April 10th, 2007

 

Blurb: With an election looming, the new federal budget is loaded with goodies.

 

The new federal budget: what it means to Canadians

 

By Peter Diekmeyer • Bankrate.com

 

Anytime that a government announces a new budget when an election is looming, you can be sure its contents will reflect that fact. The 2007 federal budget was no exception. As Finance Minister in a minority government, Jim Flaherty released his latest offering fully aware that its contents stand a good chance of being fresh in voters’ minds the next time they go to the polls.

 

The result is a budget targeted toward the Canadian center, devoid of the radical moves that you might expect from a party whose roots are on the right wing. By all appearances, the rich and businesses have for the most part, been left on the backburner. And spending increases abound.

 

“New program spending is poised to trump tax reductions by a ratio of 2:1, precisely the reverse of last year’s budget,” comments Derek Burleton, a senior economist with TD Bank Financial Group. “While the tilt towards spending was a little heavier than we expected, no major priority areas were forgotten.”

 

Transfers and debt pay-downs

The biggest budget initiatives relate to transfers by the federal government to the provinces, to pay for things such as health and education. In all $39 billion in new money will be shelled out over the next eight years, in order to correct the “financial imbalance,” caused by the combination of rising needs of provincial governments coupled with the cash a-plenty at the federal level.

 

The new budget also calls for an estimated $9 billion surplus during the 2006-2007 fiscal year, which is roughly the same amount that will be applied toward reducing the national debt. As a result of this and other initiatives, the federal debt to GDP ratio is expected to fall to 25 percent by 2012-2013 compared to 32.8% during the latest fiscal year.

 

The irony is that despite the enormous effects that both initiatives will have on ordinary Canadians, many will not notice those effects immediately, nor when they do, will they realize that they are due to the federal budget. That’s because all of the direct spending from the increased transfer payments will be done by provincial governments. But few Canadians really pay much attention to much attention where the cash to pay for that spending comes from. The debt-pay down will also bring big benefits to Canadians, because it will lead to reduced interest costs down the line. These in turn will provide the government more latitude for tax cuts and spending increases in future budgets.

 

Highly targeted measures,…which affect a lot of people

The budget also included several highly targeted measures that are designed to generate the biggest bang among the most voters possible, for each dollar spent. Many of these measures are slated to ease the lots of families, seniors and low-income earners. For example a new child tax credit is being introduced, which should provide families with about $310 in tax relief per child.

 

Seniors are also big winners in the recent budget. Older Canadians are healthier today than ever before and living longer. As a result, many are electing to stay in the workforce longer. In recognition of this fact, the budget proposes to extend the date by which one must begin pulling funds out of their RRSP from 69 years of age to 71.  Small adjustments were also made to increase the flexibility of Registered Education Savings Plan contributions.

 

Lower income Canadians will benefit from two key measures. Those that have either employment or business income will now be entitled to a credit of 20% of earned income in excess of $3,000. The maximum benefit will be $500 and the credit will be reduced by 15 percent of net family income in excess of $9,500. A credit will also be extended to cost-per-trip payment cards of public transit users.

 

Loan Buyers Plan

According to one real estate industry expert, two groups were left behind: potential first-time home buyers and those who are thinking about booting their investments in revenue property.

 

Prior to the budget, the Canadian Real Estate Association had proposed that recaptured depreciation and capital gains tax could be deferred when investment properties such as duplexes and triplexes are sold, as long as the proceeds were invested in another investment property. “Small investors are holding onto their real property investments because of the tax consequences associated with selling and reinvesting, and this is unduly influencing typical market activity,” said Pierre Beauchamp, CREA’s CEO.

 

CREA had also called for the federal government to increase the maximum amount that individuals could withdraw from a home buyers’ plan. When the initiative was introduced in 1992, a limit of $20,000 was placed on the amount that first-time home buyers could withdraw from their RRSPs to apply to their down payments. However this limit has not increased since then, despite the fact that inflation has continued unabated. CREA had called for the limit to be increased to $25,000. But the latest budget did not deliver on either the limit increase nor on the proposed tax relief for investment property owners.

 

Peter Diekmeyer (www.peterdiekmeyer.com) a freelance business and economics writer.

 

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