The federal Liberals hold a strong hand as they prepare to table the federal budget, the first of the new minority government, experts suggest.
The government will focus on implementing campaign promises in its 2020 budget — and the Liberals won’t have to worry about making major concessions to win Opposition support.
“No one wants an election; no one is ready to go,” says Elliot Hughes, senior advisor with Ottawa-based Summa Strategies Canada Inc., and a former deputy director of tax policy to Finance Minister Bill Morneau. “The Conservatives are in the midst of a leadership campaign [and] the NDP are flat broke.”
Hughes says he expects the Liberals will get the votes needed to pass the budget from the Bloc Québécois, which has signalled an interest in working with the government.
“I would expect the government to follow through on most of [its campaign promises, but] I wouldn’t say all and I wouldn’t say all at once,” Hughes says.
Aaron Wudrick, federal director of the Canadian Taxpayers Federation in Ottawa, says he thinks the Tories may support a budget from the Liberal government, whose policy pushes so far have involved the Trans Mountain pipeline expansion and a tax cut in the form of an increase in the basic personal exemption amount to $15,000 over four years. “[Those] are things that the Conservatives are essentially going to be forced to support,” Wudrick says.
Prime Minister Justin Trudeau’s mandate letter to Morneau, released in mid- December, includes a long list of priorities revolving around the Liberals’ campaign policy themes of supporting the middle class; encouraging investment in clean energy and the fight against climate change; closing tax loopholes; and fighting aggressive tax avoidance and tax evasion.
For example, the Liberals are likely to go ahead with a proposed 10% luxury tax on vehicles valued over $100,000, and a 1% annual vacancy and speculation tax on residential properties owned by non-residents, says Hughes: “I don’t see why [the government] wouldn’t have those in [the 2020 federal budget].”
Other priorities in the mandate letter, such as “a review of tax expenditures to ensure wealthy Canadians don’t benefit from unfair tax breaks” and the closing of perceived tax loopholes that favour large multinational corporations, are likely to gain ready support from the NDP and the Bloc.
These and similar measures also would help the government raise revenue, something the Liberals will need to do if they introduce pricey spending programs, such as a universal drug-coverage plan — a priority included in the finance minister’s mandate letter.
“I don’t think pharmacare can be implemented without raising taxes,” says Brandon Schaufele, assistant professor in business, economics and public policy at the Ivey Business School at the University of Western Ontario in London, Ont. Schaufele says the Liberals are at least two or three years out from introducing a universal drug plan.
Says Wudrick: “I think the [Liberals] would love to raise taxes, but they know they can’t right now.” Wudrick suggests that recent tax cuts in the U.S. essentially force the Canadian government to keep the status quo in terms of rates, “if not look for ways to match.”
One way the Liberals could raise billions in tax revenue immediately would be to increase the capital gains inclusion rate. The NDP, which promised in its election platform to raise the inclusion rate from 50% to 75%, would likely support such a move.
Raising the capital gains rate would fit well with the Liberals’ policy goal of taxing high- income Canadians more. And a higher rate would effectively close a tax loophole available to Canadian small businesses that allows for the conversion of dividends into capital gains in a practice called “surplus stripping.”
“All of these factors say that if there ever was ever a time that the government will look at [raising the capital gains rate], this might be the time,” says Jamie Golombek, managing director of tax and estate planning, CIBC financial planning and advice, with Canadian Imperial Bank of Commerce in Toronto.
Others say the government isn’t likely to raise the rate, particularly since such a move wasn’t included in the Liberals’ election platform.
“I would be really surprised if it happened,” says Ian Russell, president and CEO of the Investment Industry Association of Canada. He suggests that raising the capital gains rate would be “counterproductive” for promoting investment.
Schaufele, for his part, says he “can’t see” the Liberals raising the capital gains rate in the 2020 budget.
The government also stated it will revisit the rules governing the taxation of employee stock option deductions in the upcoming budget, changes the government first proposed last year. The Liberals proposed limiting the employee stock option grants that can be taxed effectively at the capital gains rate to $200,000 annually, with carve-outs for small businesses and certain startup businesses.
“We’re waiting to find out what’s going to happen to the stock option rules, because there’s a lot of uncertainty,” Golombek says.
The good news for the Liberals, in terms of policy flexibility, is that the state of the domestic economy is good, if not necessarily great, Schaufele says. “Ottawa’s books are in pretty good shape, [the Liberals have] maintained a good credit rating and the debt-to-GDP ratio is within reasonable bounds.”
Morneau’s mandate letter instructs him to implement the government’s fiscal plan while lowering the debt-to-GDP ratio, keeping Canada’s AAA credit rating and ensuring the government has “the fiscal firepower in the event that we need to respond to an economic downturn” — all while continuing to invest in people.
“It’s going to have to be a fiscally responsible budget,” says Katie Walmsley, president of the Portfolio Management Association of Canada, “but at the same time, consistent with [the Liberals’] messaging about respecting and taking care of middle-class Canadians.”