C.D. Howe Institute said Wednesday Ottawa should cut taxes, control spending, and restructure the system of federal-provincial transfers, in next week’s federal budget.

The right-wing think tank published its “shadow budget, written by senior vice-president and director of research William Robson and associate director of research Finn Poschmann. It lays out details of the policies they say the federal budget should introduce.

“Fiscal policy affects families and businesses as they make their daily decisions and its quality helps determine whether living standards rise or fall,” say Robson and Poschmann. “By instilling federal taxation and spending with fresh purpose, this [shadow budget] takes that responsibility seriously.”

On the tax front, they advocate a restructured tax system that would raise thresholds, provide fairer treatment to families with children, allow more generous transfers of tuition tax credits, reduce corporate income tax rates to 17% by 2009/2010 and lower personal tax rates.

Other changes proposed by C.D. Howe include:

  • bringing the tax treatment of dividends more closely in line with capital gains;
  • introducing tax-prepaid savings plans;
  • moving back the age at which RRSPs must be wound down to 70 for 2006 and raise it by one additional year in each of 2007, 2008 and 2009;
  • restoring the contribution room to individuals who withdraw RRSP funds so that the same cumulative net lifetime contribution room will be available to savers with comparable lifetime incomes;
  • scrapping the foreign property rule immediately;
  • dropping the exemption on the lifetime capital gains, which is available on the disposition of shares of small businesses and family farm properties;
  • and scrapping the tax subsidy for labour-sponsored funds.



The report also calls on the government to overhaul the system of federal-provincial transfers. “This [shadow] budget initiates a major review of federal-provincial transfers to correct recent ad hoc decisions that have put them on an unsustainable path, and it puts more resources into the hands of the provinces themselves,” the authors say.

For example, they recommend a four-year phase-out of employee premiums and spending on non-insurance-related programs, with the provinces taking up responsibilities for training and related programs. They also call for a widening the mandate of the panel of experts charged with redesigning the equalization program to include all health and social transfer payments. “Currently, the federal government is expected to increase transfers indefinitely at a rate that exceeds growth in the Canadian economy and in federal revenue; inevitably, Ottawa cannot deliver on such a promise.”

In the shadow budget, “transfers for health and social programs will grow 10% in 2005/2006, rather than at 15% or more that would otherwise occur — and remain constant in dollar terms afterwards.”

Robson and Poschmann say that reductions in unproductive federal spending will save more than $22 billion by 2009/2010, enabling Ottawa to substantially increase funding for the armed forces, trade infrastructure, disease control and foreign aid.