Finance minister Bill Morneau addressed Canadian businesses and investors’ concerns around competitiveness in his fall fiscal update Wednesday, with an accelerated capital cost allowance that permits immediate expensing of qualifying capital goods.
“To encourage businesses to invest in their own growth and create more good, well-paying jobs, our Government proposes to allow businesses to immediately write off for tax purposes the full cost of machinery and equipment used in the manufacturing and processing of goods. We will also allow specified clean energy equipment to be eligible for an immediate write-off of the full cost. This will help achieve climate goals, and boost Canada's global competitiveness”, Morneau said.
This was broadly in line in expectations and is seen as a positive for business growth and investment.
There will be immediate 100% expensing for manufacturing and processing machinery and equipment, along with clean energy equipment, up from 25% depreciation rates earlier. The depreciation rate for computer software will be doubled from the current 50% to 100%.
“The accelerated depreciation will certainly be welcomed by Canadian businesses and investors, particularly as many have felt disadvantaged relative to their US counterparts since US tax reform provided similar incentives. My understanding is that it applies to a broad range of capital spending. This is positive for a broad swath of Canadian companies”, noted Suzann Pennington, chief investment officer for Foresters Asset Management.
BMO Chief Economist Douglas Porter added: “This measure, along with the lifting of NAFTA uncertainty, once the USMCA is signed by November 30, could combine to meaningfully spark investment.”
Business boost doesn’t win over all
However, the cost of these measures and the increasing of the deficit have come as a disappointment to some.
The cost to the government is estimated to be $500 million for the rest of the fiscal year ending March 2019 and jumps to $5 billion for the next fiscal year. The cumulative cost by FY23/24 is around $14.5 billion.
“We are disappointed that deficit projections were raised”, said RBC Senior economist Josh Nye, adding that revenues have been tracking above plan over the first five months of the fiscal year, while program expenses have been in line with Budget 2018.
He points out that while Canada’s economy is operating at capacity and unemployment is at multi-decade lows, the federal government is focusing on the debt-to-GDP ratio as their fiscal anchor, encouraging pro-cyclical fiscal policy, allowing the government to run deficits during good economic times and leaving little ammunition should the economy falter.
“We continue to believe the government should be taking advantage of a strong economy by targeting a return to balance and saving up fiscal room for an eventual downturn,” Nye urged.
Pennington agreed more could be done, saying: “We are a little disappointed with the slow progress on actually implementing the infrastructure spending commitments from prior budgets and, while we aren't surprised by the large ongoing deficit plans, particularly as we enter an election year, we would prefer to see some plan for reducing deficits while we are in a strong economy so we have a healthy balance sheet going into the next downturn.”
Notably absent from the update was relief for the oil sector, which has been besieged by falling oil prices, and any mention of personal tax rates.
“With the intense focus on business competitiveness, there was no mention of another important competitive issue—our world-topping personal marginal tax rates. With top marginal rates of more than 53% in the two largest provinces, attracting top talent is a strain, especially in a world of tight job markets”, BMO’s Porter said.
