1997 Federal Budget Review

Highlights

* The government's fourth budget, and likely its last before a general election, does not deviate from the course set in prior years. To the extent markets feared a wavering in the commitment to fiscal discipline, this plan will be well received. More likely, the lack of surprises in this budget will minimize its impact on capital markets.
* An unbroken record of bettering targets, a $3billion contingency reserve, and conservative growth and interest rate assumptions boost the credibility of the government's funding forecasts.

Implications

* Canadian Dollar: Positive

* Short-Term Interest Rates: Neutral/Positive

* Long-Term Bonds: Positive

* Common Stocks: Neutral/Positive

Charitable Donations: Added Incentive
Canadians making charitable donations receive a federal tax credit of 17% for the first $200 donated each year, increasing to a 29% credit for amounts in excess of $200. This tax credit was limited to a maximum annual donation of 50% of net income. Beginning with the 1997 tax year, the maximum annual donation will be raised to75% of net income for individuals and corporations.
Also announced in the budget is a new incentive for taxpayers wishing to gift publicly traded securities that have appreciated in value. In the past, taxpayers wishing to donate assets that had appreciated in value were subject toa tax liability due to the capital gains triggered on thedisposition of the asset to the charity. This Budget proposes to reduce this income inclusion rate on capital gains from 75% to 37.5%, meaning that only 37.5% of the capital gain will be taxable. This reduction will apply to donations made between February l 8, 1997 and the end of the calendar year 2001. Donations eligible for this reduced rate will include securities listed on prescribed stock exchanges donated by either an individual or a corporation.

RESPs: New Rules Allow Rollovers To RSPs
The Budget announced that, effective immediately, eligible RESP contributions have been doubled to $4,000per beneficiary per year. Also, any time after 1997, subject to certain criteria, where beneficiaries are not able to pursue post-secondary education, contributors can transfer the income earned within the RESP to an RSP if they haveRSP contribution room available. The original capital portion continues to be recoverable at no tax cost to thecontributor.
In essence, where an individual has RSP contribution room available to shelter the entire RESP income inclusion,there will be no additional taxation. However, it appears that, where an individual is not able to fully offset the inclusion with a RSP contribution, the contributor may be subject to an additional 20% tax levy in addition to including the income in his/her taxable income.

Tax Assistance To People With Disabilities
Changes announced increase the list of expenses eligible for the medical tax credit, such as an increase in the limit for part-time attendant care expenses to $10,000.The government has also introduced an Opportunities Fund to help Canadians with disabilities become self-sufficient.

RRSPs: Introduction Of A Pension Adjustment Reversal
Individuals who leave their employer prior to retirement are frequently penalized by the receipt of pension benefits that are less than the benefit they would ultimately have received had they remained. To address this disadvantage, a pension adjustment reversal (PAR)was announced to restore lost RSP contribution room. The PAR will be available when an individual receives a termination benefit from a pension plan that is low relative to the RSP room given up.

Students: Increased Assistance

Education Credit:

The amount used to determine the education tax credit for post-secondary students will increase from $100 per month of qualifying enrollment to $150 in 1997, and to $200 per month in 1997 and beyond.

Tuition Credit:

The tuition credit claimed by individuals attending qualifying institutions will now include mandatory fees set by post-secondary institutions to cover the cost of education. This will not include fees levied by student bodies.

Carry-Forward Of Unused Credits:

Perhaps the most sweeping change is the ability for students to carry forward all unused education and tuition credits to be credited against any future income

Helping Students Manage Loan Repayments:

Students are normally required to begin repaying their student loans no later than six months after graduation. Students facing financial hardship have been granted an extension of an additional 18 months before their first required payment and interest charge. The 1997 budget has extended the period in which the federal government will pay the interest accruing on student loans from 18 months to 30 months.

Labour Sponsored Venture CapitalCorporations (LSVCCs)
LSVCCs can now increase the size of certain investments as well as reduce the penalties to which some funds have been exposed because they failed to meet the 60% minimum investment rule. The Budget has introduced measures intended to increase further the ability of small businesses to obtain funding. It has been proposed that for every $1 of eligible investment in a small business ($10million or less in assets) that the investment count as $1.50 towards the LSVCCs 60% investment requirement.The Budget has also proposed that the maximum allowable investment- currently 10% of its shareholders equity to a maximum of $10 million be increased to $15 million.

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