.1
59.0
60.5
49,609
57,817
79,547
105,765
136,620
169,619
195,919
215,613
236,708
262,021
287,618
309,189
340,699
366,494
401,815
428,976
16.0
16.2
21.2
26.1
30.7
35.5
38.7
39.1
39.1
40.3
43.0
45.7
49.4
51.4
53.8
55.3
1
29.7
30.2
36.5
41.8
46.8
50.8
54.1
54.6
54.4
55.1
58.4
62.9
67.6
71.3
73.0
74.0
National accounts debt figures represent net financial assets on a calendar year basis.
Source: Statistics Canada, National Balance Sheet Accounts (Cat. 13-214, category 2000).
124
Annex 2
Improved Fiscal
Outlook for the Total
Government Sector
Introduction and Overview
This annex first provides an assessment of the government financial situation at both the federal and provincial-territorial levels.
The total government fiscal situation in Canada is then contrasted
with that of the other Group of Seven (G-7) countries.
The fiscal situation of the federal-provincial-territorial sector
(defined as the total government sector on a public accounts basis)
in Canada in terms of the deficit, program spending, operating
balance and debt servicing costs has improved significantly. Further
progress is anticipated over the next two years.
The extent of fiscal progress in Canada becomes even stronger
when put in an international context. In 1997, Canada’s total
government position will be very favourable in relation to the G-7
nations – a considerable feat, given the situation at the beginning
of the decade.
125
BUDGET PLAN
Federal-Provincial-Territorial Fiscal Situation
Joint efforts towards lower deficits
Both the federal and the provincial-territorial governments have
made significant progress in reducing their budgetary imbalances.
On a public accounts basis, it is projected that the total government deficit will have been reduced by 58 per cent from 1992-93
to 1996-97. As a proportion of gross domestic product (GDP), the
federal deficit will be reduced from 5.9 to 2.4 per cent of GDP,
and the provincial-territorial deficit from 3.6 to 1.1 per cent
(Chart A2.1).
A majority of provinces are expected to report a balanced budget
or even a budgetary surplus in 1996-97. In the latter cases, the
allocation of budgetary surpluses is gradually becoming a topic of
public policy debate. Several jurisdictions have already implemented balanced budget legislation and/or announced schedules for
the repayment of the public debt.
From a target of 2 per cent of GDP in 1997-98, the federal deficit
is projected to decline further to a target of 1 per cent in 1998-99,
resulting in the elimination of the requirement for new borrowing.
Chart A2.1
Federal and provincial-territorial budgetary deficits
(public accounts basis)
per cent of GDP
10
Federal
Provincial-territorial
8
6
4
2
0
1992-93
1993-94
1994-95
1995-96
Source: Department of Finance, Canada.
126
1996-97
1997-98
Forecast
1998-99
ANNEX 2
This performance, combined with the steady decline in
the provincial-territorial deficit, will result in a total federalprovincial-territorial deficit of some 1.5 per cent of GDP by
1998-99, compared with 9.6 per cent in 1992-93.
Lower program spending remains the
cornerstone of deficit reduction success
The strategy at both levels of government has largely focused on
reducing program spending relative to the size of the economy
(Chart A2.2). Federal program spending has declined dramatically
over the past few years, falling from 17.8 per cent of GDP in
1992-93 to 13.7 per cent in 1996-97. Federal revenues have
remained relatively constant as a share of GDP over this period.
At the provincial-territorial level, the ratio of program spending
to GDP declined by 3.3 percentage points between 1992-93 and
1996-97 reaching 16.9 per cent. Provincial revenues have fallen
slightly over this period as a share of GDP.
Chart A2.2
Federal and provincial-territorial program spending
(public accounts basis)
per cent of GDP
25
Federal
Provincial-territorial
20
15
10
5
0
1992-93
1993-94
1994-95
Source: Department of Finance, Canada.
127
1995-96
1996-97
Estimate
BUDGET PLAN
Over the next two years, program spending is expected to
continue its decline in nominal terms at both levels of government.
Consequently, the expected ratios of program spending to GDP will
follow a steady downward path, further contributing to balancing
the books.
Operating balances move into surplus positions
The fiscal policy course on which the federal and provincialterritorial governments are embarked has resulted in significantly
improved operating budget surpluses, defined as the difference
between total budgetary revenues and program spending. An
operating surplus is an important indicator of fiscal policy sustainability, particularly with respect to the level of public debt.
Sufficiently large operating surpluses contribute to the stabilization
and then to the reduction of the debt-to-GDP ratio.
At both levels of government, the operating budget surplus
has been increasing rapidly since moving from a deficit to a surplus
position in 1994-95.
The federal and provincial-territorial operating surpluses are
expected to reach 3.3 and 1.5 per cent of GDP, respectively, in
1996-97 (Chart A2.3).
Chart A2.3
Federal and provincial-territorial operating balances
(public accounts basis)
per cent of GDP
4
Federal
Provincial-territorial
3
2
1
0
-1
-2
1992-93
1993-94
1994-95
Source: Department of Finance, Canada.
128
1995-96
1996-97
Estimate
ANNEX 2
Over the next two years, the federal operating surplus is
projected to increase further to reach 4.7 per cent of GDP in
1998-99.
Lower interest rates are beneficial
Canada’s excellent inflation performance and the sharp improvement in the federal and provincial-territorial fiscal situation have
led to increased confidence in financial markets and much lower
interest rates.
Short-term interest rates have declined by more than 500 basis
points since January 1995, while 10-year bond rates are some
300 basis points lower. The implied reduction in debt servicing costs
has also contributed significantly to the gradual elimination of
deficits or, in some cases, the accumulation of surpluses.
Consequently, despite the increase in the debt level of the total
government sector in 1996-97, total debt charges are estimated
to have declined. As a proportion of GDP, they are forecast to
decline at both the federal and provincial-territorial levels this year
and next.
Debt burdens are declining
With program spending declining rapidly as a proportion of GDP
and debt servicing costs to a lesser extent, the net debt-to-GDP
ratio will decline significantly in 1997-98 for the first time since the
early 1980s.
Led by the federal government, the total government
debt-to-GDP ratio is expected to decline by some 4 percentage
points by 1998-99, as compared to its peak level in 1996-97.
Canada’s Fiscal Gains in an International Context
International fiscal comparisons can sometimes be difficult for
two reasons. First, differences in accounting practices across countries hamper comparability of fiscal data. Second, fiscal responsibilities of each country are shared differently among its levels of
government. It is for these reasons that national accounts data for the
total government sector are used for the following G-7 comparisons,
129
BUDGET PLAN
as these data are more consistent across countries. Canada and the
Organization for Economic Co-operation and Development present
a comprehensive set of estimates on a national accounts basis.
On the basis of these data, the following charts illustrate that
Canada has made significant fiscal progress relative to the other
G-7 countries.
Canada’s deficit in terms of GDP lowest of the G-7
In 1992, the Canadian total government deficit (national accounts
basis) stood at 7.4 per cent of GDP, nearly double the G-7 average
of 3.8 per cent.
By 1997, the situation will have been completely reversed. The
Canadian total government deficit will be nearly half the G-7 average of 2.5 per cent, at 1.3 per cent of GDP (Chart A2.4). In fact, the
1997 Canadian total government deficit will be the lowest of the
G-7 countries (Chart A2.5). By 1998, the Canadian total government deficit-to-GDP ratio is expected to be roughly in balance, and
remain the lowest of the G-7 countries. This is in stark contrast to
the situation only five years ago.
Chart A2.4
Total government deficit
(national accounts basis)
per cent of GDP
8
Canada
G-7 average
6
4
2
0
0.0
1992
1993
1994
1995
1996
1997
1998
Estimates and projections
Sources: Canada, Department of Finance; G-7 average, OECD Economic Outlook Data,
December 1996.
130
ANNEX 2
Chart A2.5
Total government deficit in G-7 countries
(national accounts basis)
per cent of GDP
4
1997
1998
3
2
1
0
0.0
Canada
United
States
Japan
Germany
France
United
Kingdom
Italy
Sources: Canada, Department of Finance; other G-7 countries, OECD Economic Outlook Data,
December 1996.
Program spending is the key factor
in fiscal consolidation
The gap in program spending as a proportion of GDP between
Canada and the G-7 average is also narrowing and will be eliminated in 1997 (Chart A2.6).
In 1997, the ratio of program spending to GDP in Canada will
be the third lowest behind the United States and Japan (Chart A2.7).
This is expected also to be the case in 1998.
131
BUDGET PLAN
Chart A2.6
Total government program spending
(national accounts basis)
per cent of GDP
50
Canada
G-7 average
40
30
20
10
0
1992
1993
1994
1995
1996
1997
1998
Estimates and projections
Sources: Canada, Department of Finance; G-7 average, OECD Economic Outlook Data,
December 1996.
Chart A2.7
Total government program spending in G-7 countries
(national accounts basis)
per cent of GDP
60
1997
1998
50
40
30
20
10
0
United
States
Japan
Canada
United
Kingdom
Italy
Germany
France
Sources: Canada, Department of Finance; other G-7 countries, OECD Economic Outlook Data,
December 1996.
132
ANNEX 2
The Canadian net debt-to-GDP ratio
declines more rapidly
Although the Canadian net debt-to-GDP ratio is higher than the
G-7 average, it is projected to start declining at a more rapid rate
than the average in line with the gains made in deficit reduction.
Between 1997 and 1998, the Canadian net debt ratio will decline
by 2 percentage points, the largest decline among the G-7 countries
(Chart A2.8).
Chart A2.8
Total government net debt in G-7 countries
(national accounts basis)
per cent of GDP
120
1997
1998
100
80
60
40
20
0
Japan
France
United
Kingdom
United
States
Germany
Canada
Italy
Sources: Canada, Department of Finance; other G-7 countries, OECD Economic Outlook Data,
December 1996.
133
Annex 3
Fiscal Outlook:
Sensitivity to Economic
Assumptions
Sensitivity to Changes in Economic Assumptions
Estimates of the main fiscal aggregates are sensitive to changes in
economic assumptions – particularly to the level of nominal gross
domestic product (GDP) and interest rates. The following sensitivity estimates capture the direct fiscal impacts of changes, one
economic variable at a time. These are partial calculations. For
example, in the nominal income sensitivity estimate, there is no
feed-through of the change in nominal income to other variables,
such as interest rates and unemployment.
Sensitivity to changes in nominal income
A 1-per-cent increase in the level of nominal GDP leads to higher
tax bases and thus higher revenues. The ultimate deficit impact
would depend on the source of the increase in nominal incomes.
The most favourable impact on the fiscal situation would occur if
all the increase in nominal GDP resulted from increased real output.
Revenues would be higher and borrowing costs lower. Interest rates
would be relatively stable.
If, however, the improvement in nominal GDP was solely due to
inflation, then some of the positive impact of government revenues
would be offset by higher spending on those programs indexed to
inflation. Higher inflation would also likely raise interest rates.
135
BUDGET PLAN
Assuming the increase in nominal incomes comes solely from an
increase in output with no impact on interest rates, the deficit would
be lowered by $1.3 billion in the first year, rising to $1.7 billion after
four years (Table A3.1).
Table A3.1
Fiscal sensitivity analysis: 1-per-cent increase in nominal income
Estimated changes to fiscal position
Year 1
Year 2
Year 3
Year 4
(billions of dollars)
Budgetary transactions
Revenue increases
Expenditure reductions
Deficit reduction
1.2
0.1
1.3
0.2
1.4
0.1
1.6
0.1
1.3
1.5
1.5
1.7
Sensitivity to changes in interest rates
In contrast to the uncertainties of the sensitivity of the deficit
to changes in nominal GDP, the direct impact of interest
rate changes on public debt charges can be calculated with
considerable precision.
A sustained 100-basis-point increase in all interest rates would
cause the deficit to increase by $1.0 billion in the first year
(Table A3.2). As longer-term debt matures and is refinanced at the
higher interest rates, the negative impact on the deficit increases,
such that by year four, the deficit is about $2.6 billion higher.
Table A3.2
Fiscal sensitivity analysis: 100-basis-point increase in all interest rates
Estimated changes to fiscal position
Year 1
Year 2
Year 3
Year 4
(billions of dollars)
Budgetary transactions
Revenue increases
Expenditure increases
Deficit increase
0.5
1.5
0.5
2.4
0.5
2.8
0.5
3.1
1.0
1.9
2.3
2.6
136
ANNEX 3
These estimates are somewhat lower than estimates contained in
previous budgets because the government is increasing the
fixed-rate portion of the debt (the percentage of the gross debt
issued as longer-term fixed-rate instruments) towards a target of
65 per cent in order to bring more stability to debt charges.
The establishment of a prudent debt structure that has more
stable long-term financing is one of the key steps to putting
Canada’s financial house in order, and is essential to maintaining
investor and credit rating agency confidence. Canada’s past reliance
on short-term debt was noted by market participants and credit
rating agencies – a concern which, if unaddressed, could have raised
Canada’s overall cost of debt. Over the last four years, the government has significantly reduced its exposure to unexpected changes
in interest rates. The fixed element of the debt stock has
been increased from 52 to 62 per cent, with the target of 65 per cent
expected to be reached in the near future. By ensuring the government meets its objective of raising stable, low-cost funding, a
prudently structured debt stock benefits all taxpayers and brings
Canada into line with international standards. For further
information, refer to the Debt Operations Report, Department of
Finance, November 1996.
137
Annex 4
The Government’s
Response to the Auditor
General’s 1996 Reports
and Observations on the
Financial Statements
For the fifth consecutive year, the Auditor General has expressed a
clean opinion on the government’s financial statements. In the opinion of the Auditor General, the deficit outcome of $28.6 billion for
1995-96 represents “fairly, in all material respects, the
financial deficit of the Government of Canada for the year ended
March 31, 1996 … in accordance with the stated accounting policies of the Government of Canada”.1
However, as in previous years, the Auditor General has raised
a number of accounting issues in his “Observations” on the 1996
financial statements of the Government of Canada. These are:
recording of the transitional assistance for harmonizing the
federal and provincial sales taxes;
■
■
accounting for employee pensions;
■
full accrual accounting for capital assets;
■
accrual accounting for tax revenue;
■
accounting for environmental liabilities and contingencies; and
■
accounting for Enterprise Crown corporations.
The government’s responses to these issues are discussed in
this annex.
1
Public Accounts of Canada, 1995-96 Volume 1.5.
139
BUDGET PLAN
Recording of Transitional Assistance for
Harmonizing Federal and Provincial Sales Taxes
During the course of 1995-96, the government undertook detailed
negotiations with a number of provinces to harmonize the federal
goods and services tax (GST) with the provincial sales taxes (PSTs).
As a result of these negotiations, agreements were reached with the
provinces of New Brunswick, Nova Scotia, and Newfoundland and
Labrador. As part of these agreements, the federal government
provided transitional assistance totalling $961 million for part of
the revenue shortfalls that these provinces would experience in the
first three years under the harmonized system. The government
recorded this liability of $961 million in 1995-96.
In his observations to the 1996 financial statements, the Auditor
General stated that the transitional assistance of $961 million
should be included in the deficit subsequent to 1995-96. According
to the Auditor General, not all the eligibility criteria to book the
transitional assistance were met in 1995-96.
Under accounting policies recommended by the Canadian
Institute of Chartered Accountants’ Public Sector Accounting and
Auditing Board (PSAAB), and endorsed by the government,
government transfers should be recognized in a government’s financial statements as expenditures in the period that the events giving
rise to the transfer occurred, as long as:
■
the transfer is authorized;
■
eligibility criteria, if any, have been met by the recipient; and
■
a reasonable estimate of the amount can be made.
In the view of the Auditor General, the second criterion had not
been met by the three provinces by March 31, 1996, as the detailed
agreements with the three provinces and the federal government
were not in place by March 31, 1996.
The federal government disagrees with this view. Although the
final agreements were not signed until the fall of 1996, the federal
government made an irrevocable offer to those provinces, and only
to those provinces that had indicated in a written memorandum of
understanding to the federal government before March 31, 1996
that they would harmonize their provincial sales tax with the federal
tax. Authorization to make these payments was included as part of
140
ANNEX 4
the 1996 budget legislation which received Royal Assent prior to
the closing of the financial statements for 1995-96. In addition, the
federal government is of the view that it must be held accountable
to Parliament and the Canadian public for the liabilities that it
incurs – in the year those liabilities are incurred even if the applicable legislation is not passed and/or final agreements completed
before the end of the fiscal year. The offer made to the three
provinces in 1995-96 represented such a liability and thus was
appropriately recorded in the year that it was incurred.
However, as the Auditor General noted in his observations, the
booking of this liability did not materially affect the reported deficit
outcome of $28.6 billion for 1995-96.
Accounting for Employees’ Pensions
The government is responsible for the defined benefit plans,
covering substantially all its full-time employees (including the
Public Service, Canadian Forces, Royal Canadian Mounted Police
and certain Crown corporations), as well as federally appointed
judges and Members of Parliament.
Annually, the actuarial pension obligations to these plans are
estimated by projecting benefits expected to be paid in the future
and calculating their present value. Many assumptions are required
for this process, including estimates of future inflation, interest
rates, general wage increases, workforce composition, retirement
rates and mortality rates.
The actuarial obligation was estimated at $87 billion at
March 31, 1996. This compares to the pension account liability of
$110 billion as determined by legislation. This liability is comprised
of the accrued benefit obligation of $87 billion, plus unamortized
pension adjustments of $23 billion. This liability is based on the
contributions into the plans (both employee and employer), less
benefits paid, plus the interest credited on plan balances. There are
a number of reasons for this difference, primarily relating to the
assumptions used in calculating the actuarial pension obligations.
And, as noted by the Auditor General, this difference is expected to
grow over time.
The Auditor General notes that this difference could likely be
reduced if the government changed the manner in which pension
interest is calculated. Presently, the government credits the interest
141
BUDGET PLAN
on the basis of total pension account liability, as required by
legislation. The PSAAB, however, recommends that pension interest be calculated on the basis of the actuarial obligation for accounting purposes. The Auditor General notes that if the interest was
credited on the actuarial obligation only (i.e. on the $87 billion
rather than the $110 billion), then the difference between the actuarial obligation and the liability reported on the Statement of Assets
and Liabilities would be reduced over time.
The government is concerned about this growing difference and
is amortizing it over periods ranging from 7 to 14 years, as required
by generally accepted accounting practices set out by the PSAAB.
However, the government is willing to explore measures with the
Auditor General to address this issue.
Capitalization of Physical Assets
As announced in the 1995 budget, the government intends to move
to full accrual accounting for budgeting and accounting purposes.
The accrual basis, which is widely used in the private sector in
Canada, will allow the government to report more accurately the
cost of its activities on an annual basis and thereby ensure that it is
more accountable to Parliament and the public.
The Auditor General supports this move to a better accounting
for capital assets, but recommends that it be done at the program
level and in compliance with generally accepted accounting principles when reporting them at a summary level.
During the course of 1996, the Treasury Board Secretariat issued
a proposed policy on accounting for capital assets. The PSAAB
approved, for public comment, guidelines on how federal and
provincial governments should account for and report tangible
capital assets. In his observations to the 1996 financial statements,
the Auditor General notes that he is encouraged by the government’s efforts in this area and encourages the government to follow
the PSAAB’s recommendations as they evolve.
The government will continue to work with the Auditor
General to implement accrual accounting for capital assets in a
responsible way.
142
ANNEX 4
Accrual Accounting for Tax Revenue
In the 1996 budget, the government announced its intention to
report tax revenues on an accrual basis of accounting. In his
observations, the Auditor General applauds this move but cautions
that full accrual of tax revenues represents a significant challenge
as most systems at Revenue Canada will need to be modified. He
encourages the government to take the time necessary to ensure the
integrity and auditability of that information.
The government is well aware of the challenges that accrual
accounting of tax revenues present. Revenue Canada and the
Treasury Board Secretariat are working closely with the Office of
the Auditor General to ensure that his concerns are being addressed.
Accounting for Environmental
Liabilities and Contingencies
This observation has been raised by the Auditor General in previous
years. The environmental liabilities of the government are likely
significant. The government has not yet recognized these liabilities
in its financial statements because of uncertainties in defining and
estimating them. The Auditor General is of the view that steps can
and should be taken now to provide a more complete picture of
environmental liabilities and costs in the financial statements.
The Auditor General recommends that high priority be given to
quantifying the government’s potential environmental liabilities,
and to determining when these potential liabilities become actual
liabilities. As well, the Auditor General recommends that additional
steps should be taken to improve disclosure in this area. He is particularly concerned that the government provide a general understanding of the uncertainties inherent in the process of measuring
environmental liabilities – including a discussion of the assumptions
used to calculate the liabilities and the range of sensitivities to
changes in the assumptions.
This is a very complex area. The government is in the process of
developing policies with regard to accounting for environmental
liabilities.
143
BUDGET PLAN
Investments in Crown Corporations
In the 1996 budget, the government announced its intention to
adopt the PSAAB’s recommendations that profits and losses
reported by Enterprise Crown corporations be included in the
government’s deficit or surplus for that year. This is in contrast with
the current practice of recording such investments at cost and
making appropriate adjustments through allowances. The Auditor
General notes his support for this change. The government will
introduce this change with the move to accrual accounting.
144
Annex 5
Tax Fairness
Introduction
Canadian governments provide a variety of services to citizens and
the principal source of revenue to finance them is taxes. In raising
revenue, it is essential for governments to use a tax system that is
fair which means applying the following key principles:
■ taxes must reflect the ability to pay – those with similar incomes
and in similar circumstances should pay similar taxes, but those
with higher incomes must pay more. When feasible, those with
higher incomes should pay progressively more taxes. Corporations
must also pay taxes in Canada on their profits prior to their distribution to either domestic or foreign shareholders;
those who need help get it – the tax system must recognize special
circumstances that affect the ability to pay tax and should indeed
be capable of actually providing assistance to, rather than levying
taxes on, those in greatest need; and
■
taxes that are owed are indeed paid – this involves compliance
with the tax system. The government must ensure that Canadians
clearly understand their legal obligations and that Revenue Canada
collects taxes that are owed in a fair and efficient manner both for
the government and taxpayers.
■
145
BUDGET PLAN
Maintaining tax fairness requires a constant monitoring of the
tax system. Tax measures which were appropriate when introduced may no longer be suitable due to changes in the economy,
new social priorities, aggressive tax planning and the need to
improve compliance.
A portrait of the Canadian tax system follows with a particular
focus on its many aspects that promote fairness. Highlights of the
specific tax measures this government has introduced since 1994 to
enhance fairness and information on steps taken in recent years to
improve compliance are provided next. The last section summarizes
measures in this budget to further increase the fairness of the
Canadian tax system.
The Tax System and Fairness
Overview
Total tax revenues for all levels of government in Canada stood at
36.1 per cent of gross domestic product (GDP) in 1994, the last year
for which internationally comparable data are available. This puts
Canada in the middle of the Group of Seven (G-7) large industrialized countries, but well above our major trading partners – the
Chart A5.1
Total tax revenue in G-7 countries: 1994
percentage of GDP
50
40
30
20
10
0
France
Italy
Germany
Canada
Source: OECD, Revenue Statistics, 1995.
146
United
Kingdom
Japan
United
States
ANNEX 5
United States, Japan and the United Kingdom (Chart A5.1). Taxes
as a share of GDP in Canada rose in the 1980s and 1990s
(Chart A5.2), although they peaked at 36.7 per cent in 1991 and
have declined slightly since then.
An efficient tax system should include taxes from several different sources. This ensures that the tax system has the flexibility
to meet different policy goals and that no one tax source is relied
on excessively.
In 1995-96, federal revenues totalled $130.3 billion (16.8 per cent
of GDP). Personal income tax is the most important source
of revenue for the federal government followed by employment
insurance (EI) contributions, sales taxes and corporate income tax
(Chart A5.3). These are reviewed in the rest of the chapter with the
exception of employee contributions to EI. These are linked with EI
benefits, and the impact of benefits and contributions on fairness
should thus be examined jointly. In this regard, studies show clearly
that Canada’s tax transfer system is highly progressive.
Chart A5.2
Revenues by level of government in Canada
percentage of GDP
50
40
1970s
1980s
1990s
30
20
10
0
Provincial and local
Federal
Source: National Accounts.
147
Total
BUDGET PLAN
Chart A5.3
Sources of federal revenues: 1995-96
Non-tax
revenues
5%
Other
tax revenues
9%
Personal
income tax
47%
EI
contributions
14%
Sales
taxes
13%
Corporate
income tax
12%
Direct taxes on persons
The personal income tax system is the largest source of revenue
for Canadian governments. It is also the most important tool in
the pursuit of the objective of tax fairness. There are three key
principles that drive personal income tax:
■ individuals with similar income and in similar circumstances
should pay similar amounts of tax;
special circumstances of taxpayers are recognized, so that
two Canadians with similar incomes but different ability to pay
because of particular needs, may pay different levels of taxes
depending upon their particular needs; and
■
the tax system is progressive. This means that the percentage of
income paid in taxes increases with income.
■
Comprehensive income is the basis for determining the ability to
pay tax in the Canadian tax system. Income includes wages and
salaries, self-employed earnings and capital income such as dividends, interest and capital gains. Some sources of income may
not be fully taxed in order to achieve a variety of economic and
social objectives. Certain transfers received by Canadians, such as
social assistance and the guaranteed income supplement (GIS), are
148
ANNEX 5
excluded in defining taxable income. Deductions and tax credits
are provided to recognize the influence of a number of factors on
the ability to pay taxes. In some cases, credits at a federal rate of
17 per cent are used rather than deductions to ensure that highincome Canadians do not receive higher tax relief, reinforcing
progressivity in the Canadian tax system. For example, credits are
provided to cover the costs of medical expenses, education and
disabilities. These features have the effect of eliminating tax liability for many low-income Canadians and significantly reducing the
effective tax rates for other Canadians with modest incomes.
The three tax brackets – 17 per cent, 26 per cent and 29 per cent –
and high-income surtaxes reflect the progressive nature of the
Canadian tax system. Taking into account the various deductions
and exemptions, average filers pay 18 per cent of their income in
combined federal and provincial personal income tax, compared
with a 23-per-cent average tax rate for filers with income between
$50,000 and $100,000, and a 33-per-cent tax rate for filers with
income above $250,000. Chart A5.4 shows that Canadians at
the high-income end pay substantially more taxes relative to
their incomes than low-income Canadians.
Chart A5.4
Distribution of income tax burden by income level, 1994
per cent
50
Share of total
income per
income group
40
Percentage of
the federal tax
burden per income
group – before CTB
Percentage of
the federal tax
burden per income
group – after CTB
30
20
10
0
Up to 25K
25-50K
50-100K
Individual income
149
Over 100K
BUDGET PLAN
The income tax system also has two refundable tax credits –
the goods and services tax (GST) credit and the Child Tax Benefit
(CTB) which includes the Working Income Supplement (WIS)
directed to low-income working families – which reinforce progressivity by reducing or eliminating the tax burden on low- and middleincome Canadians. The CTB recognizes that the costs of raising
children reduce the ability of modest- and middle-income families
to pay tax. These credits are paid to eligible taxfilers even where
there is no income tax liability. The WIS reduces work disincentives
by providing an income supplement to families where a parent
leaves social assistance to find employment. This offsets part of the
employment-related expenses and the loss of social assistance benefits they incur. This means that the lowest-income Canadians actually receive assistance from the income tax system rather than
paying taxes.
Why do some high-income individuals
not pay any taxes at all?
High-income earners pay a large proportion of federal taxes. For example, in 1994, those with incomes above $100,000 (about 2 per cent
of filers) received 15 per cent of total income, but paid 21 per cent of
total federal tax.
A few high-income earners may not pay income tax in a particular
year by claiming legitimate deductions and credits. In 1994, for example, 290 individuals out of 54,000 taxfilers with incomes above
$250,000 did not pay tax in that year. Deductions and credits which
are available to all taxpayers may result in the elimination of tax liability for some individuals. For example, a taxfiler earning a large income
from one source may incur a loss from an unincorporated business,
give a large charitable donation and save for his retirement, thus ending
up paying no tax in a particular year.
It should be noted, however, that while an individual may be
non-taxable in one year, this is not generally the case in preceding and
subsequent years as non-taxability typically results from an unusual mix
of circumstances.
In order to ensure that deductions and credits are not used abusively
to eliminate tax liability, the alternative minimum tax (AMT) disallows
some deductions and credits in the calculation of the tax. More than
27,000 taxpayers were subject to the AMT in 1994.
150
ANNEX 5
How much tax are low-income Canadians paying?
In 1994, individuals with incomes below $25,000 represented about
60 per cent of all taxfilers, received about 25 per cent of total income
and paid about 4 per cent of total federal tax, when Child Tax Benefit
(CTB) payments are taken into account. In fact, many low-income
Canadians actually receive money from the government through the tax
system rather than paying taxes. About $8 billion in federal assistance
to low- and modest-income households is provided through the two
federal refundable tax credits – the CTB ($5.1 billion) and the GST credit
($2.9 billion). To provide additional help to low-income working parents,
the 1996 budget announced a $250 million enrichment of the WIS, a
component of the CTB, to take effect in two steps in 1997 and 1998.
Are family trusts being used to avoid the payment
of taxes by the wealthy?
No. Family trusts are arrangements used to transfer property (for example, a family business or real property) to one or more members while
trustees maintain control of the property. Trust arrangements are often
used where beneficiaries are unable to manage the property for themselves, for example, because they are minors or disabled.
To ensure that all trust income is taxed appropriately, the 1995
budget eliminated an income-splitting opportunity by announcing the
end of a measure that allowed undistributed trust income to be taxed
in the hands of beneficiaries, except in the case of beneficiaries who
are mentally or physically impaired. The 1995 budget also cancelled
provisions which allowed trusts to defer paying taxes on capital gains
for long periods of time. As a result, tax advantages associated with
family trusts have been eliminated.
The income of trusts paid out to beneficiaries is taxed in their hands.
The undistributed income of trusts, except for trusts created under an
individual’s will on death (testamentary), is taxed at the highest federal
income tax rate of 29 per cent (provincial taxes are on top), rather than
at the graduated tax rates at which individuals are taxed. This means
that non-testamentary trusts pay a higher proportion of their incomes
in taxes than do individual taxpayers.
151
BUDGET PLAN
Why does the federal government not have
a wealth tax to enhance fairness?
Even though Canada does not have either an annual net wealth tax or
a wealth transfer tax, taxes on wealth holders (e.g., municipal property
taxes, corporate capital taxes) were higher as a per cent of GDP than
in any other OECD country in 1994.
High-income taxpayers already pay substantial taxes. In 1994,
individuals with over $100,000 in income represented just over
2 per cent of tax filers, received 15 per cent of total income, but paid
21 per cent of income taxes.
To prevent the tax-free transfer of income between generations, the
government also taxes all unrealized capital gains at death, except
when they are transferred to a spouse.
A wealth tax would simply add to the already high effective tax rates
on investment returns.
Since 1994, the government has sought to ensure high-income
earners shoulder their fair share of deficit reduction. Measures
introduced include:
eliminating the $100,000 lifetime capital gains exemption;
eliminating inappropriate tax advantages that flow from establishing
family trusts;
■ reducing registered pension plan and registered retirement savings
plan limits; and
■ restricting inappropriate opportunities to defer taxes.
■
■
Sales tax
The second major type of tax on individuals is sales tax. This tax is
linked to the amount of consumption, in contrast to income tax
which is linked to the amount of income. As argued above, such
diversification of the tax base is important for a number of reasons.
With respect to the GST, tax fairness is accomplished primarily
through the income-tested refundable GST credit, worth
$2.8 billion in 1994. By providing direct payments to families and
individuals at low- and modest-income levels, and reducing these
payments as income rises, the refundable GST credit helps offset the
sales tax burden of lower-income families and individuals, thereby
ensuring that sales tax burdens are sensitive to differences in income
and family type.
152
ANNEX 5
Another instrument for addressing fairness in sales tax burdens
is to exempt from taxation some commodities that are more heavily
consumed by low-income individuals. Key examples are the taxfree treatment of basic groceries and prescription drugs, and the
exemption of residential rents from the GST.
The GST also includes a system for rebating a portion of tax paid
by municipalities, universities, schools and hospitals, as well as
qualifying non-profit organizations and charities. GST rebates to
these sectors help ensure that the cost of the important public
services they provide is not unduly affected by sales taxes.
The federal government has recently expanded these rebates to
effectively lift all the GST from books purchased by schools, universities, libraries and other literacy-promoting organizations. The
100-per-cent GST rebate on books recognizes the instrumental role
played by these institutions in helping individuals gain access to the
tools they need to learn to read or pursue their education.
Does the GST impose an unfair burden
on low-income Canadians?
No. The refundable low-income GST credit, worth $2.8 billion in 1994,
significantly reduces the GST burden faced by low-income Canadians.
For example, in 1994, over six million families and low-income singles
with incomes below $20,000 received, on average, $320 under the
refundable GST credit. Furthermore, the tax-free treatment of major
consumption items such as basic groceries and prescription drugs
ensures that these expenditures are not taxed at all, while the exemption of residential rents provides further sales tax relief. These
three areas of expenditures are most important for lowincome Canadians.
Chart A5.5 combines the incidence of income and sales taxes to
determine the extent to which the federal tax system is progressive
for Canadian families. Chart A5.5 confirms the conclusion drawn
from Chart A5.4 on income tax alone: Canadian families at the
high-income end pay considerably more taxes relative to their
incomes, which is in accordance with the principles of fair taxation.
153
BUDGET PLAN
Chart A5.5
Incidence of federal income and sales tax
by family income level, 1996
per cent
30
25
20
15
10
5
0
0 to 25K
25-50K
50-75K
Family income
Share of total income
per income group
75-100K
100K +
Percentage of the federal tax
burden per income group
(net of refundable tax credits)
Taxes on business
A key element of a fair tax system is that corporations should pay
their fair share of tax. Some have argued that corporations should
not pay taxes at all since, sooner or later, corporate income ends up
in the hands of individuals and is taxed under personal income tax.
This view is inaccurate and corporations should pay tax for three
key reasons. First, businesses benefit from public services in many
of the same ways that individuals do. Second, in the absence of tax
on corporations, it would be possible for individuals to postpone
tax on income or capital gains indefinitely by placing incomeproducing assets in a corporation and thereby having the income
or gains accrue within the corporation. Corporate income tax
addresses this problem by imposing a tax on profits and capital
gains prior to their distribution to individuals in the form of dividends.
Third, corporate taxes allow the taxation of income accruing to
foreigners and ensure that foreign-based corporations operating in
Canada pay tax on income earned in Canada.
154
ANNEX 5
Capital taxes are used by both federal and provincial governments to supplement income tax revenues and to ensure that corporations pay for the public services they use. For example, the federal
large corporation tax (LCT) ensures that all large corporations pay
tax. Similarly, provincial capital taxes are an important source of
revenue in some provinces. Capital taxes can also serve as a form
of minimum tax as is the case for the federal capital tax on financial institutions where large banks, trusts and life insurance companies have to pay a minimum amount of tax based on capital which
can then be offset by federal income tax. Overall, these capital taxes
generated $1.5 billion in federal revenues in 1995.
Corporations pay a variety of other taxes and contributions in
addition to income and capital taxes. These include payroll taxes
(in respect of employers’ contributions to EI, Canada/Quebec
Pension Plans (CPP/QPP) and Workers’ Compensation), property
taxes, and indirect taxes such as sales and excise taxes. Excluding
indirect taxes – for example, fuel taxes – corporations paid about
$57 billion in total taxes and levies to federal, provincial and municipal governments in 1995. Chart A5.6 illustrates the breakdown of
net earnings by corporations and Chart A5.7 illustrates the breakdown of the federal component of corporate taxes. Over the last
three decades, corporations have paid an average of 36 per cent of
their pre-tax profits in income and capital tax.
Corporate income tax receipts vary cyclically with the level of
profits in the economy. Over the last few years, corporate income
taxes have experienced the fastest rate of growth of all federal
revenue sources, reflecting their sensitivity to stronger economic
growth experienced over this period. Between 1988-89 and
1991-92, federal corporate income and capital taxes declined from
$12 billion to less than $10 billion. They have since risen to
$16 billion in 1995-96.
155
BUDGET PLAN
Chart A5.6
Corporate earnings ... who gets what – 1995
CPP/QPP
contributions
$4.7B
Net earnings
after tax
$43.8B
Federal
$21.3B
Provincial
$17.3B
Municipal
$14.3B
Chart A5.7
Corporate taxes: federal mix – 1995
Large
corporations tax
and Part VI
$1.5B
Income tax
$12.4B
EI premiums
$7.4B
156
ANNEX 5
Has the tax burden on corporations
been reduced in recent years?
Comparison of the ratio of corporate income taxes to total government
revenues or to GDP can create the misperception that the total tax
burden on corporations is falling. The major reason these ratios fell,
particularly in the early 1990s, is that corporate profits have fallen as
a percentage of Canada’s GDP. In fact, the corporate income and
capital tax burden has not declined. It has ranged, on average, between
32 to 41 per cent of pre-tax earnings since 1965.
In addition to corporate income and capital taxes, businesses pay
a wide variety of other taxes such as employers’ payroll taxes and property taxes. All the direct taxes paid by corporations amounted to more
than $57 billion in 1995. Over the years, payroll taxes paid by employers for EI, CPP/QPP, Workers’ Compensation and other provincial
payroll taxes increased significantly from 1.4 per cent of total payroll in
1961 to 7.8 per cent in 1993.
Corporate income and capital taxes
as a per cent of pre-tax profits: 1965-95
per cent
50
45
40
35
30
25
Yearly data
20
5-year moving average
15
10
5
0
1965
1970
1976
1981
157
1986
1991
1995
BUDGET PLAN
Are payroll taxes too high in Canada?
The total payroll tax burden in Canada is lower than in other countries,
including the U.S. Of the G-7 countries, Canada and the U.K. have the
lowest level of payroll taxes as a proportion of GDP. Total payroll taxes
paid by employers and employees are lower in Canada than in the U.S.
at all levels of employee income. This could be an important factor in
a firm’s decision to locate its production facilities in Canada or the U.S.
Most studies show that it is not the level of these taxes that has an
adverse effect on job creation but rather the increase in the payroll tax
rate, particularly during a recession. The government has lowered the
tax rate on employees under EI from $3.07 to $2.90 per $100 of their
maximum insurable earnings (MIE) and from $4.30 to $4.06 for employers. The decline in MIE itself has also lowered the payroll tax burden.
The decline in the payroll tax has not been more rapid because of the
constraints imposed by the fiscal situation.
In addition, almost 900,000 firms in Canada will be eligible for
EI premium relief under the New Hires Program. This means almost all
eligible firms will pay virtually no premiums for new employees hired in
1997, and will benefit from a 25-per-cent reduction in premiums for
new employees the following year. The maximum benefit per firm will
be $10,000 in each year.
Payroll taxes as a per cent of GDP
G-7 countries, 1994
per cent
25
20
Employer
Employee
15
10
5
0
France
Germany
Italy
Japan
158
United
States
United
Kingdom
Canada
ANNEX 5
Measures to Enhance Fairness
in the Last Three Budgets
The government has undertaken a large number of actions to
improve tax fairness in the last three budgets. Table A5.1 provides
a convenient summary of the most important of these measures. All
major tax areas were changed including personal income tax, business income tax and sales tax. In all, Table A5.1 lists 35 major
actions. In addition to these changes, the government has made or
announced a number of other changes to the tax system since 1994
in budgets, technical bills and press releases to achieve a variety of
objectives. A full listing of these other tax changes is provided in the
Appendix. Many of these changes, although not major, also
improved the fairness of the tax system.
The focus on the personal income tax side has been twofold: to
ensure that those Canadians who are better off pay their fair share
of taxes; and to provide additional tax assistance to those
Canadians who can least afford to pay taxes. Key steps on the
former included the elimination of the $100,000 lifetime capital
gains exemption (LCGE), elimination of tax advantages available
through family trusts, and the expansion of the base for the alternative minimum tax (AMT). On the latter, the main areas of action
were greater tax assistance for education, children, charities and
persons with disabilities.
On the business income tax side, the main objective has been to
close down unintended tax loopholes and to ensure that corporations make a reasonable contribution to help deal with the federal
government’s fiscal problem. Major steps included tightening in a
number of areas, including the reduction of possibilities to defer tax,
and increases to the LCT and the corporate surtax. In total, these
measures are now generating more than $1 billion in additional tax
revenue each year.
New rules on taxpayer migration were recently announced.
These rules will ensure that taxes on gains accrued in Canada are
indeed paid to Canada.
Canada is also participating in initiatives of the Organization
for Economic Co-operation and Development (OECD) to devise
co-ordinated responses to international tax avoidance through
tax havens.
159
BUDGET PLAN
Modest but important steps were also taken in the sales tax field
to reduce the tax burden on the disabled, the sick and charitable
and public sector organizations, thus eliminating the need to pay
sales tax on many essential items of purchase. The government has
also provided a 100-per-cent GST rebate on all books purchased by
public libraries, schools, universities, public colleges, municipalities
and qualifying charities and non-profit organizations.
Table A5.1
Measures to enhance the fairness of the tax system since 1994
(year of introduction shown in parentheses)
Ability to pay: personal income tax
• eliminated the $100,000 lifetime capital gains exemption (LCGE). (1994)
• extended the base for the alternative minimum tax (AMT). (1994)
• eliminated tax advantages available through trusts. (1995)
• restricted the use of tax shelters. (1994)
• introduced new rules on taxpayer migration to ensure that gains that
accrue while a taxpayer is a resident of Canada are subject to Canadian
tax. (1996)
• extended the taxation of employer-paid life insurance premiums to the
first $25,000 of coverage. (1994)
• reduced the overcontribution allowance for registered retirement savings
plans (RRSPs) from $8,000 to $2,000. (1995)
• reduced the RRSP and money purchase registered pension plan (RPP)
dollar limits to $13,500 in 1996 and froze them through 2003 and 2002
respectively. (1995, 1996)
• froze the maximum pension limit for defined benefit RPPs at
$1,722 per year of service until 2005 (only affecting individuals
earning over $75,000). (1996)
• eliminated the retiring allowance rollovers for years of service after 1995.
(1995)
• introduced income-testing of age credit. (1994)
• reduced the maximum age limit for deferring tax on savings in RRSPs
and RPPs from 71 to 69. (1996)
160
ANNEX 5
Table A5.1 (cont’d)
Measures to enhance the fairness of the tax system since 1994
(year of introduction shown in parentheses)
Ability to pay: business income tax
• increased the large corporation tax (LCT) and corporate surtax. (1995)
• introduced temporary surcharge on banks and other large deposittaking institutions. (1995)
• eliminated the small business deduction for large private corporations.
(1994)
• reduced the deduction for business meals and entertainment
expenses from 80 to 50 per cent to better reflect the
personal consumption element of these expenditures. (1994)
• increased the rate of tax on corporate dividends received by private
investment corporations. (1994)
• taken steps to ensure that the income of financial institutions is
measured appropriately for tax purposes. (1994)
• eliminated the deferral of tax on unincorporated business
income. (1995)
• eliminated the deferral advantage for investment income earned by
private holding companies. (1995)
Special help for those in need: personal income tax
• introduced new tax treatment of child support payments with payments
non-deductible for the payer and non-taxable for the recipient. (1996)
• announced two-step enrichment of the Working Income Supplement
(WIS) of the Child Tax Benefit (CTB) of $250 million. (1996)
• proposed new Seniors Benefit, which is more progressive, fully
indexed and tax-free, will replace old age security (OAS) and the
guaranteed income supplement (GIS) in 2001. (1996)
• replaced the seven-year limit by an unlimited carry-forward of unused
RRSP room. (1996)
• enriched the infirm-dependant tax credit. (1996)
• lowered the threshold at which charitable donations begin to earn the
29-per-cent tax credit from $250 to $200. (1994)
• increased the limits on charitable donations eligible for tax credits from
20 to 50 per cent of net income, and to 100 per cent of net income in
the year of death and the preceding year. (1996)
• increased the education amount from $80 to $100 per month. (1996)
161
BUDGET PLAN
Table A5.1 (cont’d)
Measures to enhance the fairness of the tax system since 1994
(year of introduction shown in parentheses)
Special help for those in need: personal income tax (cont’d)
• raised the annual limit on the transfer of the tuition fee and education
amounts to those who support students from $4000 to $5000. (1996)
• increased the annual limit on contributions to registered education
savings plans (RESPs) from $1500 to $2000, and the lifetime limit
from $31,500 to $42,000. (1996)
• broadened eligibility for the child care expense deduction to assist
parents who undertake education or retraining. (1996)
Special help for those in need: sales tax
• proposed expanding zero-rating to persons with disability to purchase
orthopaedic and orthotic devices. (1996)
• proposed expanding zero-rating of hospital beds to all health care
facilities, including long-term care facilities. (1996)
• proposed most charitable and public organizations raise funds without
collecting and remitting GST on sales. (1996)
• proposed 100-per-cent GST rebate on books purchased by public
libraries, educational institutions and other specified bodies. (1996)
Taxes Owed are Indeed Paid:
Measures in Recent Years
Canada’s tax system is based on the principle of self-assessment in
which Canadians assess their own taxes by filing tax returns with
Revenue Canada, pay any taxes due and, of course, receive as a
refund any funds due to them.
Revenue Canada’s strategy to obtain compliance with the tax
laws is based on voluntary compliance. Compliance is achieved
through a balance of assistance, education and service activities
along with responsible enforcement.
Revenue Canada has taken a number of initiatives to simplify tax
administration, including outreach programs, improved telephone
information systems and ongoing liaison with special taxfiler
groups such as seniors and industry associations. By facilitating
compliance, these initiatives help recover tax revenues. Details of
these measures can be found in Table A5.2.
162
ANNEX 5
The system works well. The vast majority of Canadians comply
fully with the law. However, as in any tax system, there are instances
where taxes are not paid or not paid on time.
Tax law is complex and every effort must be made to simplify the
system for those who may not have access to professional advice.
There may be those who have experienced circumstances beyond
their control preventing them from paying on time. Others may
have no financial means to pay due to a pending bankruptcy. Also,
there are those who avoid or evade taxes.
Different actions are required to recover taxes in these different
situations. Table A5.2 also provides a summary of the most recent
actions taken in this area. Chart A5.8 shows that Revenue Canada’s
verification and enforcement activities resulted in $4.8 billion in
additional reassessments in 1995-96, a 25-per-cent increase over
four years.
Tax evasion is the most serious aspect of non-compliance. It is
the deliberate action of illegally hiding or underreporting income or
inflating deductions or expenses.
Chart A5.8
Results of enforcement and
verification programs in 1995-96
International
program
$.1B
Processing, review
and matching
$.3B
Other
programs
$.6B
Identification
of non-filers
$.5B
Tax
avoidance
program
$.4B
Large business
audit program
$1.7B
Small- and
medium-sized
audit program
$1.2B
163
BUDGET PLAN
Table A5.2
Measures to enhance the effectiveness of tax collection
Simplifying tax administration for Canadians
• strengthened outreach and education programs.
• enhanced easy-to-understand automatic telephone
information systems.
• provide advice to taxpayers who need it.
• meet with special taxfiler groups such as senior citizens and immigrants
to help them comply.
Simplifying tax administration for business
• established a single Business Number for streamlining registration for
GST remitters, employers, corporations and importers/exporters.
• new “Business Window” initiative to provide one-stop service, especially
beneficial for small businesses.
• simplified payroll reporting for small businesses.
• reduced compliance costs for small- and medium-sized businesses
by co-ordinating GST, income tax and excise tax audits.
• streamlined procedures to simplify and expedite customs clearance.
Improved enforcement
• implemented a new approach to large business audits including
audit protocol.
• reinforced measures to target the underground economy.
• earlier identification of abusive tax avoidance and tax shelter schemes.
• continued improvement of sophisticated risk models to identify areas
of high risk and a sector approach to compliance for small- and
medium-sized businesses.
• forgiveness of penalties on voluntary tax disclosures to encourage
taxpayers to comply voluntarily.
• agreements with many countries for exchange of information to help
deal with tax havens.
• new rules requiring residents of Canada to file an information return
when they own foreign assets in excess of $100,000 in value.
164
ANNEX 5
Revenue Canada, together with provincial authorities, have
focused on a number of sectors of the economy where the risk of
tax evasion is high, including construction, jewellery sales, auto
repairs, home repairs, hospitality and other services. Sector-specific
strategies have been developed such as the new reporting system
for the construction industry. Revenue Canada also deals
with tax evasion through criminal investigation programs. In
1995-96, special investigations reviewed over 28,000 referrals from
external sources.
The government implemented an anti-smuggling initiative which
has resulted in the seizure of contraband, such as drugs, tobacco,
alcohol and firearms valued at more than $2 billion.
A particular area of government focus has been international tax
havens. Tax recoveries on international transactions have tripled
since 1992-93. Resources for international audit and verification
will be tripled by 1998 compared to 1993 and Canada will
strengthen its exchange of information with its tax treaty partners
to ensure full reporting of foreign income.
New Budget Measures
This budget continues the task of improving fairness by providing
additional tax assistance in a number of areas of priority:
■ assisting students to defray the costs of education, helping
workers to enhance their skills, and helping parents save for their
children’s education;
■ helping children by providing significant additional funds towards
an enriched and simplified National Child Benefit System as a step
towards a more level playing field between families receiving social
assistance and low-income working families;
■ assisting people with disabilities to participate more fully in
society by increasing tax assistance for disability-related costs and
reducing disincentives to work;
■ helping charities to raise donations by enhancing tax incentives
to donors; and
165
BUDGET PLAN
■ updating Canadian rules on transfer pricing to bring Canadian
law and practices in line with the evolving international standard
to improve taxpayer compliance and to facilitate audits by Revenue
Canada. These changes will preserve the fairness of Canada’s tax
system by ensuring that profits earned by taxpayers in connection
with international transactions with non-resident related parties are
properly measured and taxed in Canada.
Table A5.3 summarizes the new measures proposed in
this budget.
Table A5.3
New budget measures to enhance the fairness of the tax system
Higher and more flexible tax assistance to students
• double the basis for the education credit over two years to
$200 per month.
• make ancillary fees eligible for the tuition credit.
• allow a carry-forward of unused tuition and education credits.
• increase annual contribution limits for registered education savings
plans (RESPs) from $2,000 to $4,000.
• allow transfers of RESP funds to a registered retirement savings
plan (RRSP) or to the contributor.
Move towards a National Child Benefit System
• proposing a $6 billion Canada Child Tax Benefit by simplifying and
enriching the current Child Tax Benefit, starting July 1998.
• enrichment of the Working Income Supplement (WIS) in July 1997
from the $125 million announced in the 1996 budget to $195 million
and restructuring from a per-family to a per-child basis.
Additional tax assistance for people with disabilities
• broaden the medical expense tax credit.
• remove the limit on the attendant care deduction.
• introduce a refundable medical expense credit for earners.
• broaden the definition of preferred beneficiary for trusts benefiting
people with disabilities.
166
ANNEX 5
Table A5.3 (cont’d)
New budget measures to enhance the fairness of the tax system
Increase tax assistance for charitable donations
• reduce the inclusion rate on capital gains arising from the donation
of publicly listed securities from 75 to 37.5 per cent.
• change the income limit for donations to 75 per cent.
• include 25 per cent of capital cost allowance (CCA) recapture in the net
income limit.
• introduce a new method of valuation for easements of ecologically
sensitive lands.
• increase resources for Revenue Canada to enhance information
and compliance.
Transfer pricing
• update Canadian rules.
• require adequate documentation of transactions and introduce new
penalty provisions related to Revenue Canada reassessments.
• increased resources for Revenue Canada for transfer pricing audits.
167
BUDGET PLAN
Appendix
Other changes to personal income
tax expenditures
1994
■
continued Home Buyers’ Plan for first-time home buyers only.
1995
exempted donations of ecologically sensitive land from the
20-per-cent limit.
■
■ required non-resident recipients of OAS benefits to report their
world income for purposes of the OAS high-income clawback.
■
increased the rate of interest charged on income tax arrears.
■ eliminated double claims of personal credits in year of personal
bankruptcy.
■ expanded taxation of non-residents’ gains on Canadian
capital property.
1996
■ reduced the tax credit in respect of LSVCCs as well as the
maximum purchase eligible for the credit. Increased the minimum
holding period with respect to the credit. Denied eligibility for the
credit for three years following the redemption of an LSVCC share.
■ eliminated the administrative fee deduction for registered
retirement income funds (RRIFs) and RRSPs.
■ limited the withholding tax relief available to non-resident
recipients of Canadian pension income.
■
tightened rules governing the overseas employment tax credit.
168
ANNEX 5
Recent changes to corporate income
tax expenditures
1994
■ introduced a temporary 40-per-cent surcharge on tobacco manufacturing profits.
■ lowered tax rate for manufacturing and processing – one
percentage point reduction in the tax rate from 22 to 21 per cent.
■ phased out access to refundable scientific research and
experimental development (SR&ED) tax credits for larger private
corporations having taxable capital between $10 and $15 million.
eliminated the 30-per-cent special investment tax credit and
the 30-per-cent Atlantic SR&ED credit.
■
■ reduced the Atlantic Canada investment tax credit from 15 to
10 per cent.
eliminated the accelerated depreciation for air and water
pollution abatement equipment effective 1999.
■
■ reduced the accelerated depreciation rate for energy
conservation equipment from 50 per cent straight-line to 30 per cent
declining balance.
■
tightened the rules applicable on forgiveness of debt.
■ eliminated the use of “purchase butterflies” as a method to avoid
tax on dispositions of appreciated corporate property.
increased the refundable tax on dividends received by private
corporations (Part IV tax).
■
■ eliminated
the special
SR&ED performers.
preference
for
sole-purpose
constrained certain tax shelter schemes that had been developed
utilizing convertible debt and negative adjusted cost bases.
■
required property and casualty insurers to fully discount
unpaid claims.
■
modified the basis upon which insurance companies may claim
reserves for income tax purposes.
■
introduced a rule providing a deadline for making
SR&ED claims.
■
eliminated tax benefits for limited recourse financings, applied
the minimum tax to all tax shelter deductions, and increased penalties for selling unregistered tax shelters (December 1, 1994 release).
■
169
BUDGET PLAN
1995
■ replaced film tax shelter mechanism with an investment
tax credit.
tightened the rules relating to non-arm’s-length contract SR&ED,
non-arm’s-length provision of goods and services for SR&ED and
certain third-party payments.
■
■ announced rules strengthening the ability of Revenue Canada to
obtain information.
announced rules preventing the avoidance of source deduction
remittances.
■
■ eliminated the preferred beneficiary election for most beneficiaries.
improved rules preventing artificial or premature recognition of
tax losses.
■
introduced rules preventing capital costs being converted into
up-front expenses by prepaying rent.
■
expanded taxation of non-residents’ gains on Canadian
capital property.
■
1996
■ tightened the resource allowance rules to provide a more
consistent and stable resource allowance calculation and eliminated
uncertainties related to court decisions.
■ tightened flow-through shares (FTS) to better focus the
incentive – ensured that FTS are used to finance the more risky
expenditures such as exploration and development costs and not
property-related costs.
■ reduced the threshold levels and introduced a new restriction
on reclassifications of expenses by oil and gas companies using
FTS to better target this incentive to junior companies in start-up
situations.
■ excluded off-the-shelf seismic costs as eligible costs for FTS.
Modified rules for accelerated CCA for mining activities – companies can earn accelerated CCA when they undertake large capital
expenditures (i.e. above 5 per cent of gross revenues). In addition,
oil sands projects using in situ extraction processes will also be
eligible for accelerated allowances.
170
ANNEX 5
■ enhanced incentives to invest in renewable energy – relaxed the
specified energy property rules and expanded eligibility for FTS.
extended the capital tax surcharge on large deposit-taking
institutions by one year.
■
■ announced pending changes to the taxation of life insurance
companies and a three-year extension of additional capital tax in
life insurance to take effect in 1996.
limited amount of wages and salaries eligible for SR&ED tax
credits for specified employees.
■
■ terminated transitional provision for certain building rental
payments in respect of SR&ED.
determined the ordinary tax rate of non-residents for
withholding tax purposes by reference to the greater of Canadian
and worldwide income.
■
■
repealed joint exploration corporation rules.
tax shelter rules concerning mismatched expenses and revenues
announced November 18, 1996.
■
Recent changes to GST
■ measures to simplify the operation of the tax for many
businesses, charities and non-profit organizations.
■ measures to improve the fairness of the GST for businesses and
consumers.
■
clarifications and measures to ease compliance.
171
Annex 6
Tax Measures:
Supplementary
Information and
Notices of Ways
and Means Motions
173
Table of Contents
Overview ........................................................................................ 177
Tax Assistance for Education and Training ................................... 179
Helping students and those who support them........................... 179
Encouraging savings for education through
registered education savings plans (RESPs) ............................... 180
Helping Small Businesses ............................................................. 183
Quarterly remittance of withholding amounts............................ 183
Labour-sponsored venture capital corporations (LSVCCs).......... 184
Improving the Retirement Income System ................................... 186
Pension adjustment reversal (PAR) ............................................. 186
CPP/QPP lump sum payments.................................................. 191
Towards a National Child Benefit System .................................. 192
Tax Measures for Canadians With Disabilities ............................. 193
Broadening the medical expense tax credit .................................
Eliminating the $5,000 limit
on the attendant care deduction................................................
Disability tax credit certification .................................................
Trusts and people with disabilities...............................................
Changes to the Customs Tariff ......................................................
Refundable medical expense supplement for earners..................
193
194
194
194
195
195
Measures to Enhance Tax Assistance to Charitable Giving ......... 196
Recent budget changes to enhance tax assistance ....................... 196
175
Business Tax Measures................................................................. 201
Review of transfer pricing provisions.......................................... 201
Restriction on claiming investment tax credits ........................... 204
Extension of the temporary capital tax surcharge
on large deposit-taking institutions ........................................... 205
Environmental Initiatives ............................................................... 205
Environmental trusts................................................................... 205
Conserving Canadian resources
and sustainable development..................................................... 208
Energy efficiency investments..................................................... 211
Sales and Excise Tax Measures.................................................... 215
Visitors’ Rebate Program............................................................ 215
Amendment to the Excise Tax Act
Concerning Measurement of Fuel Volumes ................................ 216
Tax rebate on aviation fuel.......................................................... 216
Tobacco tax changes..................................................................... 217
Notice of Ways and Means Motion
to Amend the Income Tax Act .................................................... 218
Child Tax Benefit – Working Income Supplement......................
Tuition fee and education tax credits ..........................................
Registered education savings plans (RESPs) ...............................
Medical expense tax credit .........................................................
Refundable medical expense supplement ...................................
Disability tax credit.....................................................................
Attendant care expenses..............................................................
Preferred beneficiary election .....................................................
CPP/QPP lump sum payments..................................................
Pension adjustment reversal ........................................................
Charitable donations ..................................................................
Investment tax credits .................................................................
Environmental trusts...................................................................
Labour-sponsored venture capital corporations (LSVCCs)..........
Part VI surtax..............................................................................
218
218
219
220
221
222
222
222
223
223
223
226
226
226
228
Notice of Ways and Means Motion
to Amend the Excise Tax Act...................................................... 229
Notice of Ways and Means Motion
to Amend the Customs Tariff ...................................................... 230
176
Tax Measures:
Supplementary
Information
Overview
This budget proposes a number of measures to provide selective
increases to tax assistance for those most in need. The government
is targeting additional tax relief to children in low-income families,
to students and their parents, to persons with disabilities and to help
charitable organizations in raising funds. There are also measures
to help small businesses and improve the retirement income system.
The budget also proposes a number of measures designed to
improve the effectiveness of the business income tax system and
promote fairness. To help maintain revenues, the budget proposes
extending the temporary tax on the largest deposit-taking
institutions, and a number of other measures to prevent the loss of
corporate and excise tax revenues.
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BUDGET PLAN
Table A6.1
Federal revenue impact of new tax measures
1997-98 1998-99
1999-2000
(millions of dollars)
Personal income tax measures
Enhance tax assistance to
education and training
Increase education credit
-5
Make ancillary fees eligible for the tuition credit
-5
Allow a carry-forward of unused tuition and
education credits
–
Increase RESP annual limit to $4,000 and
allow transfers to RRSPs or to contributor
-10
Helping small businesses
Quarterly remittance of withholdings
-180
Enhancing effectiveness of LSVCCs
–
Improving the retirement income system
PAR: restoring lost RRSP room
–
Averaging of CPP/QPP lump sum
payments
small
Towards a National Child Benefit System
Enrichment and restructuring of the
-50
Child Tax Benefit
Measures to assist Canadians with disabilities
Broadening the medical expense tax credit;
removing limit on attendant care deduction
-5
Refundable medical expense supplement
-5
for earners
Measures to enhance tax assistance
to charitable giving
Reduce the inclusion rate on capital gains
arising from the donation of publicly listed
securities from 75% to 37.5%
-20
75% net income limit for all donations;
include 25% of CCA recapture in the
–
net income limit
New method of valuation for easements
of ecologically sensitive lands
–
Increased resources for Revenue Canada
-5
Subtotal
-285
Business taxation measures
Review of transfer pricing rules
Restricting investment tax credit claims
Extension of temporary tax on large
deposit-taking institutions
Environmental initiatives
Sales and excise tax measures
Clarify measurement of fuel volumes
Total
178
-45
-30
-80
-30
-10
-25
-25
-40
-5
–
-5
–
–
–
small
small
-470
-600
-30
-30
-30
-40
-90
-90
-5
-5
–
-5
-745
–
-5
-950
prevents revenue losses
prevents revenue losses
25
–
45
-25
–
-25
–
-260
–
-725
–
-975
ANNEX 6
Tax assistance for education and training
Increasingly, achieving higher education and continuously updating
skills are essential to securing a prosperous future for Canadians.
Tax assistance to students and those supporting them helps
Canadians meet these challenges. The tax system also encourages
parents to save for their children’s education.
Helping students and those who support them
At present, the following tax relief is available to students
in Canada:
■
a credit in respect of tuition fees;
■ an education credit based on an amount of $100 (increased from
$80 for 1996) for each month in which an individual is enrolled as
a full-time student; and
an exemption of $500 for scholarship, fellowship or
bursary income.
■
In order to provide additional assistance to students to help
defray the costs of higher education, the budget proposes to double
the education amount, from $100 to $200 per month of full-time
study. The education amount will rise to $150 in 1997 and reach
$200 for 1998 and subsequent years. This significant increase in the
education credit since 1995 will benefit roughly one million
students.
Fees eligible for the tuition credit include the basic costs of
instruction as well as charges, for example, for library or laboratory facilities and mandatory computer service fees. Increasingly,
universities are also relying on ancillary fees which are imposed on
all students. These include fees for health services, athletics and various other services. The budget proposes to extend the tuition tax
credit to cover mandatory ancillary fees imposed by universities,
colleges and other post-secondary institutions to cover the cost of
education. This extension will not apply to student association fees,
ancillary fees at institutions certified by the Minister of Human
Resources Development and, as with the current tuition credit, will
not cover goods of enduring value that are retained by students.
At present, if a student has insufficient income to take full advantage of the education or tuition amounts, the unused portion may
be transferred to a supporting spouse, parent or grandparent. The
sum of the amounts transferred and used by the student is subject
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BUDGET PLAN
to a limit of $5,000 (increased from $4,000 for 1996). This transfer
recognizes that some students are not in a taxable position and are
supported by their family.
While the tuition and education credits may only be claimed in
the taxation year to which they relate, most students are able to use
them fully or transfer them to a supporting individual. However,
some students are unable to use these credits fully, either because
they have low incomes, relatively high tuition fees, no supporting
individual, or supporting individuals who themselves have low
incomes in the year. In the case of workers taking upgrading courses
or returning to studies after a period in the workforce, there may
be no supporting individual with sufficient taxable income in that
year to benefit from a transfer. To permit all students to take full
advantage of the tuition and education credits, the budget proposes
to allow the student to carry forward these credits indefinitely until
they have sufficient tax liability to make use of them.
The carry-forward will apply with respect to tuition and education amounts earned in 1997 and subsequent taxation years. Any
amounts not used by the student, and not transferred to a supporting individual, will be automatically carried forward for future use
by the student. The unused amounts transferred to a supporting
individual cannot exceed the total tuition and education amounts
arising in that year, and will continue to be limited to $5,000 per
year. However, amounts carried forward will be available for the
student’s own use in any subsequent year. Students will be required
to provide the necessary information to establish a carry-forward.
Revenue Canada will keep track of a student’s unused amounts and
report them on the student’s notice of assessment.
These measures are effective starting with the 1997 taxation year.
Encouraging savings for education through
registered education savings plans (RESPs)
Registered education savings plans provide a vehicle for individuals
to accumulate income for post-secondary education. Under these
plans, individuals make contributions which are held in trusts in order
to generate income to be used to finance the post-secondary education
costs of the beneficiaries under the plan. In practice, most contributors are parents saving for their children’s education. Contributions
to registered education savings plans (RESPs) are not deductible from
the income of the contributor, and normally return to the contributor
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ANNEX 6
tax free. However, the income generated by the contributions is tax
sheltered until paid out to named beneficiaries, when it is taxed in the
beneficiaries’ hands. Since students typically have little income, they
pay little or no tax on the RESP-sheltered income.
To ensure that the amount of the tax-assisted savings sheltered
by an RESP bears a reasonable relationship to the costs of postsecondary education, there is an overall lifetime limit of $42,000
per beneficiary. To encourage regular savings for education over a
long period, there is an annual limit of $2,000 on contributions in
respect of a beneficiary. These limits represent a 33-per-cent increase
over the levels in place prior to the 1996 budget. All registered plans
must be wound up after 25 years.
In light of rising tuition costs, and the need to encourage additional savings for post-secondary education, the budget proposes to
increase the limit on annual RESP contributions from $2,000 to
$4,000. This increase in the annual limit will give taxpayers significantly more flexibility in the timing of their contributions to a plan –
e.g., by allowing them to make up for missed contributions. It also
recognizes that many taxpayers are not in a position to set money
aside for their children’s education when the children are very
young, and therefore need to contribute more in later years. This
provision may also be beneficial to immigrants with children who
were unable to use RESPs when their children were very young.
Because the purpose of an RESP is to help post-secondary
students, if a contributor’s named beneficiary does not pursue
higher education, the income from the RESP must go either to
another eligible student or to an educational institution. In particular, RESP income is not available to the contributor unless the
contributor is the named beneficiary of the plan and is enrolled in
post-secondary education.
Parents and others who consider setting up an RESP for a child are
sometimes dissuaded by the risk that their investment income will be
forfeited if their child does not go on to post-secondary education. To
reduce the risk that RESP income will be directed beyond the wishes
of the contributor, the budget proposes to allow contributors to
receive RESP income directly under certain circumstances.
If all intended beneficiaries are not pursuing higher education by
age 21, and the plan has been running for at least 10 years, a
contributor resident in Canada will generally be allowed to withdraw the income from the plan. The contributor will be allowed to
transfer RESP income to a registered retirement savings plan (RRSP)
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BUDGET PLAN
under which the contributor (or the contributor’s spouse) is the
annuitant, without penalty, if the contributor is able to claim RRSP
deductions for the year of the transfer equal to at least the amount
of the transferred RESP income. To the extent that RESP income is
not fully offset by RRSP deductions, a charge of 20 per cent will
apply in addition to regular taxes for the receipt of the RESP
income. This charge is necessary to ensure that tax assistance is not
provided for those who might use RESPs for tax-deferral purposes
unrelated to either education or retirement savings. Further to this
objective, the total amount of RESP income which a contributor
may transfer to an RRSP during his or her lifetime will be limited
to $40,000. Although a subscriber may direct that the principal
from a plan be returned to another individual on a tax-free basis,
income which is not an educational assistance payment will be
considered income of the subscriber for tax purposes.
At present, RESP beneficiaries are not eligible to receive educational assistance payments from the plan if they are taking distance
education courses, such as correspondence courses. The budget
proposes to change this provision so that full-time students enrolled
in a qualifying educational program at an eligible institution will
become eligible for educational assistance payments.
The Income Tax Act permits a contributor to set up a “family
plan”, in which each of the plan’s beneficiaries is related to the
contributor by blood or adoption. Family plans, which are typically
established for several siblings under age 18, are subject to the same
contribution limits per beneficiary, but provide additional flexibility for the contributor because education assistance payments need
not be limited by each child’s “share” of the contributions. This
allows a contributor with three beneficiaries, for example, to direct
the entire income to the two children pursuing education if the third
child is not eligible. At present, many group plans are structured in
a way that prevents a child who may pursue higher education from
benefiting from income accumulated in respect of a sibling who will
not be pursuing education. The budget proposes to allow other
siblings to benefit from this accumulated income by preventing the
RESP overcontribution penalty from applying to transfers of this
sort within group plans.
In light of these new measures, Revenue Canada will require
additional information from RESP trustees, primarily in relation to
the number of active plans in place and the funds accumulating in
those plans.
182
ANNEX 6
The measures involving the annual limits, distance education and
RESP contributions for a family are effective starting with the 1997
taxation year. The provisions regarding the return of RESP income
to the contributor, and additional information requirements, will
apply after 1997.
More details on these proposals, together with information on
changes of a technical nature, are provided in the accompanying
Notice of Ways and Means Motion to amend the Income Tax Act.
Helping Small Businesses
Quarterly remittance of withholding amounts
Employers are required to withhold income taxes, employment
insurance (EI) premiums and Canada Pension Plan (CPP) contributions from their employees’ pay, and remit those amounts, along
with the employer’s portion of EI and CPP, to the government. Most
employers are required to remit withholding amounts on a monthly
basis, while large employers must remit more frequently. Those with
average monthly withholding amounts between $15,000 and
$50,000 remit bi-monthly, and those with withholding amounts
greater than $50,000 must remit within three days of the pay period.
Through the Joint Forum to Reduce Paper Burden on Small
Business, the small business community told the federal government
that very small employers view the monthly remittance of withholding amounts to be overly burdensome. These small employers
often do not have the resources available to larger employers, and
consequently, face a greater administrative burden from filing
monthly remittances.
The Joint Forum recommended reducing the frequency of remittances for very small employers. The government accepts their
recommendation as it will make compliance easier for small
employers as well as reduce administration and processing costs for
the government.
The budget proposes allowing small employers with average
monthly withholding amounts of less than $1000 for the second
preceding calendar year and no compliance irregularities for the
preceding 12 months, to remit only on a quarterly basis. Perfect
compliance records for both withholdings and goods and services
tax (GST) remittances will be required. Quarterly remittance
periods would end on March 31, June 30, September 30 and
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BUDGET PLAN
December 31, and the remittances would be due by the 15th of the
month following the end of the quarters.
It is proposed that the quarterly remittance program commence
in the fall of 1997 such that the withholding amounts for October
and November, that would otherwise be required on November 15
and December 15, 1997, will be deferred to January 15, 1998. In
support of this initiative, Revenue Canada will review compliance
records for the 12 months preceding October 1, 1997 of all employers with average monthly withholdings of less than $1,000 in 1995.
Those employers with a perfect compliance record throughout the
12-month period will be notified of their eligibility. Participation in
the program will be voluntary. A participant who makes a late
payment or fails to remit will be dropped from the program and
required to remit monthly. For each new calendar year, Revenue
Canada will notify qualifying employers of their eligibility, and
notify employers who will no longer qualify because their average
monthly withholdings during the second preceding calendar year
were $1000 or greater. Businesses that satisfy the requirements may
also apply to Revenue Canada for quarterly remittances at any time
during the year.
The estimated revenue impact is $180 million in 1997-98. This
is largely a one-time impact due to withholding amounts from
January and February 1998 being paid April 15 and credited to the
1998-99 fiscal year, rather than the 1997-98 fiscal year as would
have been the case with monthly remittances. There is also an estimated $5 million ongoing annual cost due to carrying costs arising
from the delay in receiving withholding amounts.
Labour-sponsored venture
capital corporations (LSVCCs)
The federal government and most provincial governments continue
to provide generous tax assistance to individuals in respect of the
acquisition of shares in LSVCCs to facilitate access to capital for
small- and medium-sized enterprises (SMEs). The federal government provides a 15-per-cent credit for the acquisition of shares of
LSVCCs, to a maximum purchase of $3,500. By improving access
to capital for SMEs, LSVCCs have helped many SMEs create and
maintain jobs. Under the current LSVCC rules, LSVCCs are
required to invest in businesses which have assets up to $50 million
and up to 500 employees. The budget proposes a number of
improvements to rules governing LSVCCs.
184
ANNEX 6
While access to capital for SMEs has improved significantly in
recent years, some very small businesses continue to have difficulty
finding equity financing. The federal government will therefore
encourage LSVCCs to invest more actively in small businesses. It is
proposed that every $1 in an eligible investment made by an LSVCC
after February 18, 1997 in a business with $10 million or less in
assets (immediately before the investment is made) be counted oneand-a-half times toward the LSVCC’s 60-per-cent business investment requirement.
In the province of Ontario, some LSVCCs are registered federally and provincially (dual-registrants), and must comply with
federal and provincial business investment requirements. Others are
registered only provincially and are not subject to federal business
investment requirements. The co-existence in a province of LSVCCs
subject to different business investment requirements is not a significant issue in any other province. Currently, to be an eligible business for the purposes of the federal 60-per-cent business investment
requirement, the business must not have more than $50 million in
total assets, including the amount invested by the LSVCC. Under
Ontario rules, a similar test is conducted immediately before the
investment is made by the LSVCC. As a result, Ontario LSVCCs
that are not registered federally may invest in businesses that are
not eligible investments for LSVCCs registered federally. In an effort
to harmonize federal and provincial rules, it is proposed that, for
investments made after February 18, 1997, the federal size test be
conducted immediately before the LSVCC’s investment. This
change is consistent with a recommendation of the House of
Commons Standing Committee on Finance.
Existing rules may prevent LSVCCs from further investing in the
businesses that they have helped succeed, and that need further capital injections to help them reach their full potential. Currently, an
LSVCC may not invest more than 10 per cent of its shareholders’
equity, to a maximum of $10 million, in any one business. It is
proposed to increase the $10 million maximum to $15 million effective for investments made after February 18, 1997. The 10-per-cent
requirement will remain to ensure that LSVCCs continue to maintain a diversified venture investment portfolio.
Currently, an LSVCC registered under provincial law (but not
federal) is not liable to pay any amount under the Income Tax Act
(ITA) if it fails to meet the business investment requirements under
provincial legislation. This means that non-compliance with business investment requirements is less onerous for such an LSVCC
185
BUDGET PLAN
than for a dual-registrant. It is thus proposed that where, as a consequence of non-compliance with business investment requirements,
an amount becomes payable to a province by such an LSVCC, that
the LSVCC be liable to pay an equal amount under the ITA. This
measure is effective with respect to amounts that become payable
to a province after February 18, 1997 by such LSVCCs. Refunds of
such amounts paid under the ITA will be provided to the extent the
corresponding amounts are refunded under provincial law.
At present, certain taxpayers are permitted to elect to treat any
gain or loss arising on disposition of Canadian securities as a capital gain or loss. However, certain categories of taxpayers (including
a trader or dealer in securities) are not entitled to this election. To
remove uncertainty in this regard, the budget also proposes that
there be changes to ensure that LSVCCs and other mutual funds
can elect to treat gains from the dispositions of Canadian securities
as capital gains.
Additional details on these proposals, together with information
on changes of a technical nature, are provided in the accompanying
Notice of Ways and Means Motion to amend the Income Tax Act.
Improving the Retirement Income System
Pension adjustment reversal (PAR)
For individuals who leave registered pension plans (RPPs) or
deferred profit sharing plans (DPSPs) before retirement, the budget
proposes to introduce a pension adjustment reversal (PAR) which
will restore lost RRSP contribution room. The government
announced its intention to examine this issue in the 1995 budget.
PAR will improve the fairness of the system of tax assistance for
retirement saving by ensuring that individuals who receive low
termination benefits from such plans – because of job changes early
in their career, for example – have the opportunity to make up for
this shortfall through additional RRSP contributions.
Lost RRSP room
When an individual is a member of an employer-sponsored RPP or
DPSP, the employer is required to report a pension adjustment (PA)
amount that reflects the individual’s participation in the plan. The
PA amount reduces the individual’s RRSP deduction room dollar
186
ANNEX 6
for dollar. If the individual leaves the plan before retirement, the
termination benefit paid by the plan could be less than the total PAs
reported while the individual was a plan member – i.e. less than the
RRSP deduction room given up during the years of plan membership. Generally, PAR will increase the individual’s RRSP deduction
limit by the amount by which the PAs exceed the termination benefit – thereby restoring the RRSP room that would otherwise be lost
permanently.
PAR reporting requirements
PARs will have to be calculated whenever an individual ceases,
after 1996 and before retirement (i.e. before receiving periodic
payments), to have any entitlement to benefits under a DPSP or
under a benefit provision of an RPP (other than a specified multiemployer plan). When PAR is greater than zero, the RPP administrator or the DPSP trustees will have to report it to Revenue Canada
within a specified period of time. In order to give administrators
and trustees time to adjust to the new reporting requirements, PARs
for terminations in 1997 and 1998 will not have to be reported
before the end of 1998. PARs for terminations after 1997 will be
added to an individual’s RRSP deduction room for the year of termination. PARs for terminations in 1997 will be added to RRSP
deduction room for 1998.
Calculating PARs
An individual’s PAR under a money purchase provision of an RPP
will generally be equal to the total of all amounts included in the
individual’s pension credits under the provision since 1990 but not
vested in the individual. PAR under a DPSP will be determined in
the same manner.
An individual’s PAR under a defined benefit RPP provision will
generally be equal to the individual’s total pension credits plus past
service pension adjustments (PSPAs) under the provision since
1990, minus any lump sum payments made to the individual, or
transferred to an RRSP or other money purchase-type registered
plan, in respect of the individual’s post-1989 benefits under the
provision. Modifications to this basic rule are discussed in the
section entitled “PARs and past service events”.
187
BUDGET PLAN
Defined benefit pension credit offset and other changes
The 1995 budget indicated that any measure to restore lost RRSP
deduction room would be revenue neutral. To accomplish this, the
budget proposes to modify the way in which pension credits are
calculated for individuals who accrue benefits under a defined benefit provision of an RPP. Currently, the calculation contains a $1,000
offset which reduces an RPP member’s PA and increases the RRSP
deduction room available to the member. For pension credits calculated for 1997 and future years, the $1,000 offset will be reduced
to $600.
Similarly, the $1,000 offset that applies to the determination of
amounts that reduce RRSP deduction room for individuals participating in certain unregistered pension arrangements (e.g., federal
judges and Canadians who are members of foreign pension plans)
will be reduced to $600 for 1998 and future RRSP years. (It should
be noted that, as set out in the 1996 budget, the RRSP deduction
room for high-income earners in such arrangements will continue
to be nil during those years in which the RRSP limit is less than
$15,500.)
Currently, there are special rules for determining an individual’s
pension credit under a DPSP or benefit provision of an RPP, if the
individual terminates from the plan before becoming vested. These
rules ensure that the individual’s pension credit for the year of termination does not exceed the individual’s contributions in that year.
In effect, this precludes any loss in RRSP deduction room for the
year of termination. With the introduction of PAR, these rules will
become redundant and will be eliminated in determining pension
credits for 1997 and future years.
PARs and past service events
This section describes the framework for proposed changes to the
Income Tax Regulations dealing with the impact of PARs on the
determination of PSPAs and vice versa. This information is for
administrators of RPPs with defined benefit provisions, and is
intended to assist them in making preparations for the introduction
of PAR.
The information in this section relates primarily to past service
events as a result of which an individual’s benefits under a defined
benefit provision are reinstated or are replaced with benefits under
another defined benefit provision. There are special rules in subsection 8304(5) of the regulations for calculating PSPAs for such past
188
ANNEX 6
service events. These rules (the “modified PSPA rules”) provide an
offset in the PSPA calculation for pension credits and PSPAs associated with the benefits being reinstated or replaced.
Generally speaking, with the introduction of PAR, an individual’s
PSPA will be determined without any offset for prior pension credits and PSPAs if the individual ceased to be entitled to the prior benefits before the past service event. However, the offset will continue
to apply if the individual ceased to be entitled to the prior benefits
before 1997, reflecting the fact that there is no PAR to support the
additional amount of PSPA that would be determined without the
offset. The offset will also continue to apply if the past service event
occurred before the individual ceased to be entitled to the prior
benefits, and any PAR subsequently determined in connection with
the prior benefits will be modified to take this into account. These
changes are discussed in more detail below.
Effect of PAR on PSPAs
For past service events that occur before 1998, there will be no
changes to the PSPA rules. This will ensure that the introduction of
PAR will not disrupt the processing of past service events in 1997.
(However, as noted below, such a past service event may affect the
calculation of a PAR.)
For past service events that occur after 1997, the regular PSPA
rules in subsection 8303(3) of the regulations will replace the modified PSPA rules where:
the individual had previously been entitled to benefits (the “prior
benefits”), either under the current provision or under another
defined benefit RPP provision, in respect of the past service period;
and
■
the individual had ceased to have any entitlement to the prior
benefits after 1996 and before the past service event.
■
The fact that the regular PSPA rules apply means that there is no
offset in the PSPA calculation for pension credits and PSPAs associated with the prior benefits, reflecting the fact that credit has
already been given for those pension credits and PSPAs in determining the individual’s PAR in connection with the prior benefits.
Furthermore, the regular PSPA rules will be amended to include
in the PSPA calculation an additional amount where the termination benefit paid in connection with the prior benefits was greater
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BUDGET PLAN
than the total pension credits and PSPAs associated with the benefits
– that is, where PAR was zero – and all or part of the termination
benefit was transferred to an RRSP or other money purchase-type
registered plan. In general terms, the amount that will be added to
the PSPA is the amount by which the transfer exceeds the total prior
pension credits and PSPAs. This may result in the excess having to
be withdrawn, or transferred to the defined benefit provision to
fund the new benefits, in order for those benefits to be provided,
thus ensuring that there is no doubling up of tax assistance.
Effect of past service events on PAR
As noted above, when the modified PSPA rules apply, the PSPA is
offset by the amount of any pension credits and PSPAs associated
with benefits previously provided to the individual for the period of
past service. Thus, in determining PARs, it is appropriate to take
into account the extent to which such offsets have reduced PSPAs.
Accordingly, the rules for determining PAR will require that the
PAR that would otherwise be determined in such circumstances be
reduced by the amount that would have been the PSPA for the new
benefits if the PSPA had been determined using the regular PSPA
rules – that is, ignoring any prior pension credits and PSPAs – and
there had been no qualifying transfers from a money purchase-type
registered plan to fund the new benefits. (A PSPA determined in this
manner is referred to in the remainder of these notes as a “grossedup PSPA”.) This recognizes that the prior benefits have not been lost,
they have been replaced. Usually in this situation, PARs will be nil.
Where, in this situation, PSPA is being determined under one
particular RPP and PAR is being determined under another, the
administrator of the particular RPP will be required, within 60 days
of the past service event, to advise the other RPP administrator of
the existence of the event and, where the associated PSPA is exempt
from certification (for example, where the PSPA is nil), of the amount
of the grossed-up PSPA. Where the PSPA is not exempt from certification, the particular RPP administrator will be required to advise
the other administrator of the amount of the grossed-up PSPA within
60 days of certification. However, no notification in respect of past
service events occurring in 1997 will be required before the end of
1997. These notification requirements will ensure that the other RPP
administrator is aware that PAR must be reduced, and that he or she
is able to determine the reduced PAR amount.
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ANNEX 6
To summarize, these special PAR rules will apply in the following circumstances:
■ whenever an individual’s benefits under a defined benefit provision are replaced with benefits under another defined benefit
provision and the past service event occurs before or at the time
the individual ceases to be entitled to the prior benefits; and
■ when an individual’s benefits under a defined benefit provision
are reinstated, or are replaced with benefits under another defined
benefit provision, and the past service event occurs after the individual ceases to be entitled to the prior benefits but before the end
of 1997.
Reflection of past service benefits in PAR
As noted above, the basic PAR calculation under a defined benefit
provision is, in general terms, the amount by which the individual’s
pension credits and PSPAs under the provision exceed the individual’s termination benefit. Where benefits have been provided on a
past service basis, the associated PSPA may not fully reflect the “PA
value” of the past service benefits. This would be the case when the
modified PSPA rules had applied or the individual had made qualifying transfers from a money purchase type registered plan to fund
the benefits (which reduce PSPA under both the modified and the
regular PSPA rules). To ensure that PAR does not underestimate the
loss of benefits on termination in this situation, the PAR calculation
will take into account the grossed-up PSPA amount (rather than the
actual PSPA amount) associated with any past service benefits
provided under the plan.
CPP/QPP lump sum payments
An individual receiving disability benefits relating to preceding
years under the Canada Pension Plan (CPP) or the Quebec Pension
Plan (QPP) may elect to have the amounts taxed as if they had been
received in those years. It is proposed that this provision be
extended to apply to all types of benefits received under those plans
after 1995.
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BUDGET PLAN
Towards a National Child Benefit System
Currently, over $5.1 billion in assistance is provided to more than
three million families under the Child Tax Benefit. Through this
program, the federal government provides an annual basic benefit
of $1,020 per child, a supplement of $75 for the third and each
subsequent child, and an additional supplement of $213 for each
child under age seven when no child care expenses are claimed. The
basic benefit is reduced by 5 per cent of family net income above
$25,921 (2.5 per cent for one-child families). A Working Income
Supplement (WIS) of up to $500 is also paid to low-income working families with incomes up to $25,921. The WIS enhances support
to low-income families and helps working parents offset a portion
of the extra cost of working. The WIS is phased in over the family
earnings range of $3,750 to $10,000. It is reduced by 10 per cent
of family net income above $20,921. The maximum WIS is scheduled to increase to $750 in July 1997 and $1,000 in July 1998.
The Government of Canada is proposing to allocate $600 million
in new funds, in addition to the $250 million announced in the 1996
budget, to introduce a $6.0 billion Canada Child Tax Benefit effective July 1998, or sooner if that proves possible. Discussions with
provinces and territories will be followed by the introduction of
federal legislation in the fall.
As an interim measure, the government proposes to restructure
the WIS from a family basis to a per-child basis, consistent with the
structure of the proposed federal platform and child allowances
under social assistance. The modified WIS will be introduced in
July 1997 and enriched by $195 million instead of the $125 million
proposed in the 1996 budget. Of this additional $70 million enrichment, $50 million will be spent in the 1997-98 fiscal year and
$20 million in the 1998-99 fiscal year.
Maximum levels for the modified WIS will be $605 for a
one-child family and $1,010 for a two-child family. For larger families, the maximum WIS will be $1,010 plus an additional $330 for
the third and each subsequent child. The WIS will continue to be
phased in at annual family earnings of $3,750, reaching the maximum at an earnings level of $10,000. The supplement will be
reduced based on the level of family net income in excess of
$20,921. The reduction rate will be 12.1 per cent for a one-child
family, 20.2 per cent for a two-child family and 26.8 per cent for
families with three or more children.
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ANNEX 6
Tax Measures for Canadians With Disabilities
The budget proposes several tax measures to increase assistance to
persons with disabilities.
Broadening the medical expense tax credit
The existing medical expense tax credit recognizes the effect of
above-average medical expenses on the ability of an individual to
pay tax. It does this by providing a tax credit for eligible medical
expenses in excess of a certain percentage of individual net income.
For 1997, the medical expense tax credit reduces the federal tax of
a claimant by 17 per cent of qualifying unreimbursed medical
expenses in excess of the lesser of $1,614 and 3 per cent of the
claimant’s net income. When provincial taxes are also taken into
consideration, the credit provides tax relief of about 25 per cent of
eligible medical expenses. In 1995, about 1,330,000 individuals
claimed the credit.
The budget proposes that the list of expenses eligible for the
medical expense tax credit be broadened to include:
■ 50 per cent of the cost, to a maximum eligible expense of $1,000,
of an air conditioner necessary to help an individual cope with a
severe chronic ailment, disease or disorder;
■ 20 per cent of the cost, to a maximum eligible expense of $5,000,
of a van that is adapted, or will be adapted within six months, for
the transportation of an individual using a wheel chair;
■
sign language interpreter fees;
■
expenses incurred for moving to accessible housing;
■ reasonable expenses relating to alterations to the driveway of an
individual’s principal place of residence where the individual has a
severe and prolonged mobility impairment and the alterations are
made to facilitate the individual’s access to a bus; and
■ an increase in the limit for part-time attendant care from $5,000
to $10,000.
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BUDGET PLAN
Eliminating the $5,000 limit
on the attendant care deduction
Current rules allow those with severe and prolonged mental or
physical impairments to deduct up to two-thirds of their earned
income to a maximum deduction of $5,000 of attendant care
expenses that are necessary to allow the individual to work. To
reduce barriers to work for people with disabilities, the budget
proposes to eliminate the $5,000 limit on the deduction for attendant care expenses. Workers with disabilities will now be able to
deduct the cost of attendant care expenses up to two-thirds of their
earned income. This change will allow most disabled workers to
deduct the full cost of attendant care.
Disability tax credit certification
The existing disability tax credit improves tax fairness by recognizing the effect of a severe and prolonged disability on an individual’s
ability to pay tax. For 1997, the credit reduces federal tax by about
$720 and combined federal-provincial tax by about $1,120. It is
available to individuals with a severe and prolonged mental or physical impairment that markedly restricts their ability to perform basic
activities of daily living. In 1995, about 543,000 individuals claimed
the disability tax credit.
To qualify for the disability tax credit, individuals must currently
be certified by a medical doctor or, where the impairment is an
impairment of sight, an optometrist. The budget proposes to allow
audiologists to certify eligibility for the disability tax credit in
respect of hearing impairments.
Trusts and people with disabilities
Trusts allow individuals (known as trust “settlors”) to transfer
property to a trust for the benefit of other individuals or “beneficiaries” of the trust. Trusts may be used for many different purposes
including meeting the needs of beneficiaries with disabilities.
The undistributed income earned by a trust is normally taxed at
the trust level. An exception to this general rule is currently made
in the case of beneficiaries qualifying for the disability tax credit.
The existing preferred beneficiary election allows the income earned
by a trust to be taxed as if it had been paid out to a preferred beneficiary. A preferred beneficiary is a beneficiary under a trust who is
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ANNEX 6
entitled to the disability tax credit and is in a close family relationship with the settlor of the trust. Although the funds stay in the trust,
the election allows the income of the trust to be taxed in the hands
of a preferred beneficiary, who may be subject to tax at a lower tax
rate than the trust.
The budget proposes to broaden the definition of a preferred
beneficiary to include adults who are dependent on others by reason
of mental or physical infirmity. This measure will apply to individuals for whom an infirm dependant credit can be claimed.
Changes to the Customs Tariff
It is proposed that the Customs Tariff be amended to provide
duty-free entry for all goods specifically designed for the use of
persons with disabilities. This measure is effective February 18, 1997.
Refundable medical expense
supplement for earners
The loss of subsidies for disability-related supports under provincial social assistance can be an important barrier to participation in
the labour force by Canadians with disabilities. To address this
problem, the budget proposes to introduce a refundable tax credit
for low-income working Canadians with higher than average
medical expenses.
The refundable tax credit will be based on eligible medical
expenses and reduced by a percentage of family net income above
a threshold. The credit will be available to workers with at least
$2,500 in earned income. It will be the lesser of $500 and 25 per
cent of the allowable portion of expenses that can be claimed under
the medical expense tax credit. To target assistance to those with
low incomes, the credit will be reduced by 5 per cent of family net
income in excess of $16,069. Individuals claiming this credit may
also claim the medical expense tax credit.
These changes, except where noted, will be effective for the 1997
and subsequent taxation years.
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BUDGET PLAN
Measures to Enhance
Tax Assistance to Charitable Giving
Recent budget changes to enhance tax assistance
To support the important work of charities in meeting the needs of
Canadians, generous incentives are provided in the tax system. For
individual donors, a federal tax credit at the rate of 17 per cent is
provided on the first $200 of donations each year, while a federal
tax credit of 29 per cent is available for the portion of donations
exceeding $200 up to the applicable net income limit. When
combined with the impact on provincial taxes, this results in total
tax assistance of roughly up to 52 per cent of the value of the gift –
i.e. there is a 50/50 partnership between the donor and governments. Corporate donors are allowed to deduct charitable gifts up
to the applicable net income limit in calculating their taxable
income, producing federal and provincial tax assistance of up to
43 per cent. Individual donors claimed tax credits in respect of
$3.4 billion of donations, while corporate donors deducted $526
million of donations in 1994.
Tax incentives for charitable giving have been enriched in each
of the 1994, 1995 and 1996 budgets.
In the 1994 budget, the threshold for the higher 29-per-cent
credit was lowered from $250 to $200. In the 1995 budget, donations of ecologically sensitive land were exempted from the net
income limits. In the 1996 budget, the amount of donations eligible for the credit was increased: the general annual limit was raised
from 20 to 50 per cent of net income; the limit on donations in the
year of death and donations carried back to the preceding year was
raised from 20 to 100 per cent of net income; and to eliminate the
potential cash flow impacts arising from the donation of appreciated capital property, the general limit of 50 per cent was further
increased by half the amount of taxable capital gains resulting from
the donation of capital property. It was also announced that ways
of further encouraging charitable giving would be examined during
the year.
Building on existing incentives and
recent enhancements to tax assistance
Following extensive consultations with the charitable sector, the
government proposes in this budget additional changes to build on
existing incentives and recent enhancements.
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ANNEX 6
Donations to the Crown and Crown foundations may be claimed
for tax purposes up to 100 per cent of the taxpayer’s net income
for the year. Donations to other charities, on the other hand, may
be generally claimed only up to 50 per cent of net income.
Representations to the government have indicated that the different net income limits may distort the pattern of giving in Canada,
especially for large gifts. A standard limit of 75 per cent of net
income is thus proposed for all charitable donations and Crown
gifts claimed by individuals or corporations for taxation years
commencing after 1996. This limit will level the playing field across
charities, and encourage more donations by providing enhanced
ability to claim tax assistance in the year of donation for the most
generous donors. It is proposed that this limit be further increased
by 25 per cent of any taxable capital gain arising from the donation
of appreciated capital property to continue to ensure that any tax
liability arising from the donation of such property can be offset by
tax credits in the year of donation. Donations in the year of death
and the preceding year, as well as donations of ecologically sensitive land and Canadian cultural property will still be eligible up to
100 per cent of net income.
The budget proposes to reduce the income inclusion rate on capital gains arising from certain donations by individuals or corporations to charities (other than private charitable foundations) from
75 per cent to 371/2 per cent. Donations that will be eligible will be
those of securities, such as shares, bonds, bills warrants and futures,
that are listed on a prescribed stock exchange, where the donation
is made between February 18, 1997 and the end of the calendar
year 2001. Prescribed stock exchanges are listed in the Income Tax
Regulations and include five Canadian stock exchanges (Alberta,
Montreal, Toronto, Vancouver and Winnipeg) and a number of
foreign stock exchanges. This measure will provide a level of tax
assistance for donations of eligible appreciated capital property that
is comparable to that in the U.S. (see box on next page). While the
existing treatment of charitable donations is already generous, this
change will facilitate the transfer of appreciated capital property to
charities to help them respond to the needs of Canadians.
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BUDGET PLAN
Combined federal and provincial tax assistance for cash donations in
Canada reaches up to 52 per cent (the 29-per-cent federal credit also
reduces surtaxes and provincial taxes to a total of 52 per cent of the
value of the donation), whereas combined federal and state tax assistance is up to 43 per cent for high-income earners in a typical
American state.
The U.S. tax code exempts donations of appreciated capital property from capital gains tax. The tax assistance accruing to donations
of such property depends on both the rates of tax credits or deductions, the rate at which any capital gains are included in income, and
the length of time that the asset has been held. Experience from the
United States indicates that a typical capital gain realized on the donation of appreciated capital property can represent about 60 per cent of
the value. The full capital gains exemption thus increases the tax assistance on such donations by up to 19 per cent, resulting in maximum
tax assistance up to 62 per cent on donations of such property in a
typical U.S. state.
For a typical donation of eligible appreciated capital property in
Canada, the proposed reduction to the income inclusion rate from
75 per cent to 371⁄2 per cent will increase the rate of tax assistance by
about 12 per cent. Combined with the 52-per-cent assistance already
provided by the charitable donations tax credit, this will result in tax
assistance of up to 64 per cent for donations of eligible property in a
typical province.
To reinforce the 1995 budget measure to encourage donations of
ecologically sensitive lands, it is proposed that a provision be introduced to change the method of valuing donations of easements,
covenants and servitudes in respect of such land. Easements,
covenants and servitudes protect ecologically sensitive lands by
preventing development now and in the future. Normally, the value
of a donation is determined to be what a purchaser would pay for
the property on the open market. As there is no established market
for such restrictions, the fair market value determined under this
method is often minimal. It is proposed that the value of the donation now be deemed to be the greater of the fair market value of the
restriction otherwise determined, and the amount by which the fair
market value of the land to which the gift relates is decreased as a
result of the gift. This would reflect the amount of the donation
more accurately. This measure would be effective for donations
made after February 27, 1995.
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ANNEX 6
It is proposed that donations of depreciable assets such as buildings and equipment be encouraged by adjusting the amount of
donations the donor can claim as a percentage of net income. In the
1996 budget, net income limits of taxpayers donating appreciated
capital property were increased to reflect the inclusion in income of
taxable capital gains arising from the donation. Donors of depreciable capital property that has a value greater than its depreciated
value for tax purposes may find themselves with a tax liability. This
flows from the recapture of capital cost allowance (CCA) that arises
when the asset depreciates more slowly than is claimed for tax
purposes. This budget proposes to increase the net income limit by
25 per cent of any CCA recapture arising from donations of depreciable capital property by individuals or corporations for taxation
years commencing after 1996. This would ensure that donors of
these assets will always have enough tax credits or deductions to
more than offset the tax arising from the recapture of CCA. This
measure would be of particular benefit to taxpayers donating buildings, equipment and other similar assets. It will also aid in the
preservation of heritage buildings across Canada.
Strengthening Canadians’ confidence in,
and understanding of, the charitable sector
Charitable giving depends on donors having confidence that their
donations will be used in an effective and efficient way. On the whole,
the charitable sector works well and is very careful with the donors’
funds. Any perception of waste or abuse, however, undermines
donors’ confidence and has the potential to reduce charitable giving.
A number of changes are proposed in this budget to increase
donors’ confidence that their donations are being put to good use
and to ensure that tax assistance is properly targeted to meet the
needs of Canadians. These measures will improve donors’ access to
information about charities, and provide for greater transparency
with regard to charities’ affairs. Greater transparency will increase
self-discipline in the charitable sector, and empower donors to play
a better role in monitoring the sector. As well, these changes will
enable Revenue Canada to better address concerns that have been
raised regarding those few charities that are not meeting the requirements for charitable status.
In addition to the annual information return filed by charities,
the public will have access to other documents filed by charities,
including:
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BUDGET PLAN
■
governing documents, including statement of purpose;
any information required to be provided by a charity upon applying for registration if registration has been granted;
■
■
notification of registration, including any conditions or warnings;
■ where the registration of the charity has been revoked, any letter
sent by, or on behalf of, the Minister of National Revenue to the
charity indicating the grounds for the revocation; and
lists of directors of newly registered charities (for existing charities, they appear in the information returns that are already public).
■
In addition to making more information available to the public,
Revenue Canada will examine ways to make this information more
widely available. Revenue Canada will also expedite the process of
deregistering charities that fail to provide the necessary information. As well, Revenue Canada will be provided with additional
resources to ensure that all charities comply with the Income Tax
Act and that charitable status is conferred only on those organizations that should have it.
For enhanced incentives to generate additional donations, it is
important that donors and potential donors understand the value
of the tax assistance that is available. The incentives for charitable
donations are among the most generous in the tax system. Many
donors, however, appear to underestimate the tax assistance
currently available. Revenue Canada will provide more information to charities on how to explain the value of the tax assistance
to donors.
Finally, measures will be introduced to prevent potential abuses
involving transactions by taxpayers not dealing at arm’s length with
charities and loan-back transactions. Loan-backs are transactions
through which some taxpayers have been attempting to earn tax
credits without having to forgo the use of funds by transferring
funds to a charity, and receiving a loan of the funds back from the
charity, sometimes immediately. Revenue Canada is of the view that
these transfers are not gifts as they are not made unconditionally.
To prevent potential abuse involving these types of transactions,
it is proposed that a special tax be imposed on the charity of
50 per cent of the amount of a debt, or of the fair market value of
shares acquired by the charity from a person with whom the charity does not deal at arm’s length. Similarly, it is proposed that the
same special tax be imposed where, within five years after a donation
to a charity, the charity holds a debt or a share issued by the donor
(or a person with whom the donor does not deal at arm’s length),
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ANNEX 6
or allows property of the charity to be used by the donor (or a
non-arm’s length person). Shares and debt listed on prescribed stock
exchanges as well as amounts held on deposit at a financial institution will be exempt from these rules. In addition, it should be
noted that Revenue Canada will continue to challenge loan-back
arrangements effected before February 18, 1997.
Business Tax Measures
Review of transfer pricing provisions
The growth of international trade in recent years has meant a corresponding increase in the volume of goods, services and intangible
property traded among related parties (i.e. parties that do not deal
at arm’s length) that are situated in different countries. As a result
of this growth, tax administrations around the world have recently
focused more attention on the issue of international transfer pricing. A number of important changes affecting the way governments
apply and enforce international transfer pricing rules (i.e. the
domestic income tax rules governing the determination of the
income and expenses relating to such cross-border intra-group
trade) have resulted. In view of these and other developments,
Canada will be updating its current practices in the area of transfer
pricing and will be introducing new documentation requirements
to ensure taxpayer compliance and facilitate administration by
Revenue Canada.
Canadian transfer pricing law and administrative practices are
based on principles developed by the Organization for Economic
Co-operation and Development (OECD). After a thorough review
of existing guidelines published in 1979, the OECD issued revised
guidelines in 1995 which updated the existing international standard in this area. The fundamental reference point for this standard
is the “arm’s length principle”, the yardstick used to ensure that
prices charged between related parties on cross-border transactions
correspond to those that would have been charged between unrelated parties. This standard protects the tax base against the shifting of income that can potentially occur from the discretionary
determination of transfer prices on transactions made between
related parties situated in different countries. The international
adherence by all industrialized countries to a common standard also
prevents the double taxation of profits of multinational enterprises
by two or more tax jurisdictions and, consequently, promotes
international trade.
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BUDGET PLAN
OECD guidelines on transfer pricing
The OECD guidelines on transfer pricing represent the consensus position of all member countries and set out internationally acceptable
approaches for dealing with transfer pricing issues among nations. The
guidelines offer practical guidance for both taxpayers and tax administrations with regard to methods that can be used to determine whether
prices on transactions undertaken by related parties situated in different countries are in accordance with the “arm’s length principle”. This
principle rests on a comparison of the conditions of transactions
between related parties with conditions observed between independent
parties in similar circumstances entering into similar transactions. This
is why the guidelines express a clear preference in favour of so-called
“transaction-based” methods to determine arm’s length prices, since
they focus on the conditions of comparable transactions undertaken by
independent parties. These transaction-based methods are:
■ the “comparable uncontrolled price” method, which requires a
comparison with prices on transactions for similar goods or services
with (or between) independent parties;
■ the “cost plus” method, which requires a comparison with profit
mark-ups applied by independent parties on the cost of production of
similar goods or services, in order to obtain the arm’s length sale price
that should be charged by the taxpayer for the goods or services; and
■ the “resale price” method, which requires a comparison with profit
mark-ups applied by independent parties on the sale of similar goods,
in order to obtain the arm’s length purchasing price that should be paid
by the taxpayer to a related party in respect of the goods subsequently
being resold to third parties.
The guidelines also authorize, in limited circumstances, the use of
profit-based methods when the transaction-based methods cannot be
used with a sufficient degree of reliability. These methods are:
■ the “transactional profit split” method, which determines the division
of profits that independent parties would have expected to realize,
based upon functions performed, assets used and risks assumed,
from engaging in transactions similar to those entered into between
the related parties; and
■ the “transactional net margin” method, which examines the net
profit margin realized by a taxpayer from one or more transactions (to
the extent that they can be properly aggregated) with related parties
and compares it to the net profit margin realized by independent parties
in similar circumstances.
Profit-based methods tend to be less precise than transaction-based
methods because they focus on net profits (more precisely, net profits
earned in respect of aggregate intra-group transactions) as opposed
to the terms of the transactions. For this reason, the OECD guidelines
consider them methods of last resort, whose use will be carefully
monitored by member countries.
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ANNEX 6
The revised OECD guidelines also address a number of administrative issues relating to transfer pricing. New guidance is provided
regarding the nature and extent of the documentation of
related-party transactions that can reasonably be expected by tax
administrations from taxpayers, as well as the imposition of penalties relating to transfer pricing. The issue of documentation is not
insignificant, since the determination (and subsequent verification)
of transfer prices is a fact-sensitive matter. Unfortunately, taxpayers sometimes neglect to document properly their transactions
with related parties or the basis upon which transfer prices are
determined. This can make transfer pricing audits lengthy and
inefficient for both taxpayers and Revenue Canada.
In view of the above, the government will shortly propose
changes to the Income Tax Act that will pursue the following
objectives:
■ to harmonize the standard contained in section 69 of the Act with
the arm’s length principle as defined in the revised OECD guidelines
and ensure that, in selecting the most appropriate pricing method,
all the various methods described in the OECD guidelines are
available to taxpayers; and
■ to ensure the contemporaneous documentation by taxpayers of
cross-border related-party transactions, so that taxpayers are in a
position to provide to Revenue Canada, on a timely basis, the relevant information supporting the transfer prices used in the course
of their related-party transactions. This will improve the ability of
Revenue Canada to administer the law and make audits more
efficient from a taxpayer perspective. Penalties commensurate with
a transfer pricing adjustment would apply where these documentation requirements are not met or where the taxpayer did not act
diligently in establishing transfer prices that are in conformity with
the arm’s length principle.
The government recognizes that documentation requirements
should not impose an undue burden on taxpayers and that a
balance must be struck between the benefits for taxpayers and
Revenue Canada of having relevant and timely transfer pricing
information available and the cost for taxpayers of complying with
these documentation requirements.
These changes will be effective for taxation years that begin
after 1997. In view of the resource intensive nature of transfer
pricing examinations, additional efforts will also be directed at the
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BUDGET PLAN
administration and enforcement of the new rules. Revenue
Canada will, in coming years, increase resources devoted to transfer pricing audits in the field.
The proposed statutory provisions will require a revision of
Revenue Canada’s administrative position that is currently set out in
Information Circular 87-2. Further details on the proposed legislative
changes, together with the revision of Revenue Canada’s administrative position, will be released in draft form in the coming months and
will be the subject of consultations with interested parties.
Restriction on claiming investment tax credits
In the 1994 budget, the government responded to concerns about
the increasing number of taxpayers who were reopening the
calculation of tax credits for scientific research and experimental
development (SR&ED) in respect of expenditures made in earlier
years. These concerns were addressed by restricting the SR&ED tax
credits to those SR&ED qualifying expenditures identified by the
taxpayer within a specified period. This deadline is 12 months after
the taxpayer’s filing due date for the taxation year in which the
SR&ED expenditure was incurred.
The potential exists for taxpayers to reopen the tax credit calculation with regard to other investment tax credits (ITCs). This is
inconsistent with the goal of these tax credits which is to encourage
investment which might not otherwise occur. Where investment has
taken place without any expectation of entitlement to an ITC, the
provision of an ITC in respect of that investment at a much later
time is in the nature of a windfall for the taxpayer.
The budget proposes, therefore, to restrict the eligibility for all
ITCs claimed after February 18, 1997 in a manner similar to the
restriction in place for SR&ED qualifying expenditures.
Specifically, eligibility for an ITC will be limited to those qualifying
expenditures identified by a taxpayer on a prescribed form (i.e.
Investment Tax Credit – Form T2038) filed with the Minister of
National Revenue within 12 months of the taxpayer’s filing due
date for the taxation year in which the property was acquired.
As a transitional measure, taxpayers will have the length of time
specified above or until May 31, 1997, whichever is later, to identify the eligible expenditures.
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ANNEX 6
Extension of the temporary capital tax
surcharge on large deposit-taking institutions
The temporary capital tax surcharge on large deposit-taking institutions, which was originally introduced in the 1995 budget, extended
in the 1996 budget and is scheduled to expire on October 31, 1997,
is proposed to be extended until October 31, 1998.
This temporary surcharge applies to financial institutions as
defined under Part VI of the Income Tax Act. However, it does not
apply to life insurance companies as it is proposed that the special
tax applying to life insurers under Part VI continue to apply until
the end of 1998. The surcharge will continue to apply at a rate of
12 per cent of the capital tax imposed under Part VI calculated
before any credit for income taxes and with a capital deduction of
$400 million. The surcharge is also not eligible to be offset by tax
payable under Part I of the Act.
For taxation years that include October 31, 1998, the surcharge
will be prorated on the basis of the number of days in the taxation
year that are before November 1, 1998.
Environmental Initiatives
Steady progress has been made through previous budgets to advance
environmental objectives through conservation and protection
measures dealing with mining reclamation trusts, donations of
ecologically sensitive lands, energy efficiency and renewable energy.
This budget announces further steps which build on this progress and
the government’s ongoing commitment to sustainable development.
Environmental trusts
Certain environmentally sensitive activities can disturb the natural
environment in the area where the activity takes place, and
measures may need to be taken to repair the environmental damage
after operations have terminated. For example, a mine site may need
to be restored after mining activities have ceased. In these situations,
governments may require companies to set aside funds in advance
in environmental trust funds. The purpose of such an environmental trust is to ensure that adequate funds are available to conduct
restoration activities at the end of operations. In other situations,
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BUDGET PLAN
governments may be satisfied with the posting of bonds or other
financial assurances that monies will be available to perform any
necessary post-closure reclamation.
The 1994 budget proposed changes to the Income Tax Act (the
rules for mining reclamation trusts) that permitted the deductibility of contributions to provincially or federally mandated trust
funds that are set up for the sole purpose of restoring a mine site
and that are held by an independent third-party trustee. The
changes were of particular benefit to single-mine companies,
because the deduction in respect of reclamation activities would
otherwise have only become available when the work was incurred.
This would ordinarily occur after the mine had closed and the
mining company might not have sufficient income against which it
could claim the deductions.
The 1996 budget proposed that the government would consult
with industry, provinces and environmental groups to determine if
the mining reclamation trust rules should be extended to other environmentally sensitive sectors such as waste disposal and reforestation. The consultations included a special workshop hosted by the
National Round Table on the Environment and the Economy.
Financial assurances and environmental trusts
Several provinces and territories have statutory or regulatory mechanisms in place under which operators of waste disposal sites or quarries for the extraction of industrial minerals, sand and gravel (or other
aggregates) may be required to post financial security (called financial
assurances) in respect of the costs of restoring the site after the waste
disposal activities have terminated.
Financial assurances can take many forms, including surety bonds,
letters of credit, cash or environmental trust funds. Of these, environmental trusts are among the most stringent forms of financial assurance.
Under an environmental trust fund, the operator is required to contribute
amounts to a fund over the period in which the site is operating, and the
funds must be held solely for the purpose of reclaiming the site after
termination of activities.
Typically, statutory or regulatory requirements for financial assurances provide a wide degree of latitude to environmental authorities in
terms of the form the financial assurance may take. In general, if the
extent of environmental damage is expected to be small and the operator is financially sound, environmental authorities may be satisfied
with less stringent financial assurances.
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ANNEX 6
As a result of the consultations, this budget proposes that the
mining reclamation trust rules be extended to similar trust funds
established for waste disposal sites and quarries for the extraction
of aggregates and other similar substances. Of the sectors considered, the environmental obligations, and in particular the timing of
those obligations, related to waste disposal sites and quarries are
the most similar to those in the mining industry. In particular, operations at a waste disposal site or quarry may last for many years,
and significant restoration activities may need to be undertaken
after the termination of operations, at which point the operator may
not be generating income. For these reasons, waste disposal and
aggregate extraction operations can be expected to derive the most
benefit from extending the rules. In addition, officials in provincial
environment ministries indicated that extending deductibility of
contributions to trusts set up for the purpose of restoring waste
disposal sites and quarries would be a useful complement to provincial initiatives in the area of financial assurances for environmental
protection and restoration.
The rules applying to environmental trusts for waste disposal and
aggregate extraction sites are proposed to be the same as the current
rules for mining reclamation trusts. In particular:
■
contributions to qualifying environmental trusts will be deductible;
■ earnings of the fund will be taxed at the trust level. Operators
will be required to report income earned in the trust as if it had been
earned in the company, and will receive a refundable credit for tax
already paid by the trust. This has the overall effect of taxing trust
income as if it had been earned in the company; and
■ withdrawals from the fund will be taxable. However, in general,
reclamation expenses are considered to be deductible by Revenue
Canada in computing taxable income. Therefore, to the extent that
the funds are used to pay eligible reclamation expenses, there will
be no net increase in tax arising from withdrawals from the fund.
The overall effect of these rules is to advance the timing of the
deduction in respect of reclamation expenses.
As in the case of mining reclamation trust funds, the impact of
these rules is consistent with the principle of “polluter pay” and
with a recent recommendation from the National Round Table on
Environment and the Economy that income earned in environmental trusts should be taxable. It also assists companies subject to
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BUDGET PLAN
environmental regulations to meet their obligations under the relevant federal or provincial statutes. It achieves this result without
distorting these governments’ choices of instrument used to provide
the assurance.
It is proposed that the changes will take effect with respect to
qualifying environmental trusts after February 18, 1997.
Conserving Canadian resources
and sustainable development
Incentives to invest in renewable energy
and energy conservation
The 1996 budget proposed changes to improve the incentives for
investments in renewable energy and energy conservation projects.
The changes achieved this result by ensuring a more level playing
field in the income tax treatment of renewable and non-renewable
energy. The changes included the introduction of a new category of
fully deductible expenses called Canadian renewable and conservation expenses (CRCEs). The 1996 budget also tightened the eligibility rules for expenses related to non-renewable energy which
could be used with flow-through share financing arrangements.
Investments in energy conservation and efficiency equipment are
also encouraged by allowing taxpayers to deduct the cost of such
equipment at a rate of 30 per cent per year (declining balance) under
Class 43.1. This rate often represents an acceleration of the depreciation which would normally be calculated for accounting purposes
on these assets.
Canadian renewable and conservation expenses (CRCEs)
Regulations detailing the expenses that are eligible for inclusion in
the CRCE category were released on December 5, 1996. This budget
proposes one additional modification to the definition of a CRCE.
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ANNEX 6
Canadian renewable and conservation
expense (CRCE) category
Canadian renewable and conservation expenses include certain
intangible development costs associated with projects primarily using
equipment eligible for Class 43.1.
The CRCE category is similar in concept to the definition of expenses
used in the non-renewable energy sector. These expenses generally
include all intangible expenses incurred to determine the existence,
location, extent or quality of certain non-renewable resources such as
crude oil and natural gas.
CRCE was introduced to encourage investment in the pre-production
development phases of energy conservation and renewable energy
projects. CRCE deductions can be accumulated from December 5, 1996,
when the legislation implementing the 1996 budget changes was tabled
in Parliament.
Expenditures eligible for CRCE treatment are fully deductible and can
be carried forward indefinitely. These expenditures can also be
renounced to shareholders who have entered into a flow-through share
agreement. The CRCE definition also provides taxpayers investing in
renewable energy and energy conservation projects with more rapid
deductions for certain other types of expenses which would normally
be treated as capital in nature.
Test wind turbines
Following upon recent consultations with industry associations, this
budget proposes to modify the CRCE definition released on
December 5, 1996 to include the costs of acquiring and installing test
wind turbines. Favourable prior opinions must be issued by the
Minister of Natural Resources for each test wind turbine installation.
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BUDGET PLAN
Eligible energy conservation equipment
This budget proposes changes to expand eligibility for Class 43.1
capital cost allowance treatment to certain acquisitions of used
equipment. A reduced qualification threshold for photovoltaic
systems is also proposed.
Eligibility for class 43.1 CCA treatment
Eligibility for Class 43.1 is described in draft regulations to the Income
Tax Act. Detailed information on both Class 43.1 and CRCE eligibility
criteria will be available in a revised “Technical Guide” to be released
shortly by Natural Resources Canada (NRCan). Class 43.1 was introduced following the termination of Class 34. In general, the following
types of equipment may qualify for inclusion in Class 43.1:
■ cogeneration and specified waste-fuelled electrical
generation systems;1
■ active solar systems;1
■ small-scale hydroelectric installations;
■ heat recovery systems;1
■ wind energy conversion systems;
■ photovoltaic electrical generation systems;
■ geothermal electrical generation systems; and
■ specified waste-fuelled heat production equipment.1
1
Active solar heating, heat recovery and heat production systems must
be used directly in connection with an industrial process to qualify as
Class 43.1 equipment.
Used equipment
The news release entitled “New Tax Measures for Renewables and
Energy Conservation” dated June 27, 1996 proposed that only new
equipment would be eligible for Class 43.1. This change was
proposed to ensure that the incentive provided by the tax system is
targeted towards current energy efficient technology. The budget
proposes to relax these restrictions to accommodate certain used
equipment to the extent that the equipment was included in
Class 34 or 43.1 of the vendor, remains at the same site in Canada
and is not more than five years old (from the time it was originally
placed in service). The cost which can be included under Class 43.1
by the purchaser of any used Class 34 or 43.1 equipment cannot
exceed the original capital cost of the equipment when first placed
in service.
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ANNEX 6
This change is relieving in nature and will be effective for equipment acquired after June 26, 1996.
Photovoltaic peak capacity requirement
The budget proposes to lower the minimum peak capacity requirement for photovoltaic systems from the current level of 10 to
3 kilowatts. This will permit smaller applications of solar power
to qualify.
This change is also relieving in nature and will be effective for all
equipment acquired after February 18, 1997.
Energy efficiency investments
The 1996 budget noted the importance of energy efficiency investments in achieving the government’s environmental and economic
objectives. To this end, it was subsequently announced that the
Departments of Finance and Natural Resources would consult on
the treatment of energy efficiency investments and investments
providing heating and cooling from renewable energy sources to
identify impediments. The 1996 budget also noted the importance
of the development of recognized standards for energy-using
equipment and structures.
Numerous submissions were received and a draft report on the
consultations has been circulated to interested parties. The government found these consultations to be helpful and a broad range of
ideas was presented.
One of the impediments identified was a lack of information and
awareness about the benefits of technologies and practices to
improve energy efficiency. Since the 1996 budget, there has been
considerable progress in the development of recognized standards
for buildings and houses and in the promotion of energy efficiency
improvements to existing houses. The Minister of Natural
Resources announced additional measures in December 1996 to
address this and other impediments.
New national standards for buildings and houses
The National Research Council, under an NRCan Program
co-funded by provincial energy ministries, is about to publish the
National Energy Code for Buildings (NECB). The National Energy
Code for Houses (NECH) is scheduled to be released soon.
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BUDGET PLAN
National Energy Code for Buildings (NECB)
and Houses (NECH)
The NECB and NECH are Canada’s first comprehensive energy efficiency
codes. These codes have been developed over a six-year period through
a consultative process involving Natural Resources Canada, the National
Research Council, provincial and territorial government energy ministries
and electric utilities. Compliance with code requirements can be demonstrated by either a prescriptive or per formance approach. Using the
prescriptive approach, the specific thermal requirements contained in
the code for each building component must be met. Using the performance approach, deviation from the prescribed value is permitted as
long as the overall building energy use is equal to or less than if all
components were built to the prescribed values. The codes accommodate regional variations through the use of cost and climate factors for
34 administrative regions. The NECB and NECH are primarily targeted
to new construction, including buildings and additions.
The NECB has recently passed through the consensus process of
the Canadian Commission on Building and Fire Codes. This code specifies minimum levels of thermal performance for commercial buildings
through the establishment of minimum standards of construction for
building components and features that affect a building’s energy efficiency. Various authorities having jurisdiction for buildings are actively
considering the NECB for adoption. Some provincial governments, and
the federal government, are considering using the codes as internal
guidelines for their own construction.
The NECH is due to be published soon. The code sets minimum
energy efficiency standards for new houses, based on regional differences such as climate and energy costs; it is very similar to the NECB
in overall structure and general level of requirements.
Home energy rating systems
There are over seven million single- and multi-family houses in
Canada today. Residential energy use accounts for over 20 per cent
of secondary energy use in Canada today. There is significant potential for improving energy efficiency in this sector. In particular, it is
recognized that energy performance can often be improved when
renovations, such as replacing windows, finishing basements and
attics or replacing furnaces, are planned.
Since 1993, Natural Resources Canada has been developing the
Home Energy Retrofit Initiative in response to a desire to promote
energy efficient renovations. One of the elements of this program
is the Canadian Home Energy Efficiency Rating System
(CHEERS) which is due to be released later this year and tested
through pilot projects.
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ANNEX 6
Canadian Home Energy Efficiency Rating System (CHEERS)
The Canadian Home Energy Efficiency Rating System will soon be
released. CHEERS will offer builders, renovators, home buyers and
vendors a reliable tool to assess the energy performance of a house.
The system will support a computerized analysis of a house and
produce a comparative rating based on the purchased energy needed
to operate the house. For existing homes, the system will also
recommend specific energy efficiency improvements. NRCan is
also developing audit software that will help homeowners identify
cost-effective opportunities for energy efficiency retrofits.
Energy efficiency regulations
Under the authority of the Energy Efficiency Act, the Government
of Canada has regulated minimum energy performance standards
for some 20 household products, lamps and motors that are
imported into Canada or traded interprovincially. The regulations
are designed to phase out less efficient equipment from the
Canadian market; they complement energy efficiency regulations
which are currently in effect in a number of provinces.
The range of products regulated under these regulations will soon
be expanded to include an additional 13 energy-using products.
Performance levels will be established for such products as compact
clothes dryers, dehumidifiers, gas- and oil-fired boilers and oil-fired
furnaces. In addition, the existing standard for split-system central
heat pumps will be strengthened. Following these initiatives, regulations will apply to energy-using products that account for more
than 75 per cent of residential energy demand.
Energy efficiency and renewable energy
in commercial buildings
During the consultations on energy efficiency and heating and cooling from renewable sources, a number of proposals suggested that
the tax system be used to provide an incentive for energy efficient
buildings. Proposals were varied in nature with some focusing on
new commercial buildings (e.g., office buildings, shopping centres,
hotels, motels and large apartment complexes) meeting very high
energy efficiency standards. Other submissions concentrated on the
need to encourage energy efficient retrofits of the existing building
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BUDGET PLAN
stock because of the large potential gains. Still other suggestions
were received to promote the use of renewable energy to meet the
energy needs of buildings.
Some participants in the consultations suggested introducing new
income tax incentives tied to either the C-2000 criteria or the new
National Energy Code for Buildings. There was a recognition that
new commercial buildings would need to exceed the NECB by a
certain amount in order to demonstrate a high level of energy efficiency. In general, the higher the threshold of energy efficiency in
excess of the code proposed, the more generous was the tax treatment advocated.
There was also considerable interest in encouraging greater use of
renewable energy for the heating and cooling of commercial buildings. This is in recognition of the benefits that renewable energy can
have in reducing emissions of certain greenhouse gases. The government acknowledges that the increased use of renewable energy for
heating and cooling of commercial buildings should be encouraged.
The government is prepared to examine the appropriateness of
using some tax or other mechanism to promote renewable energy,
and energy efficiency investments in commercial buildings linked to
the National Energy Code for Buildings. While the precise nature
of the new incentive mechanism has not yet been determined, possibilities under review include, inter alia, an additional CCA
allowance, an investment tax credit (possibly refundable) or a direct
program spending initiative administered by NRCan. The government will be examining these and other alternative mechanisms.
Funding totalling $60 million to support this new initiative has been
set aside – i.e. $20 million per year for three years beginning in
1998. The new initiatives will complement other activities already
underway at NRCan and be an important element in promoting
investments in energy efficiency and renewable energy for new and
existing commercial buildings.
Further details on this proposed new incentive mechanism will be
developed in consultation with stakeholders and the final design will
be announced by the Minister of Natural Resources later this year.
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ANNEX 6
Sales and Excise Tax Measures
Visitors’ Rebate Program
A common feature of value-added taxes around the world is
the provision of rebates to foreign tourists of sales tax paid on selected
purchases, such as goods and short-term accommodation.
The Visitors’ Rebate Program was established to minimize the
impact of the GST on the tourism industry, thereby encouraging the
continued interest in Canada as an attractive vacation destination
as well as a place to convene trade shows and conventions. The
program will apply equally to the harmonized sales tax (HST).
The Visitors’ Rebate Program also promotes exports by ensuring that the GST is removed from goods exported from Canada.
Currently, non-resident visitors to Canada are entitled to claim a
rebate of the GST paid on eligible goods purchased by them while
in Canada, provided the goods are removed from Canada within
60 days. Rebates may also be claimed for the tax paid on short-term
accommodation.
Foreign conventions (i.e. where at least 75 per cent of participants
are non-residents and the head office of the convention sponsor is
situated outside Canada) are permitted to claim rebates on eligible
purchases, such as meeting rooms, short-term accommodation and
certain other purchases of goods and services used in the course of
the convention.
Since the inception of the program, there have been a number of
proposals by the tourism industry to broaden the administration of
the program, such as providing rebates at international airports as
well as point-of-sale rebates for short-term accommodation and the
expansion of the eligibility of certain goods and services which
could be rebatable.
Therefore, the government is proposing a review of the Visitors’
Rebate Program in order to evaluate its efficiency and effectiveness
in encouraging tourism in Canada and thereby promoting
the growth of employment in the tourism sector. The objective
of the review is to determine whether the current design and
administration of the program can be improved to more effectively
target resources to promote Canada as a tourist destination and
support the tourism industry in the creation of employment.
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BUDGET PLAN
In addition, the review will study whether there are additional
measures which Revenue Canada could adopt to ensure that the
program is administered in the most cost-effective and efficient
manner possible to achieve its goals.
The review will be conducted in consultation with the tourism
industry over the next six months. The findings of the review are to
be submitted to the Minister of Finance in the fall of 1997.
Amendment to the Excise Tax Act
Concerning Measurement of Fuel Volumes
Excise taxes are imposed on gasoline, diesel fuel and aviation fuel
at specific rates per litre. In recognition of the fact that fuel volumes
vary according to temperature, it is proposed to amend the Excise
Tax Act to clarify the method to be used to measure fuel for excise
tax purposes.
For most commercial transactions, fuel is measured in litres
corrected to the reference temperature of 15 degrees Celsius. While
this temperature compensated method has become the international
industry standard, the measurement of fuel in uncompensated litres
nevertheless continues to be used in the domestic industry.
For purposes of accounting for excise tax, industry will continue
to be able to use the temperature compensated method or the
uncompensated method. It is proposed, however, that the Act be
amended, effective February 19, 1997, to require excise licensees to
account for excise tax using the same fuel measurement method
(whether temperature compensated or uncompensated method), that
they use to determine the quantity of fuel delivered and charged to
a purchaser, or the quantity of fuel imported.
Tax rebate on aviation fuel
In November 1996 a program to rebate excise tax paid on aviation
fuel was proposed. The government intends to proceed with this
rebate program and to introduce legislation that would amend the
Excise Tax Act and Income Tax Act to this effect.
Under this program, all airline companies carrying on business
in Canada will be able to obtain a rebate of federal excise tax paid
on their aviation fuel. However, in order to receive this rebate,
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ANNEX 6
companies will be required to give up the right to use some of their
accumulated tax losses that would otherwise be available to reduce
federal and provincial income taxes on future profits.
Tobacco Tax Changes
The government will also be introducing legislation amending the
Excise Tax Act, the Income Tax Act and the Customs Tariff to
implement the tobacco-related changes that were proposed on
November 28, 1996 and December 11, 1996.
These proposals include increased excise tax rates for tobacco
products for sale in Ontario, Quebec, New Brunswick, Nova Scotia
and Prince Edward Island, and a three-year extension of the corporate surtax on the profits of tobacco manufacturers.
In addition, proposed changes to the excise tax on exported
tobacco products will allow foreign duty-free shops to acquire
Canadian tobacco products without application of the tax. At the
same time, the duty- and tax-free allowances in respect of importations of fine cut tobacco and tobacco sticks by returning residents
will be reduced.
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BUDGET PLAN
Notice of Ways and Means Motion
to Amend the Income Tax Act
That it is expedient to amend the Income Tax Act to provide among
other things:
Child Tax Benefit – Working Income Supplement
(1) That the provisions of the Act relating to the annual working
income supplement under the Child Tax Benefit be modified with
respect to amounts of the supplement that become payable during
months after June 1997, in accordance with proposals described in
the Budget Papers tabled by the Minister of Finance in the House
of Commons on February 18, 1997.
Tuition fee and education tax credits
(2) That the provisions of the Act relating to the tuition fee and
education tax credits be modified to
(a) include, in computing the expenses eligible for the tuition fee
tax credit of a full-time student or a part-time student for the
1997 or a subsequent taxation year, ancillary fees (other than
student association fees) paid to an educational institution, where
the fees are
(i) in respect of courses at the post-secondary school level, and
(ii) required by the institution to be paid by all its full-time
students or part-time students, respectively,
(b) allow the unused portion of a student’s tuition fee tax credit
and education tax credit for 1997 or a subsequent taxation year
to be claimed (to the extent that it is not transferred in the year
to a spouse or supporting individual) by the student in a subsequent taxation year, and
(c) increase the monthly amount on which the education tax credit
is calculated from $100 (as proposed in the 1996 Budget) to
(i) $150 for the 1997 taxation year, and
(ii) $200 for the 1998 and subsequent taxation years.
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ANNEX 6
Registered education savings plans (RESPs)
(3) That, for the 1997 and subsequent taxation years, the $2,000
annual limit on contributions to RESPs be increased to $4,000.
(4) That,
(a) at any particular time after 1997, in addition to being permitted to distribute educational assistance payments, an RESP be
permitted to distribute any part of its accumulated income to or
on behalf of a person resident in Canada, where
(i) the person is the RESP’s subscriber, if the subscriber is alive
at the particular time,
(ii) each beneficiary in respect of whom the subscriber has
made contributions to the RESP
(A) has, before the particular time, attained 21 years of age
and is not eligible to receive educational assistance
payments at the particular time, or
(B) has died before the particular time, and
(iii) either
(A) the particular time is after the ninth year that follows
the year in which the first contribution was made by the
subscriber under the RESP in respect of one of those beneficiaries, or
(B) each of those beneficiaries has died before the particular time and was, or was related to, the subscriber (or was
the nephew, niece, great nephew or great niece of the
subscriber),
(b) the amount so distributed be included in computing the
income of the person, and
(c) the RESP be required to be terminated before March of the
year following the year in which the distribution is made.
(5) That, where in the 1998 or a subsequent taxation year an
RESP distributes to or on behalf of its subscriber any part of the
RESP’s accumulated income (otherwise than by way of an educational assistance payment), an additional tax be payable by the
subscriber equal to the amount determined by the formula:
20% x (A – B)
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BUDGET PLAN
where
A is the total of all such distributions made in the year from RESPs,
and
B is the lesser of
(a) the total amounts deducted under subsections 146(5) and
(5.1) of the Act in computing the subscriber’s income for the year,
and
(b) the amount by which $40,000 exceeds the total of all
amounts each of which is the lesser of the amount determined for
A for a preceding taxation year and the amount determined
under subparagraph (a) of this description for the preceding year.
(6) That, where at any time after 1997 an RESP distributes any
part of its accumulated income (otherwise than by way of an educational assistance payment) and its subscriber had died before that
time, an additional tax be payable by the recipient equal to 20 per
cent of the amount of the distribution.
(7) That regulations be authorized to require the withholding by
RESPs from their distributions made after 1997, where the withholding is on account of recipients’ taxes payable under the Act.
(8) That, where after 1996 an individual under 21 years of age
replaces the brother or sister of the individual as a beneficiary under
an RESP, none of the contributions made to the RESP in respect of
the brother or sister be taken into account in determining the
amount of overcontributions to RESPs that have been made in
respect of the individual.
(9) That, in order to accommodate distance education programs
(such as correspondence courses) after 1996 for the purposes of the
RESP rules, enrolment in a qualifying educational program as a fulltime student at a post-secondary institution be considered full-time
attendance at the institution.
(10) That the provisions of the Act relating to pre-1972 income
of RESPs be repealed for the 1998 and subsequent taxation years.
Medical expense tax credit
(11) That, for the 1997 and subsequent taxation years,
(a) the list of expenses eligible for the medical expense tax credit
be expanded to include
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ANNEX 6
(i) the lesser of 50 per cent of the cost of an air conditioner
prescribed by a medical practitioner as being necessary to
assist an individual in coping with the individual’s severe
chronic ailment, disease or disorder, and $1,000,
(ii) the lesser of 20 per cent of the cost of a van that, at the time
of its acquisition or within six months after its acquisition, is
adapted for the transportation of an individual requiring the
use of a wheelchair, and $5,000,
(iii) reasonable expenses relating to alterations to the driveway
of an individual’s principal place of residence where the individual has a severe and prolonged mobility impairment and
the alterations are made to facilitate the individual’s access to
a bus,
(iv) reasonable expenses incurred in respect of an individual
who lacks normal physical development or has a severe and
prolonged mobility impairment to move to housing that is
more accessible by the individual or in which the individual is
more mobile or functional, to a maximum of $2,000, and
(v) sign language interpreter fees paid to a person who is in the
business of providing such services, and
(b) the maximum amount of remuneration for part-time attendant care eligible for the medical expense tax credit be increased
to $10,000 from $5,000 (and to $20,000 from $10,000 where
the individual died in the year).
Refundable medical expense supplement
(12) That, for the 1997 and subsequent taxation years, eligible
individuals be entitled to a refundable tax credit for the year equal
to the amount by which
(a) the lesser of
(i) $500, and
(ii) 25 per cent of the allowable portion of medical expenses
included in computing the individual’s medical expense tax
credit for the year
exceeds
(b) 5 per cent of the amount by which
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BUDGET PLAN
(i) the individual’s adjusted income for the year
exceeds
(ii) $16,069
and, for this purpose,
(c) “eligible individual” means an individual (other than a trust)
(i) who is resident in Canada throughout the year,
(ii) who is not, at the end of the year, a qualified dependant for
the purpose of the Child Tax Benefit, and
(iii) whose total office, employment and business income for
the year (without including amounts received in the year under
a wage-loss replacement plan) is at least $2,500, and
(d) “adjusted income” of an eligible individual for a year means
the total of the income of that individual and the income of the
person who is, at the end of the year, that individual’s cohabiting spouse.
Disability tax credit
(13) That, after February 18, 1997, a person authorized to practice as an audiologist be allowed to certify the existence of a severe
and prolonged hearing impairment for the purpose of the disability
tax credit.
Attendant care expenses
(14) That, for the 1997 and subsequent taxation years, the
$5,000 annual limit on the deductibility of attendant care expenses
in computing a taxpayer’s income be eliminated.
Preferred beneficiary election
(15) That a beneficiary under a trust not be excluded as a
“preferred beneficiary” under the trust for any trust taxation year
that ends after 1996 because the beneficiary does not claim a
disability tax credit where another person is entitled to claim
a dependant tax credit under paragraph (d) of the description of
variable B in the formula used in subsection 118(1) of the Act in
respect of the beneficiary.
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ANNEX 6
CPP/QPP lump sum payments
(16) That the provisions of the Act under which an individual
(other than a trust) may elect to
(a) exclude from the individual’s income for a taxation year the
portion of disability benefits received in the year under the
Canada Pension Plan or the Quebec Pension Plan that relates to
an earlier taxation year, and
(b) increase the individual’s tax payable for the year by the additional tax that would have been payable by the individual for the
earlier year if that portion had been included in computing the
individual’s income for the earlier year
apply to all benefits (rather than only to disability benefits) received
after 1995 under those plans by such an individual.
Pension adjustment reversal
(17) That, for individuals terminating participation under a
deferred profit sharing plan or a provision of a registered pension plan
after 1996, measures relating to pension adjustment reversals be
introduced for the 1998 and subsequent taxation years in accordance
with the proposals described in the Budget Papers tabled by the
Minister of Finance in the House of Commons on February 18, 1997.
Charitable donations
(18) That the provisions of the Act relating to charitable donations be modified to reduce to 37 1/2 per cent from 75 per cent the
income inclusion rate of capital gains from gifts (other than gifts
made to private foundations) made after February 18, 1997 and
before 2002 of securities listed on prescribed stock exchanges.
(19) That, for taxation years commencing after 1996, the annual
income limitation for charitable donations be changed from
(a) 50 per cent of the donor’s income for the year, with respect to
the donor’s charitable gifts, and
(b) 100 per cent of the donor’s income for the year, with respect
to the donor’s Crown gifts
to 75 per cent of the donor’s income for the year with respect to all
such gifts and by increasing that limitation by an amount equal to
25 per cent of
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BUDGET PLAN
(c) the lesser of
(i) the amount of recapture of capital cost allowance included
in the donor’s income for the year in respect of a prescribed
class of depreciable property that included a property that was
the subject of such a gift in the year, and
(ii) for each such gift made in the year of property that was
included in the class, the lesser of its capital cost and its fair
market value, and
(d) the amount of taxable capital gains included in the donor’s
taxable income for the year from such gifts made in the year.
(20) That, for the purposes of determining the fair market value
of a gift made after February 27, 1995 of a servitude, covenant or
easement included in the total ecological gifts of a taxpayer, that
value be considered to be the greater of the fair market value otherwise determined and the amount by which the fair market value of
the land to which the gift relates is decreased as a result of the gift.
(21) That,
(a) where, at any time after February 18, 1997, a charity acquires
(i) a debt obligation (other than a debt obligation listed on a
prescribed stock exchange) of a person or partnership that
does not deal at arm’s length with the charity, or
(ii) a share (other than a share listed on a prescribed stock
exchange) of the capital stock of a corporation that does not
deal at arm’s length with the charity, or
(b) where
(i) at any time a gift is made to a charity,
(ii) an amount is deducted, in respect of the gift, in computing
the donor’s taxable income or tax payable under Part I of the
Act for any taxation year, and
(iii) within five years after the day of the gift,
(A) the charity holds a debt obligation of the donor or a
person or partnership that does not deal at arm’s length
with the donor (other than a debt obligation listed on a
prescribed stock exchange),
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ANNEX 6
(B) the charity owns a share (other than a share listed on a
prescribed stock exchange) of the capital stock of the donor
or a corporation that does not deal at arm’s length with the
donor, or
(C) the donor or a person or partnership that does not deal
at arm’s length with the donor uses property of the charity
(other than the use by a financial institution of an amount
held on deposit),
a tax equal to 50% of
(c) where subparagraph (a) applies, the amount of the debt obligation or of the fair market value, at that time, of the share, and
(d) where subparagraph (b) applies, the lesser of
(i) the amount of the gift, and
(ii) the amount of the debt obligation or of the fair market
value of the share or property
be payable by the charity and, where subparagraph (b) applies, the
donor and the person, partnership or corporation referred to in
subparagraph (b) be jointly and severally liable with the charity to
pay that tax, except that subparagraph (b) does not apply where
the gift referred to in that subparagraph was made before
February 19, 1997 and, before that day,
(e) the charity held the debt obligation or the share referred to in
that subparagraph, or
(f) the donor used the property of the charity referred to in that
subparagraph.
(22) That, after Royal Assent to any measure giving effect to this
paragraph, the Minister of National Revenue be authorized to make
available to the public the following information relating to a registered charity:
(a) the charity’s governing documents, including its statement of
purpose,
(b) any information required to be provided by the charity upon
applying for registration,
(c) the names of the charity’s directors,
(d) the notification of registration including any conditions or
warnings, and
225
BUDGET PLAN
(e) where the registration of the charity has been revoked, a copy
of any letter sent by or on behalf of the Minister of National
Revenue to the charity indicating the grounds for the revocation.
Investment tax credits
(23) That, in order for a cost incurred or an expenditure made
to qualify for the investment tax credit, for claims made after
February 18, 1997, a taxpayer be required to identify the cost or
the expenditure as qualifying for the investment tax credit on a
prescribed form filed with the Minister of National Revenue within
twelve months of the taxpayer’s filing-due date for the taxation year
in which the investment tax credit in respect of the cost or the
expense first arises, except that any such form may be filed by the
later of the date otherwise required and May 31, 1997.
Environmental trusts
(24) That the rules governing mining reclamation trusts be
extended to qualifying environmental trusts after February 18, 1997
in connection with the reclamation of property which is primarily
used or had been primarily used for
(a) the disposal of waste, or
(b) the extraction of clay, peat, sand or shale or dimension stone,
gravel or other aggregates.
Labour-sponsored venture
capital corporations (LSVCCs)
(25) That, for eligible investments made by a federall-registered
LSVCC after February 18, 1997,
(a) the maximum total investment in an eligible business entity
and all corporations related to it be increased to $15 million from
$10 million,
(b) the $50 million asset limit in respect of an eligible business
entity be applied immediately before, rather than immediately
after, the LSVCC investment is made, and
226
ANNEX 6
(c) for the purpose of the 500 employee limit, the number of
employees be calculated as the number of employees who
normally work at least 20 hours per week plus 1/2 of the number
of other employees.
(26) That, in determining the amount of tax payable under
subsection 204.82(2) of the Act by a federally-registered LSVCC,
the cost to the LSVCC of an eligible investment be considered to be
1.5 times the actual cost of the investment, provided
(a) the investment was made after February 18, 1997, and
(b) immediately before the investment was made, the carrying
value of the total assets of the entity that issued the investment
and all corporations related to it (determined in accordance with
generally accepted accounting principles on a consolidated or
combined basis, where applicable) did not exceed $10 million.
(27) That, in determining the amount of tax payable under
subsection 204.82(2) of the Act by a federally-registered LSVCC for
each taxation year that ends after 1998, the excess that is referred
to in that subsection at a particular time in the year be reduced by
the amount by which
(a) 50 per cent of the total of
(i) the total cost to the LSVCC of eligible investments at the
beginning of the year, and
(ii) the total cost to the LSVCC of eligible investments at the
end of the year
exceeds
(b) the total cost to the LSVCC of eligible investments at the
particular time.
(28) That, in determining the amount of tax payable under
subsection 204.82(2) of the Act by a federally-registered LSVCC for
each taxation year (referred to below as the “LSVCC’s year”) that
ends after 1998,
(a) specified redemptions expected to occur after a particular
taxation year that would otherwise reduce the LSVCC’s shareholders’ equity at the end of the particular year (or, where the
LSVCC’s year ends in 1999, 2000, 2001 or 2002, 20 per cent,
40 per cent, 60 per cent or 80 per cent, respectively, of the
amounts of those expected redemptions) not reduce that shareholders’ equity, and
227
BUDGET PLAN
(b) a specified redemption be
(i) any redemption that occurs within 60 days after the particular year where
(A) tax under Part XII.5 of the Act would have become
payable as a consequence of the redemption if the redemption had occurred before the end of the particular year, and
(B) tax under Part XII.5 of the Act does not become payable
as a consequence of the redemption, and
(ii) any other redemption that does not occur within 60 days
after the particular year.
(29) That, where an amount becomes payable to the government
of a province after February 18, 1997 by an LSVCC (other than a
federally-registered LSVCC) as a consequence of the failure to meet
any provincial investment requirements or the revocation, deregistration, winding-up or dissolution of the LSVCC,
(a) except to the extent otherwise expressly provided, the LSVCC
be liable for an equal amount under the Act, and
(b) the Minister of National Revenue be required to refund
amounts paid under the Act by the LSVCC on account of the
liability, to the extent that the corresponding amounts have been
refunded by the government of the province.
(30) That, for the 1991 and subsequent taxation years, a mutual
fund corporation (including an LSVCC) or a mutual fund trust not
be treated as a trader or dealer in securities for the purpose of the
election under subsection 39(4) of the Act with respect to dispositions of Canadian securities.
Part VI surtax
(31) That the 12 per cent surtax on financial institutions (other
than life insurers) be extended to October 31, 1998, prorated for
taxation years that end after October 1998.
228
ANNEX 6
Notice of Ways and Means Motion
to Amend the Excise Tax Act
That it is expedient to amend the Excise Tax Act to provide among
other things:
(1) That for the purposes of determining the tax imposed under
subsection 23(1) or (4) of the Act in respect of fuel, the volume of
the fuel be measured in accordance with
(a) the temperature compensated method, where that method is
used by the manufacturer or producer of the fuel, or by the
licensed wholesaler, for the purpose of establishing the amount
of fuel delivered and charged to the purchaser, or by the importer
of the fuel to establish the amount of fuel imported, or
(b) the uncompensated method, where that method is used by the
manufacturer or producer of the fuel, or by the licensed wholesaler, for the purpose of establishing the amount of fuel delivered
and charged to the purchaser, or by the importer of the fuel to
establish the amount of fuel imported.
(2) That for the purposes of any enactment founded on paragraph (1),
(a) “fuel” be defined as gasoline, diesel fuel and aviation fuel;
(b) “temperature compensated method” be defined as the
method involving the measurement of the volume of fuel in litres
that are corrected to the reference temperature of 15 degrees
Celsius in accordance with the requirements imposed by or under
the Weights and Measures Act; and
(c) “uncompensated method” be defined as the method involving the measurement of the volume of fuel in litres that are not
corrected to a reference temperature.
(3) That any enactment founded on paragraphs (1) and (2) be
effective on and after February 19, 1997.
(4) That interest be imposed on any increase in the amount of
excise tax payable on gasoline, diesel fuel and aviation fuel pursuant
to any enactment founded on paragraphs (1) and (2) that is not
remitted within the time within which it would have been required
to have been remitted had that enactment been assented to February
19, 1997, calculated at the rate prescribed for purposes of the
Customs Act, in the case of imported gasoline, diesel fuel and aviation fuel, and at the rate prescribed for purposes of the Excise Tax
Act, in any other case.
229
BUDGET PLAN
Notice of Ways and Means Motion
to Amend the Customs Tariff
That it is expedient to amend Schedule II to the Customs Tariff by
adding, after code 2530, the code set out in the following schedule:
Table A6.2
Schedule
Code
2531
Provision
Goods specifically designed
to assist persons with
disabilities in alleviating
the effects of those disabilities,
and articles and materials
for use in such goods …
230
Mostfavourednation tariff
General
preferential
tariff
Free
Free
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