BUDGET 2015: In the black but barely
April 22, 2015
Low oil prices may be costing billions in revenue, but the federal government has managed to balance its books on schedule – and with a modest surplus to boot.
“We have been prudent. We have been practical. And we have stuck to our plan,” says Finance Minister Joe Oliver. The surplus represents a significant achievement for the Harper government, which had vowed under former Finance Minister Jim Flaherty to eliminate the deficit by this year.
After pushing the tabling of the budget into the new fiscal year in response to economic uncertainty caused by plunging oil prices, the Department of Finance has declared a surplus of $1.4 billion. To help balance the books, the government plans to temporarily cut its contingency fund from $3 billion to $1 billion.
The country’s debt-to-GDP ratio continues to trend lower, with the government expecting a figure of 27.9% in 2017-18. That would put the ratio below its pre-recession low and keep things on track to hit the 25.0% target by 2021.
“Setting aside the government’s use of its contingency fund to reach a surplus, it’s still good to see an end to the budget deficit – it’s been a long time coming and in our view it sends a positive message about fiscal policy since the recession,” says Sadiq S. Adatia, Chief Investment Officer for Sun Life Global Investments.
“But there’s no question the impact of low oil prices could continue to take a toll as the ripple effects spread,” he adds. “If the situation persists and the various upsides of low oil prices aren’t enough to compensate, we could be in for additional economic pain – and not just in the oil patch.”
The Department of Finance expects to suffer a 2.9% drop in corporate income tax revenue in 2015-16 because of lower oil prices. Partly as a result, the government has cut its GDP growth projection to 2.0% for this year and 2.2% in 2016, while characterizing the economy as “resilient.”
“After a drop in oil prices like this pulls the rug out from under the country’s main stock market, the value of a globally diversified portfolio really becomes clear,” says Adatia. “Foreign markets that are not so heavily tilted toward the energy sector are once again outpacing the S&P/TSX Composite this year. Our negative view on the domestic economy has been reinforced and we continue to look for investment opportunities outside our borders, particularly in the U.S.”
TFSA contribution limit. In a move that was widely anticipated in the days prior to the budget release, the current Tax-Free Savings Account contribution limit of $5,500 is proposed to be increased to $10,000 annually. The new limit would no longer be subject to increases based on inflation, however. The $10,000 annual limit is proposed to be effective immediately for the 2015 taxation year.
RRIF minimum formula rates. For 2015 and going forward the Registered Retirement Income Fund minimum formula rates are being reduced for ages 71 and older. Pre-age 71 RRIF rates remain unchanged. Excess RRIF withdrawals taken in 2015 (but calculated using the old rates) can be re-contributed to a RRIF by February 29, 2016. The age 71 rate is almost 30% lower than its pre-2015 counterpart. But the difference shrinks as you get older, with the rate for those age 95 and older topping out at 20% – the same rate under the old rules for those age 94 and older.
Small business tax rates. The budget proposes to cut the small business federal tax rate by half a percentage point each year from 11% in 2015 to 9% by 2019. This rate applies to the first $500,000 of active business income. The actual rate a business pays will vary depending on its province of residence because the provinces also tax business income. But most provinces also have a low small business tax rate. For example, Ontario’s rate is 4.5%, Saskatchewan’s is 2.0%, and New Brunswick’s is 4.0%.
T1135 filings. The budget proposes to simplify foreign property reporting for taxation years that begin after 2014. Under a revised form being developed by the Canada Revenue Agency, if the total cost of a taxpayer’s foreign property is less than $250,000 throughout the year, the taxpayer can report the property under a new simplified foreign asset reporting system.
Donations involving shares of private corporations or real estate. Beginning after 2016, the budget proposes to provide an exemption from capital gains tax in respect of certain dispositions of private corporation shares or real estate. Anti-avoidance rules will apply to reverse the exemption under certain circumstances.
LCGE for farm and fishing property. Budget 2015 proposes an increase to the Lifetime Capital Gains Exemption for qualified farm and fishing property to $1 million, an increase of almost $200,000 above the current limit. The current LCGE for qualified small business shares remains at $813,600 in 2015, increased by inflation each year. Once this rate has reached the $1 million threshold to align with farm and fishing property, the same limit will be used for all types of property on an indexed basis going forward.
If there’s one thing that past episodes of market volatility have taught us, especially swings in the energy sector, it’s that ups-and-downs go hand-in-hand with opportunity.
Adatia says he and his team are standing by. “We’re far from expecting the energy sector to rebound to its former strength any time soon, but we have started to take advantage of the downturn. I think that under present conditions and given the timing, these words from Warren Buffett make more sense than ever – ‘if you wait for the robins, spring will be over.’”
This summary contains information in summary format for your convenience, published by Sun Life Global Investments (Canada) Inc. Although this summary has been prepared from sources believed to be reliable, Sun Life Global Investments (Canada) Inc. cannot guarantee its accuracy or completeness and shall not be liable for any errors and omissions. This summary is intended to provide you with general information and should be not be construed as providing specific individual financial, investment, tax, legal or accounting advice. Please note, any future or forward looking statements contained in this report are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated. Please speak with your professional advisors, such as your financial advisor or tax specialist, and refer to the Budget as published by the Government of Canada for details before acting on any of the information.
© Sun Life Global Investments (Canada) Inc., 2015.
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