2017 Federal Budget Overview
Finance Minister Bill Morneau introduced Budget 2017 titled “Building a Strong Middle Class”, the Trudeau Government’s second, in the House of Commons this afternoon.
The Government ended the 2016-2017 fiscal year on a slightly better than projected deficit of $21.8 billion, but with Morneau putting $3 billion back in contingency. The deficit for 2017-2018 is forecasted at $28.5 billion, dropping to $18.8 billion through 2021-2022, meaning a balanced budget is out of reach for the Trudeau Government in their first mandate. The ratio of Federal Debt to GDP is up minimally to 31.6% up from 31.5% last year.
The Budget eliminates the Canada Savings Bond program. It also eliminates a Public Transportation Tax Credit introduced by the previous Conservative government that redeemed 15% of monthly expenses on bus passes and fares. The Budget also introduces an “Uber” tax, ensuring that HST/GST is applied to the cost of ride sharing services in the same manner as taxi companies.
The Budget draw heavily from the recent report by the Federal Advisory Council on Economic Growth, chaired by Dominic Barton, with measures to remove barriers to Indigenous and unemployed Canadians getting into the workforce.
Despite pressure from the U.S. to increase support for NATO, defence spending received little attention in this Budget.
Below are key highlights and measures from Budget 2017-2018:
Canada Infrastructure Bank
· At least $5 billion will be available over the next 11 years for green infrastructure projects, including those that reduce greenhouse gas emissions, deliver clean air and safe water systems, and promote renewable power.
· An additional $2.8 billion will be invested over the next 11 years through a series of national programs.
Energy and Climate change
Canada’s Clean Technology Advantage
To expand commitment from Budget 2016 to support clean tech, including forestry, fisheries, mining, energy and agriculture sectors, Budget 2017 proposes measures that will:
· Provide financing that innovative companies need to facilitate business growth.
· Support research, development, demonstration and adoption of clean technologies.
· Enhance collaboration and establish new ways of measuring success, including increasing the workforce participation of women in this sector.
Access to Financing for Cleantech Firms
$1.4 billion in new financing, on a cash basis, will be made available to help Canada’s clean technology firms grow and expand. To be available through the Business Development Bank of Canada and Export Development Canada. Specifically, Budget 2017 proposes:
· Equity investments to increase capital in a firm without increasing that firm’s overall debt load. Budget 2017 proposes to provide additional capital to BDC for clean technology activities. This new capital, along with existing capital under management at BDC and EDC, will enable the organizations to offer a combined additional $380 million, to be deployed over three years, in equity financing to support clean technology firms looking to scale.
· Working capital to support investments in assets, inventory, talent and market expansion. Established companies may need working capital to fulfill a domestic or international contract. Budget 2017 proposes to provide additional capital to BDC for clean technology activities. This new capital, along with existing capital under management at BDC and EDC, will enable the organizations to offer a combined additional $570 million, to be deployed over three years, in working capital to support clean technology firms.
· Project finance to enable first-of-its-kind, high-capital-intensive, early commercial-scale clean technology deployment. To attract private sector capital for projects, Budget 2017 proposes to provide new capital to EDC to enable it to offer approximately $450 million in additional project finance for high-capital-intensive clean technology firms.
Promoting the Demonstration of Clean Technologies
- Budget 2017 proposes to invest $400 million over five years, starting in 2017–18, to recapitalize the SD Tech Fund. This funding will support projects across Canada to develop and demonstrate new clean technologies that promote sustainable development, including those that address environmental issues such as climate change, air quality, clean water and clean soil.
Investing in R&D for Clean Energy and Transportation
· $229 million over four years (starting 2018-19) to NRCan and TC to continue R&D activities through their core clean energy and clean transportation innovation programming.
Encouraging Clean Technology in the Natural Resources Sector
· $200 million over four years (starting 2017-18) to NRCan, Agriculture and Agri-Food Canada, and Fisheries and Oceans Canada
Expanding Tax Support for Clean Energy
To encourage greater use of geothermal energy, Budget 2017 proposes to:
· Extend accelerated capital cost allowance to a broader range of geothermal projects and expenses.
· Expand the range of geothermal energy project expenses that are eligible as Canadian renewable and conservation expenses, which can be fully deducted in the year incurred.
Establishing a Clean Technology Data Strategy and the Clean Growth Hub
· Establish a Clean Technology Data Strategy - $14.5 million over four years for this initiative.
· Establish a Clean Growth Hub - $12 million over four years
Creating Canada’s Clean Growth Economy
To advance Canada’s efforts to build a clean economy, Budget 2017 lays out the Government’s plan to invest $21.9 billion in green infrastructure, including initiatives that will support the implementation of the Pan-Canadian Framework on Clean Growth and Climate Change. Investments to support Canada’s transition to a clean economy will flow through three distinct streams:
· Bilateral agreements: $9.2 billion will be provided to provinces and territories over the next 11 years, on a base plus per capita allocation basis, to support priority projects, including those that reduce greenhouse gas emissions, deliver clean water, safely manage wastewater, help communities prepare for challenges that result from climate change, and help build cleaner, better-connected electricity systems.
· The Canada Infrastructure Bank: At least $5 billion will be available over the next 11 years for green infrastructure projects, including those that reduce greenhouse gas emissions, deliver clean air and safe water systems, and promote renewable power.
An additional $2.8 billion will be invested over the next 11 years through a series of national programs. In particular, the Government proposes to invest the following national programs over the next 11 years:
· $100 million to support next generation smart grid, storage and clean electricity technology demonstration projects.
· $200 million to support the deployment of emerging renewable energy technologies nearing commercialization.
· $220 million to reduce the reliance of rural and remote communities south of the 60th parallel on diesel fuel, and support the use of more sustainable, renewable power solutions.
· $120 million to deploy infrastructure for electric vehicle charging and natural gas and hydrogen refuelling stations, as well as to support technology demonstration projects.
· $182 million to develop and implement new building codes to retrofit existing buildings and build new net-zero energy consumption buildings across Canada.
· $2 billion for a Disaster Mitigation and Adaptation Fund to support national, provincial and municipal infrastructure required to deal with the effects of a changing climate.
The Pan-Canadian Framework on Clean Growth and Climate Change
Budget 2016 commitment for $2B over two years to develop Low Carbon Economy Fund has been adjusted in Budget 2017 to span over five years. Further details on the allocation of the LCEF to be announced in near future
Federal Carbon Pricing Backdrop
· The Framework seeks to have carbon pricing in place in all provinces and territories by 2018.
· Provinces and territories will have flexibility to choose between: direct price on carbon pollution or a cap-and-trade system.
· Government will be releasing a consultation paper containing technical details for the proposed federal carbon pricing backdrop mechanism
Government will be committing additional resources to:
· Ongoing work to develop climate change policy, and support regulations, adaptation and clean energy technology programs.
· New actions in the electricity, buildings and transportation sectors, and new measures to support efforts to reduce emissions from federal buildings and vehicle fleets.
Accelerating the Replacement of Coal-Generated Electricity
· Budget 2017 proposes $11.4 million over four years (starting 2018-19) to INAC to continue the Northern Responsible Energy Approach for Community Heat and Electricity Program
- To support the deployment of renewable energy projects in communities that rely on diesel for electricity and heating, Budget 2017 proposes to provide $21.4 million over four years, starting in 2018–19, to Indigenous and Northern Affairs Canada to continue the Northern Responsible Energy Approach for Community Heat and Electricity Program.
- $220 million to reduce reliance of rural and remote communities on diesel, and to support use of more sustainable, renewable power
- $400 million in Arctic Energy Fund to address energy security for communities north of the 60th parallel, including Indigenous communities.
A More Energy Efficient Transportation Sector
· Budget proposes to develop GHG regulations in the marine, rail, aviation and vehicle sectors. Efforts to be led by Transport Canada with $56.9 million over four years (starting 2018-19)
· $17.2 million over five years to ECCC and TC for heavy-duty vehicle retrofits and off-road regulations, as well as, developing a clean fuel standard to reduce emissions in transportation, building and industrial sectors
· $67.5 million over four years to Natural Resources Canada (starting 2018-19) to renew and continue existing energy efficiency programs.
· $39.8 million over four years to NRCan (starting 2018-19) to support projects and activities that increase the use of wood as a greener substitute material in infrastructure projects.
Adaptation and Climate Resilience
· Establish a new Canadian Centre for Climate Services to help support climate adaptation decision-making across the country. Centre to be administered by ECCC with $73.5 million over five years (starting 2017-18)
· Develop a national action plan to address health risks associated with climate change. $47 million over five years to Health Canada, the Public Health Agency of Canada, and the Canadian Institutes of Health Research (starting 2017-18)
· $18 million over five years to implement climate change and health adaptation program for First Nations and Inuit Communities. $83.8 million over five years to INAC to Integrate traditional Indigenous knowledge to build a better understanding of climate change and to guide adaptation measures; enhance Indigenous community resilience through infrastructure planning and emergency management in those communities where flooding risks are increasing; and enhance resilience in northern communities by improving the design and construction of northern infrastructure.
Policy, Communications, and Engagement
· $135.4 million over four years (starting 2018-19) to ECCC and NRCan to ensure a coordinated, whole-of-government approach to climate change.
Fossil Fuel Subsidies
In recent years, Canada has phased out a number of corporate income tax preferences for oil, gas, and coal mining. To make further progress, Budget 2017 proposes to:
· Modify the tax treatment of successful oil and gas exploratory drilling. The success rates for exploratory drilling have increased substantially since the 1990s and, in a majority of cases, discovery wells now lead to production, which makes the well an asset of enduring value. Consistent with the usual treatment of enduring assets, expenses associated with oil and gas discovery wells will be treated as Canadian development expenses, which are deducted gradually over time, rather than as immediately deductible Canadian exploration expenses, unless and until they are deemed unsuccessful.
· Remove the tax preference that allows small oil and gas companies to reclassify Canadian development expenses as immediately deductible Canadian exploration expenses when they are renounced to flow-through share investors. This will ensure that these development expenses, which create an asset of enduring value, are deducted gradually over time.
Impact Canada Fund
Budget 2017 proposes to create a new initiative, the Impact Canada Fund, to introduce a new mission, or “challenge-based” approach for the federal government and help focus and accelerate efforts toward solving Canada’s big challenges. The Impact Canada Fund will focus its initial efforts in two problem-solving streams:
- A clean technology stream, supported by up to $75 million over two years, starting in 2017–18, to address challenges such as helping Canada’s rural and remote communities reduce their reliance on diesel as a power source.
- A smart cities stream, supported by $300 million over 11 years, that will support the Smart Cities Challenge (see Chapter 2 for additional details).
Budget 2017 also proposes to provide $8.1 million over five years, starting in 2017–18, to oversee the implementation of the Impact Canada Fund. This initiative will also help advance the President of the Treasury Board’s mandate commitment to devote a fixed percentage of government program funds to experimentation.
Venture Capital Funds
To support the continued growth of Canada’s innovative companies, Budget 2017 proposes to make available through the Business Development Bank of Canada, $400 million on a cash basis over three years, starting in 2017–18, for a new Venture Capital Catalyst Initiative that will increase late-stage venture capital available to Canadian entrepreneurs (late-stage venture capital is typically offered to young, established businesses with sales and revenue, in order to help the businesses grow).
With funds leveraged from the private sector, and depending on the proposals received, this investment could inject around $1.5 billion into Canada’s innovation capital market.
To access the funds, private sector parties will submit proposals to the Government that would be evaluated on the amount of private sector capital already secured; expected benefits for Canadian firms; the proposed approach for risk sharing between the Government and private sector; and the investment strategy, among other considerations.
Following consultation with private sector experts, the Minister of Innovation, Science and economic Development will announce further details on the Venture Capital Catalyst Initiative’s application and competitive selection process in the coming months.
Innovation Solutions Canada
Budget 2017 proposes to provide up to $50 million, starting in 2017–18, to launch a new procurement program, Innovative Solutions Canada, modelled on the very successful U.S. Small Business Innovation Research program.
Under Innovative Solutions Canada, a portion of funding from federal departments and agencies will be allocated towards early-stage research and development, late-stage prototypes and other goods and services from Canadian innovators and entrepreneurs. In return, the Government will have access to the latest, most innovative products and services—a true win-win for citizens and the businesses that employ them.
This program will be designed to be scalable, so that other Canadian jurisdictions can take part in the future, if they wish to do so. To encourage inclusive growth, particular effort will also be made to encourage procurement from companies led by women and other underrepresented groups. All jurisdictions will be encouraged to publicly share the results of this program.
Further details about initial participation and spending targets will follow in the coming months.
Making Canada's building and industrial sectors more energy efficient will reduce emissions, make homes and buildings more comfortable, and help to lower energy costs, which can also make Canadian industries more competitive. To continue the work already underway to make the building and industrial sectors more energy efficient, Budget 2017 proposes to provide Natural Resources Canada with $67.5 million over four years, starting in 2018–19, to renew and continue existing energy efficiency programs.
Budget 2017 also proposes to provide Natural Resources Canada with $39.8 million over four years, starting in 2018–19, to support projects and activities that increase the use of wood as a greener substitute material in infrastructure projects (for example, in mid-rise commercial and industrial buildings), helping to create new markets for sustainable Canadian products.
These programs will be supported by another Budget 2017 proposed national program to develop and implement new building codes to retrofit existing buildings and build new net-zero energy consumption buildings across Canada.
Update on Infrastructure Partnerships Through Bilateral Agreements
Budget 2017 also provides further clarification around its Infrastructure program and impending cost sharing agreement with provincial, municipal and territorial partners. The bilateral agreements will be negotiated in the coming months, and provide funding for:
· Public transit infrastructure, including new construction and rehabilitation.
· Infrastructure to support greenhouse gas mitigation efforts in provinces and territories, as outlined in the Pan-Canadian Framework on Clean Growth and Climate Change.
· Infrastructure that will help communities prepare for challenges that result from climate change.
· Other green infrastructure that supports the health of our environment, such as water and wastewater infrastructure.
· The unique infrastructure needs of rural and northern communities, including delivering more reliable energy networks and greater digital connectivity.
· Cultural and recreational infrastructure to build stronger communities and neighbourhoods.
The bilateral agreements will involve cost-sharing for agreed-to projects, with the proportions determined based on the recipient of the funds.
The Government will provide funding for projects on the following basis: up to 40% federal funding for projects undertaken with municipal and not-for-profit partners; up to 50% federal funding for projects with provincial partners; and up to 75% federal funding for projects with Indigenous partners and projects with territorial partners. For public transit in provinces, the Government will provide up to 50% of eligible costs for rehabilitation projects (with funding for rehabilitation projects capped at 15% of total public transit funding), while funding for new public transit construction and expansion projects will be cost-shared at up to 40% federal funding.
The bilateral agreements will include provisions to support ongoing monitoring of projects, and reporting to Canadians on how the Government's infrastructure plan is delivering results in local communities and meeting national objectives. The Government intends to work with the provinces and territories to establish outcomes and results that can be measured and reported on in a timely and meaningful way.
Health Care Spending
· $6 billion over 10 years on Homecare initiatives as well as $5 Billion for mental health through its individual agreements with the Provinces and Territories (all but Manitoba have signed)
· $691.3 million over five years to expand the caregiver benefit for Canadians supporting critically ill and injured family members and increased to 15 weeks.
· In 2017–18, the Government will provide over $37.1 billion to the provinces and territories, under the Canada Health Transfer. This year's funding—an increase of approximately $1.1 billion from last year—will provide long-term, predictable and growing funding to our provincial and territorial partners. Over the next five years, the Canada Health Transfer amounts provided to provinces and territories are expected to total approximately $200 billion to support the health and well-being of Canadians.
· $950 million dollars through 2021-2022 for investment and creation of a series of “Superclusters” i.e. high density areas of business activity that contain large and small companies, post-secondary institutions and specialized talent and infrastructure—energize economies and act as engines of growth.
· New $1.26 billion five-year Strategic Innovation Fund to consolidate and simplify existing business innovation programming, in particular the Strategic Aerospace and Defence Initiative, Technology Demonstration Program, Automotive Innovation Fund and Automotive Supplier Innovation Program.
· $400 million over three years to create the Venture Capital Catalyst Initiative through Business Development Bank Canada to allow greater access of capital on late-stage ventures. Greater details to be revealed by Minister Bains in “the coming months”
Indigenous and Northern initiatives
· $4 billion over 10 years, starting in 2018–19, to build and improve housing, water treatment systems, health facilities and other community infrastructure topping up what was announced in Budget 2016. This investment will be delivered through the second phase of green infrastructure and social infrastructure funding.
· Budget 2017 proposes to invest $828.2 million over five years, starting in 2017–18, to improve the health outcomes of First Nations and Inuit including mental health services. This amount includes $15 million in proposed funding for harm reduction measures that form part of the Canadian Drugs and Substances Strategy.
· Announcement of a $400-Million-dollar Artic Energy Fund to reduce Indigenous community reliance on fossil fuels.
Growing the Economy Through Agri-Food Innovation
Canada’s agriculture and agri-food sector is an important driver of economic growth, accounting for more than 6% of Canada’s GDP, and employing one out of every eight Canadians. The Advisory Council on Economic Growth recently highlighted this sector’s potential for growth, citing Canada’s natural endowment of water and arable land, research strengths and accomplishments, and strong network of entrepreneurs.
The Council also pointed to the significant opportunity that the increasing international demand for food and an expanding global middle class should create for Canada’s agriculture and agri-food sector. The recent launch of the “Canada Pavilion” on the Chinese e-commerce site Alibaba is one example of the ways Canadian agri-food companies are showcasing the quality of Canadian products and taking advantage of emerging market opportunities.
It is for this reason that the Innovation and Skills Plan has set an ambitious target to grow Canada’s agri-food exports to at least $75 billion annually by 2025. In recent years, industry growth has been strong, with farm revenues, annual exports and farm incomes all reaching record highs. Despite this strong performance, there is still room for further growth—growth that can be achieved through innovation and the development of value-added products.
In addition to specific investments made to support the growth of and innovation in Canada’s agri-food sector, the Government has undertaken efforts to support Canada’s farmers and food processors, including:
· Launching a full review of rail service across western Canada.
· Creating a $10.1 billion Trade and Transportation Fund that will invest in gateways and ports, to help get agri-food products to market.
· Successfully completing the Comprehensive Economic and Trade Agreement with the European Union, and making ongoing efforts to expand market access for Canadian agri-food producers throughout Asia.
· Eliminating tariffs on a broad range of agri-food processing ingredients, covering approximately $700 million in annual imports, to strengthen the competitiveness of Canadian agri-food manufacturers at home and abroad.
· Improving access to support for agri-food value-added processors through the new Strategic Innovation Fund.
· Investing $500 million to support the expansion of broadband networks in rural Canada and $2 billion to support rural infrastructure including roads and bridges, making it easier for Canada’s agri-food producers to connect to markets in Canada and internationally.
Developing the Next Agricultural Policy Framework
The next agricultural policy framework will be launched in 2018 where federal, provincial and territorial governments will renew their commitments to investing in this critical sector. As part of the development of the next framework, governments will consider the ways in which innovation in agriculture can help strengthen the sector as a whole, enhance our value-added exports and create more quality, well-paying jobs for Canadians.
The current framework, Growing Forward 2 (2013–18), includes average federal, provincial, and territorial spending of over $600 million per year for programming to support innovation, competitiveness, and market development. The framework also includes a comprehensive suite of business risk management programs to help farmers manage risks associated with severe market volatility and disaster situations, with average spending of approximately $2 billion per year.
Since January 2016, federal, provincial, and territorial governments have consulted with Canadians, including stakeholders across the agriculture and agri-food value chain, to support the development of the next framework. This process assists in identifying and addressing barriers to growth and in determining how best Canada should target investments to achieve long-term, sustainable growth for the sector.
Further details of the next agricultural policy framework will be announced over the coming year.
Advancing Agricultural Science and Innovation
Budget 2016 invested $30 million over six years to support advanced research in agricultural science and genomics at Agriculture and Agri-Food Canada. Budget 2017 builds on this funding by proposing to invest $70 million over six years, starting in 2017–18, to further support agricultural discovery science and innovation, with a focus on addressing emerging priorities, such as climate change and soil and water conservation.
In addition, as part of the $200 million provided for the Clean Growth in the Natural Resources program, Budget 2017 proposes to provide funding to Agriculture and Agri-Food Canada to support the expanded adoption of clean technology by Canadian agricultural producers.
As expected, the budget goes to lengths in promising tax fairness for Canadians and closing loopholes, but details are sketchy.
Loopholes to be closed, according to the Budget, include:
· Avoidance or deferral of income tax through offsetting derivative positions in straddle transactions.
· Extension to registered education savings plans and registered disability savings plans anti-avoidance rules similar to what now covers tax-free savings accounts and registered retirement savings plans.
· Clarification of the meaning under the Income Tax Act of “factual control” for the purpose of determining who has control of a corporation to prevent inappropriate access to the small business tax or the enhanced refundable 35-per-cent scientific and experimental development tax credit for small business.
· Prevention of avoidance of tax on income from the insurance of Canadian risks by extending foreign-affiliate base erosion rules to Canadian branches of Canadian life insurers.
The federal government is relying on an old-fashioned sin tax to raise money. Excise tax on alcohol goes up almost immediately by two per cent. From here on in, the rates will be adjusted to the CPI on April 1 every year, starting in 2018. In justifying these changes, the federal government noted the tax on alcohol had not changed since the mid-1980s.There was also a warning on future taxation of cannabis once it is fully legal. The government will “take steps to ensure taxation rates remain effective over time.”
Other changes include:
· Eliminating the use of billed-basis accounting for income tax purposes by a limited group of professionals such as doctors to avoid giving a tax deferral not available to everyone else.
· Insurers are losing exemption for insuring farming and fishing property. This was introduced in 1954 to encourage insurance on rural properties.
· A new Canada Caregiver Tax Credit is being created to replace three existing ones — the current caregiver credit, the infirm dependent credit, and the and family caregiver credit. The change will provide an additional $310 million over four years and be less confusing.
· Uber and other companies offering alternatives to regular taxi service will have their fares subject to HST and GST like any other taxi service.
By comparison to last year, Budget 2017 is very much a “non-event”. However, we see the government doubling down on efforts related to climate change and the new clean and green economy. There is also a heavy focus on improving gender equality in all aspects of life and business, and in supporting Canada’s native and Indigenous peoples through initiatives related to energy, transportation, jobs training, as well as improved healthcare.
It may not go down as the most memorable, but in the mirror of a full term in government, we expect this Budget to be seen as a key step in implementing the Liberal agenda for Canada.
If you have any questions about Budget 2017, please do not hesitate to contact the Sussex team.