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Federal Budget 2021: Ottawa opens the floodgates of economic support but lacks a plan for paying down the pandemic debt.
Raymond Chabot Grant Thornton has responded with mixed feelings to the first federal budget presented by Canada’s Finance Minister, the Honourable Chrystia Freeland, due to concerns that it could result in a heavy financial burden for future generations.
“The firm welcomes the numerous investments aimed at supporting businesses and various economic sectors. The pandemic forced the government to take action in order to prevent devastating consequences,” said Emilio B. Imbriglio, President and Chief Executive Officer at Raymond Chabot Grant Thornton. “However, these massive investments should be followed by a plan to reduce the astronomical pandemic-related deficit with ambitious measures—even temporary ones—like those recommended by Raymond Chabot Grant Thornton. We could still experience additional financial turbulence caused by the pandemic.”
Having published a tax bulletin highlighting the budgetary and tax measures announced by the government, the firm wishes to share its views on the federal budget and reiterate certain recommendations.
Relying on vaccines and a strong economic recovery
Vaccines and a strong economic recovery will be vital to ending the crisis. The federal budget includes a number of measures that promise to stimulate the economy by providing effective growth levers to Canadian businesses.
“Considering that so many small- and medium-sized businesses continue to face challenging conditions, it makes sense to extend the Canada Emergency Wage Subsidy, the Canada Emergency Rent Subsidy and the Lockdown Support for Businesses until September 25, 2021, in addition to extending the Canadian Emergency Business Account,” said Sylvain Gilbert, a partner and tax specialist at the firm. Extending these programs amounts to an additional $12.1 billion in support.
The government has also announced a new accelerated capital cost allowance, which is something Raymond Chabot Grant Thornton has been recommending since 2020. “We’re pleased that the government will be allowing for the immediate expensing of up to $1.5 million of eligible investments of Canadian-controlled private corporations, every year for the next three years,” said tax partner Patrick Delisle. These deductions will help approximately 325,000 businesses make critical investments and generate $2.2 billion in total savings over the next five years.
Reducing the pandemic debt without raising taxes
The issue of public finances also requires special attention. While protecting the health of Canadians and ensuring a strong economic recovery remain the top priorities, it’s also important to consider the potential for higher interest rates and a widening deficit, as well as the need to protect future generations from inheriting a heavy financial burden. Budget projections remain fragile. Growth is expected and should lead to job creation.
However, if growth forecasts prove to be too ambitious and targets aren’t met, public finances will be further compromised. For this reason, Raymond Chabot Grant Thornton expected the federal government to take quick action and address the exceptional deficit associated with the pandemic.
Given the size of the debt, the firm believes the government should have developed special budgetary measures aimed specifically at reducing the deficit and debt generated by assistance programs, and it should have presented them separately from regular budgetary measures.
“By introducing bold measures, like the ones we’re proposing, the government could generate additional revenues to reduce the deficit. Raymond Chabot Grant Thornton’s recommendations include giving taxpayers the opportunity to immediately pay deferred taxes—amounts that would nonetheless be owed at a later date—but at a reduced rate. We also suggest reopening the immigrant investor program to bring in new foreign capital,” stated Mr. Imbriglio.
In its 2021 prebudget proposal to the federal government, Raymond Chabot Grant Thornton also suggested allowing taxpayers to withdraw funds from their RRSPs at a combined tax rate of 15%, payable immediately, by establishing a structured mechanism to ensure the sound management of the retirement fund. The firm also recommended allowing taxpayers to pay capital gains tax on assets (shares, revenue properties, etc.) at a combined tax rate of 15%.
“We know that drastic action is needed to protect future generations. The Governments of Canada and Quebec should consider options like these to take pressure off public finances. Applying special measures on a temporary basis would help prevent a public finance crisis and ensure intergenerational equity for young people, who are tomorrow’s leaders,” added Mr. Imbriglio.
Reopening the immigrant investor program to attract foreign investment
Invest in Canada and several other organizations across the country work actively to attract foreign capital and businesses. “If Canada’s efforts to attract foreign investment were supported by the reopening of an immigrant investor program, the government could use these funds to reduce the pandemic debt and pay for various economic initiatives and government programs,” said Marc Audet, President of AURAY Capital, a subsidiary of Raymond Chabot Grant Thornton that specializes in business immigration.
In 1985, Canada was the second country in the world to introduce a program allowing wealthy families to immigrate in exchange for a substantial investment. These investments were redistributed to participating provinces and territories in order for them to develop their economies. Unfortunately, Canada stopped recruiting this class of newcomers in 2012 and officially ended its immigrant investor program in 2014. Now that economic recovery is a priority, a program of this nature would be particularly helpful as it would drive considerable economic benefits.
It’s worth noting that between 2015 and 2020, the United States recruited more than 55,000 investors through their Immigrant Investor Program (EB-5), thereby bolstering its economy by more than $27 billion. Meanwhile, foreign investors injected nearly €22 billion in Europe’s various jurisdictions between 2015 and 2019 through this type of immigration program.
“Canada already has the infrastructure needed for this type of program. We just need to re-examine which types of investors are most desirable and what their contribution requirements should be. The federal government should act quickly to update and reopen the immigrant investor program. If we establish the right criteria, their financial contributions could amount to more than $1 billion annually,” concluded Mr. Audet.