Budget blah for investors

By now you’ve probably done the calculations and figured out approximately how much you’ll save in tax dollars as a result of the first Conservative budget. My guess is not a lot in absolute terms — yes, there were many tax cuts but if you look closely you’ll find they’re spread pretty thin.

From an investment perspective, there is very little to get excited about. I have perused the technical papers carefully and here’s what I came up with:

Dividend tax credit. The budget confirmed that the Conservatives will proceed with the plan introduced by former Finance Minister Ralph Goodale in the dying days of the Liberal government. Retroactive to Jan. 1 of this year, dividends paid by large corporations will be subject to a reduced rate of tax (small business dividends are not affected). The formula will be exactly the same as the one proposed by Mr. Goodale: a gross-up of 145 per cent and a credit of 19 per cent on the resulting total.

In practical terms, here’s how this works. For every $1,000 you receive in qualifying dividends, you will have to declare $1,450 in income at line 120 on the tax return. Faher along in the calculations (at line 425 on schedule 1) you can claim a 19 per cent credit against that amount, or $275.50. Under the old system, the federal credit would have been $166.66.

The provinces have not yet stated whether they will go along with the new calculation, which would add to the total tax saving. The Ontario budget, which came down earlier, took a wait-and-see stance, saying the province would deal with the matter once the federal government had clarified its position. So at this stage we cannot say with certainty what the final combined tax rate on dividends will be. All we know is that it will be lower than before.

The new formula compounds the gross-up problem that has the potential to trigger the Old Age Security clawback on the basis of income that never existed. I have written about this in the past and the issue persists. More on this in future columns.

Income trusts. Finance Minister Jim Flaherty didn’t say a word about income trusts in his speech and I could find no reference to the subject in any of the voluminous budget papers. In this case, no news is good news. The Conservatives had said prior to the election that they had no intention of revisiting the contentious income trust issue that caused so many headaches for investors, the markets, and Mr. Goodale last fall. They kept their word.

Charitable donations. The budget made only one concession on the capital gains side and charities will be the big winners. Donors who give shares in publicly-traded companies, mutual fund units, or certain other securities to charitable organizations have until now been given some tax relief on any capital gains that have accrued. Instead of the normal inclusion rate of 50 per cent, these people (or their estates) have had to pay tax on only 25 per cent of the gain. Now, as a result of the budget proposals, the capital gains tax on such donations will be eliminated entirely. That’s a tremendous incentive for investors who wish to leave substantial amounts to good causes.

Flow-through shares. This one escaped the attention of most of the media, perhaps because it is complicated and doesn’t have the headline quality of a GST cut or an employment tax credit. But it’s important for investors looking at tax shelter deals.

Back in the late 1990s when mineral prices were low (yes, it does happen), the Liberals introduced a temporary mineral exploration tax credit for flow-through share investors. This allowed flow-through promoters to pass along an extra 15 per cent of specified Canadian mineral exploration expenses to investors, who could claim them as a credit on their returns. It was an attractive sweetener at a time when flow-through share deals were having trouble raising capital.

The temporary credit expired at the end of 2005 and of course the mining industry is in much better shape today. But the Conservative government wants to keep it that way so the budget reintroduces the mining exploration credit, again on a temporary basis, to, as the technical document puts it, “solidify recent exploration gains and establish a strong base from which to move forward”. The credit will now apply to flow-through deals entered into between budget day (May 2) and March 31, 2007. So if you’re thinking about investing in mining flow-through shares this year, Ottawa has just handed you an extra incentive.

That’s about it in the way of the budget’s investment implications. Besides the gross-up problem, there are several important areas that Mr. Flaherty did not address at all and I will deal with those at another time. For now, let’s focus on the few goodies we did receive and figure out how best to make use of them.

This article originally appeared in the Internet Wealth Builder, a weekly e-mail newsletter that provides timely financial advice from some of Canada’s top money experts. For more information about becoming an Internet Wealth Builder member, go to http://www.buildingwealth.ca/promotion/50plusproducts.htm