OTTAWA - Businesses expecting their share of tax relief from the fiscal bounty at the disposal of Finance Minister Jim Flaherty were left feeling like orphans Monday as the minority Tory government chose to favour families over corporations in this year's budget.
As expected, the minister did reach out to the beleaguered manufacturing and processing sector that has been hammered in recent years by the high Canadian dollar, high energy costs and stiff foreign competition.
The sector praised the temporary introduction of a two-year write-off on investments on machinery and equipment, with overall savings of $170 million this year and $1.3 billion over the next three years.
The government also slightly sweetened the pot on previously announced corporate tax cuts to bring the tax rate on new business investment to 28.8 per cent in 2011. By offering inducements to provinces to eliminate their capital tax and harmonize retail sales taxes, the government says Canada could have the lowest taxes on new investments in the G7, making the country an attractive place for businesses to invest and expand.
But a glaring omission is the much-promised elimination of the tax on capital gains reinvested within six months.
While Perrin Beatty of the Canadian Manufacturers and Exporters called his sector ''the major winner,'' the relatively modest measures left most of the business community outside looking in at the feast of spending -- about $10 billion -- that went elsewhere, including to the provinces in new transfers, the working poor and seniors.
Moreover, Flaherty cracked down on tax loopholes that allow Canadian companies to write off money borrowed domestically to fund foreign operations.
"We don't see any broad-based tax relief either for taxpayers or businesses,'' said Nancy Hughes Anthony of the Canadian Chamber of Commerce, the country's largest business group.
"The government promised in November that they were going to make Canada more competitive and control spending and I think they broke that promise today.''
The corporate sector had held out faint hopes that the 0.5 per cent reduction in the corporate income tax announced on Oct. 31 to mollify corporate Canada over the government's about -face on the income trust levy, would not be the end of tax relief.
But with the corporate tax already scheduled to drop to 18.5 per cent in 2011 from the current 21 per cent, the government can claim it has already done enough in that area. Budget documents say that when the reductions come into full force, Canadian corporations will be facing a lower tax regime than their main competitors in the U.S.
Among other measures in the budget, Flaherty:
_ Increased corporate cost allowance rate on buildings used for manufacturing and processing;
_ Reduced the paper burden on businesses by 20 per cent by November 2008;
_ Reduced the number of tax filings and remittances for small firms by up 70 per cent.
"Small businesses and entrepreneurs are the motors of our modern economy,'' said Flaherty. "The last thing they need is excessive government red tape and needless regulation to slow them down.''
Also, the budget increases the lifetime capital gains exemption for small business owners, farmers and fishermen from $500,000 to $750,000, a measure that drew praise from the Canadian Federation of Independent Business.
One sector that was widely expected to be hit hard by the budget through the elimination of existing tax incentives -- the Alberta oilsands -- was given a temporary reprieve with the introduction of a phase-out period that begins in 2011.
Meanwhile, Flaherty cracked down on tax loopholes, putting an end to the practice of companies borrowing in Canada to fund business operations abroad, then deducting the interest paid against Canadian profits.
"It is a practice that has resulted in Canadian taxpayers indirectly subsidizing the foreign operations of multinational corporations, and paying the price in reduced business activity and job losses in Canada,'' the finance minister said in his budget speech in the Commons.
"No more. The interest expense on debt incurred to acquire shares of a foreign affiliate will no longer be deductible.''
As well, Flaherty said 'we are providing the Canada Revenue Agency the funding it needs to detect tax avoidance through offshore tax havens, and to ensure that every company pays its fair share of tax.''
"The free ride is over,'' he said. "Everyone's going to pay their fair share.''
