News

Finance Minister Jim Flaherty unveiled a budget Monday designed to appeal to the Conservatives' traditional political constituencies of small business owners, fishermen and farmers, but it was almost devoid of goodies for its other long-time backers — investors and big business.

The biggest disappointments for the investment community were the lack of tax cuts and the failure to eliminate taxes on capital gains that are reinvested within six months.

“It definitely wasn't a budget directed at business,” said Don Drummond, chief economist at TD Bank Financial Group. While he hadn't been expecting many measures to be aimed at business, he said he had thought the government would take some action on the capital gains deferral “simply because they promised it.”

The budget is disappointing for business, said Michael Tinkler, vice-chair of the Certified Management Accountants of Canada, citing a total lack of new measures for big business beyond those announced previously.

For the first time in three budgets, Ottawa offered no big cuts to corporate income tax rates. The government is, however, providing incentives to the provinces to eliminate their capital taxes by 2011.

Another hit for big business: the oil sands industry will lose its prized accelerated write-off for general investments.

Greg Stringham, executive vice-president of the Canadian Association of Petroleum Producers, said the budget creates increasing uncertainty for oil sands producers who are already facing a series of challenges, from higher construction costs to new environmental regulations.

“For the oil sands projects that are right on the line, this will certainly have an impact,” he said. “For everybody, it just adds a level of uncertainty to these projects as they are trying to make these billion-dollar decisions going forward.”

“I'm obviously disappointed but I can't say I'm surprised,” said Will Roach, chief executive officer of UTS Energy Corp., which has a 30-per-cent stake in the proposed Fort Hills mining project. “From a purely UTS perspective, this is not catastrophic and it certainty doesn't affect the viability of our oil sands business going forward. But it's another piece of negative news for our industry.”

The big treat for small businesses, farmers and fishers was an increase in the lifetime capital gains exemption from $500,000 to $750,000. That's the first time the exemption has been raised since 1988.

“It's a big budget for small business,” said Garth Whyte, executive vice-president of the Canadian Federation of Independent Business. “They met and exceeded our expectations.”

As well as the higher capital gains exemption, Ottawa is going to reduce the paper burden on small business. “That's another big top priority, because it caused a lot of stress, a lot of time, a lot of money to fill out these things,” Mr. Whyte said. “In some instances, some firms will have 34 remittances to do with the Canadian Revenue Agency and they'll be cut down to seven. So that's big.”

One budget measure that will benefit both small and big manufacturers is a faster write-off for capital investments in machinery and equipment, a move Mr. Flaherty described in his budget speech as “a shot of adrenaline” for manufacturers.

Companies will be able to write off 50 per cent of any new machinery bought between now and the end of 2008, a move that is expected to cost Ottawa $170-million in fiscal 2007-2008 and $565-million in 2008-2009. It currently takes six years to write down 85 per cent of those assets.

The accelerated write-off was praised as “overdue and badly needed” by Mel Svendsen, chief executive officer of Standen's Ltd., a Calgary auto and farm machinery parts maker. “We have a tremendous number of manufacturers that have been unable to make the kind of investments they need in order to remain globally competitive,” he said.

Mr. Svendsen's one misgiving is that the new rules are only temporary. “I hope they reconsider and look at making these capital cost allowance [rates] long term, or a permanent change,” he said.

The budget also proposes increasing the capital cost allowance rate for Canadian buildings used for manufacturing or processing goods, to 10 per cent from 4 per cent. Beyond manufacturing, the CCA rate for other non-residential buildings will rise to 6 per cent, from 4 per cent, while the rate for computers rises to 55 per cent from 45 per cent. Natural gas distribution pipelines and liquefied natural gas facilities will also be eligible for faster write-offs.

The budget is also proposing that interest expense on debts incurred to buy the shares of a foreign affiliate will no longer be deductible, unless and until the shares generate income that Canada actually taxes.

The government argues that multinational companies have been taking advantage of Canadian tax laws by borrowing in Canada to fund business operations abroad, then using the resulting interest deductions to offset Canadian-source income. In other words, Canadian taxpayers have been indirectly subsidizing the international operations of multinationals, and that was making it more attractive for even Canadian-owned companies to locate new income-earning operations in a foreign country.

And buoyed by the success of last year's move to remove the capital gains tax when an investor donates stock to charity, the government is broadening that tax removal to the donation of stock to private foundations.

With files from reporters Richard Blackwell, David Ebner, Shawn McCarthy and Tavia Grant