If there was any doubt that this is an election year, Federal Budget 2019 offered undeniable proof that we’re about to head to the polls.
Finance Minister Bill Morneau tabled a budget yesterday that introduced approximately $23 billion in new spending, with no plan to balance the budget in the foreseeable future. That latter fact isn’t entirely surprising given the Trudeau Liberals’ penchant for spending first and asking questions of fiscal probity later. Instead, the budget was designed to appeal to anxious seniors concerned over the long-term sustainability of their personal finances, Millennials worried about being priced out of major urban housing markets and the always-nebulous target demographic: hard-working middle class families.
Entrepreneurs, on the other hand, remain a seeming afterthought to this government. Budget 2019 was so thin on entrepreneur-friendly measures, in fact, that some barely warrant mention. What we can say is that even though Morneau decided not to lower personal or corporate tax rates, he managed not to increase them and put a further strain on business owners’ already stretched finances. That was the good news. On the other hand, high tax rates remain a concern, as do challenging tax compliance requirements. Let’s not forget that entrepreneurs are still reeling from changes to passive income investment and income-splitting rules that had a direct, negative impact on their bottom lines.
Indeed, it’s probably easier to assess what the budget didn’t do for business owners than what it managed to accomplish. Under that lens, Budget 2019 did not:
- Include measures to simplify Canada’s onerous tax system, despite ongoing lobbying on the part of the business community to make fair and sensible tweaks that would ease the burden on business owners.
- Make changes to rules regarding the intergenerational transfer of family businesses and related assets. The one morsel of good news on this front is that the federal government is promising to continue to look at ways to make this process more equitable for business-owning families who want to pass family-run companies along to their children without facing crippling tax rates. Under the current system, and in certain circumstances, it can be more beneficial to pass on a business to a third party than your own children. This needs to change.
- Take steps to ease the burden of increasing Canada Pension Plan costs, not to mention costs associated with the new federal carbon tax, which could have a significant impact on small and medium-sized businesses in some provinces.
One surprise measure the Liberals undertook was the introduction of a new tax on employee stock options for high-income executives employed by ‘large, long-established, mature firms.’ We hope the Department of Finance will at some point offer a clear definition of which organizations fit into this larger enterprise category. The government is planning to apply “a $200,000 annual cap on employee stock option grants (based on the fair market value of the underlying shares) that may receive tax-preferred treatment.” The budget claims that the vast majority of employees that receive employee stock option benefits will be unaffected by the changes, while start-ups and fast-growing businesses (again, the definition of which remains unclear) will see their employee stock option benefits remain uncapped. The government’s aim is to crack down on high-earning executives—which will have almost no meaningful impact on federal finances, but I digress—while allowing emerging businesses (especially in the technology sector) to remain competitive in their efforts to attract and retain top talent in hot markets such as Vancouver, Montreal and Toronto.
Here’s how the budget justifies the changes to employee stock option benefits:
‘When examining the evidence, it is clear that the employee stock option deduction is highly regressive. In 2017, 2,330 individuals, each with a total annual income of over $1 million, claimed over $1.3 billion of employee stock option deductions. In total, these 2,330 individuals, representing 6 per cent of stock option deduction claimants, accounted for almost two-thirds of the entire cost of the deduction to taxpayers. The public policy rationale for preferential tax treatment of employee stock options is to support younger and growing Canadian businesses. The Government does not believe that employee stock options should be used as a tax-preferred method of compensation for executives of large, mature companies.’
Other, relatively minor, proposed tax changes include offering a 100 per cent accelerated capital cost allowance for the purchase of low-emission vehicles (including those used for commercial purposes) and the expansion of small business tax deductions for fishers and farmers. A potentially beneficial non-tax measure is the introduction of the new Canada Training Benefit and the EI Training Support Benefit to help ease the shortage of skilled labour by providing improved access to job training. The changes are not expected to increase employment insurance rates, even though they will be paid through the EI system.
The Canada Revenue Agency will have an easier time collecting taxes thanks to Budget 2019. The CRA is about to receive a $150 million cash injection to improve tax enforcement, expand its crackdown on offshore tax evasion and—more good news!—improve customer service for taxpayers including expediting tax dispute resolution timelines. I’ve written extensively in recent blogs about service challenges at the CRA, so hopes are high that this additional funding will finally make a material difference for business owners who struggle to navigate their dealings with the agency.
The unfortunate reality is that Budget 2019 will see deficits continue to increase even as economic growth shows signs of slowing. Deficits will reach nearly $20 billion over the next two years, and will only decline to a still-hefty $9.8 billion by 2023-24. An unforeseen economic shock could torpedo these estimates and land us further in red ink, raising concerns over additional spending. But, again, election year!
The bottom line is that entrepreneurs need measures that directly address their ongoing concerns, making it easier for them to grow their businesses and achieve success. Budget 2019 simply doesn’t provide that relief. Perhaps post-election the Liberals (or their successors) will come to the realization that the business community needs the federal government’s support, too.
For more details on the budget measures, please see our full Budget 2019 commentary.
Armando Iannuzzi, Partner