Canadian Budget Office Report Casts Doubt On Flaherty's Tax Promises

by Mike Godfrey, Tax-News.com, Washington

25 January 2010

The Canadian government is to allow the Home Buyers’ Tax Credit to expire, as budgeted at the end of January – a move that could be mirrored in a number of other tax breaks as the country’s parliamentary budget office places pressure on Finance Minister Jim Flaherty to begin reining in the deficit.

The Home Buyers’ Tax Credit, introduced for purchases of qualifying homes after January 27, 2009, is set to expire on January 31, 2010. The tax credit allows eligible taxpayers to offset tax paid on qualifying homes by multiplying the lowest income tax rate for the year (15% in 2009) by CAD5,000; the credit for 2009 is therefore CAD750 (USD710). The credit is open to individuals or couples that acquire a qualifying home, and who did not own another home in any of the four preceding years.

Announcing the decision to allow the tax credit to expire to reporters on January 18, Flaherty said: “Some people are anxious to see it extended for a period of time, but it’s not inexpensive and the key was to try and preserve jobs in this very difficult past year.”

The decision to allow the tax credit to expire should be a turning point in government policy, according to the recommendations of a report published earlier this month by the parliamentary budget office. The report warns that the nation’s budget will remain in deficit in the fiscal year beginning April 2013, to the tune of CAD19bn (USD18bn), even after the economy recovers and stimulus measures are withdrawn. According to recent government projections, a state deficit of some CAD56bn is expected by the end of the 2010 fiscal year, up from just CAD3.2bn in 2008.

Against this background, the report has called for the end of tax credits that were introduced to support the recovery of the economy, and has called upon Flaherty to backtrack on supportive measures in favor of tax increases and comprehensive retrenchment. “Canada won’t be able to balance the budget within five years unless it raises taxes or implements spending cuts,” parliamentary budget officer Kevin Page explained in an address to reporters.

Flaherty’s decisions to cut corporation and sales tax have come under fire for further depriving government coffers of needed revenue, and the report casts doubt over the Finance Minister’s pledge to make the Canadian tax regime the most attractive to businesses of all G7 nations.

While the report shows that measures will be needed to stave off the accumulation of huge debts in the short-term, it does note that without tax reform the budget deficit would narrow starting 2013-2014 to CAD11.2bn and to CAD5.2bn in the following year when the global economy is expected to have recovered.

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