N.B. Given the sheer volume of budget coverage in a 24/7 news environment, RCC has decided to stop issuing same-day budget analyses and will instead take the time to carefully review the documents for issues specific to or important to retail and issue member notices on the day following a budget.
Federal Budget 2015 is, as has been stated elsewhere, primarily a pre-election document. It captures some major themes from throughout the current government’s four-year mandate, including returning the books to balance, tax assistance for families and sizeable investments in manufacturing and infrastructure. It also reaches out beyond the current fiscal year, with several measures that will not take full effect until 2019 and potentially not at all if the government is either not re-elected or returns only as a minority.
There are no measures that speak specifically to retail by name in this budget but there are several proposals that will be of interest to retailers.
Small Business Income Tax Reduction
The first and most significant of these is the decrease in the small business income tax rate from 11% to 9%. This takes the form of an increase to the small business deduction on the first $500,000 of active business income (ABI). Phased in over four years, the rate will be reduced at 0.5% a year until it reaches the 9% level in 2019.
Rates are reduced effective January 1:
- 2016: 10.5%
- 2017: 10.0%
- 2018: 9.5%
- 2019: 9.0%
The small business deduction is available to Canadian small businesses with taxable capital of less than $10 million. If the taxable capital is between $10 million and $15 million, the amount eligible for the low rate is proportionately reduced.
This measure builds upon previous reductions in the federal corporate income tax rate that have seen it drop from 22.16%i to 15% since 2007. Though the corporate rate has been reduced by almost one-third, the small business deduction had not been adjusted since 2009, which has diminished the relative value of that deduction over time. Yesterday’s measure partly restores the tax advantage that small businesses enjoy.
Manufacturing and Processing CCA Incentive
For those retail merchants who also manufacture or process their goods, Budget 2015 contains good news in the form of improved Capital Cost Allowance (CCA) provisions. Eligible investments will benefit from an accelerated CCA at a rate of 50 per cent on a declining-balance basis after 2015 and before 2026. This will allow the deduction of 90 per cent of the acquisition cost of an eligible asset by the end of the fourth year.
Employment Insurance Rate Reduction
The Employment Insurance picture is slightly less rosy than forecast and some commentators have suggested that budget balance has been achieved this year and next by raiding the EI surplus, which is expected to grow from $2.5-billion in 2015-16 to $7-billion in 2016-17ii.
The current employer contribution rate of 1.88%iii on insurable income is frozen through 2016 but will be reduced to 1.49% in 2017. This is slightly higher than the 1.45% rate that had been communicated to employers as recently as February 2015iv.
Trade and Tariff Issues
Yesterday’s announcement to establish an Internal Trade Promotion Office to eliminate trade barriers within our borders is welcome and may give some teeth to the Agreement on Internal Trade (AIT). Retailers also welcome the government’s restated commitment to reduce regulatory inconsistencies between Canada and US, on which some pilot work is already underway.
Retail merchants will be disappointed, however, that the government did not seize the opportunity in Budget 2015 to build upon tariff reductions announced in 2013. These import duties, which can be as high as 18%, impede the competitiveness of Canadian merchants and negatively impact prices for Canadian consumers. While the government did eliminate tariffs on baby clothes and most sporting goods in Budget 2013, the recent changes to the status of major source countries, including China, has led to an overall increase in the tariff burden faced by retailers and consumers in Canada.
While it is unsurprising that an election-year budget looking to balance the books would not choose to focus on reducing hidden taxes, this was nevertheless an opportunity missed to address a substantive irritant and price pressure. RCC will continue to press for tariff eliminations in future federal budgets and for the successful conclusion and implementation of trade agreements like the Comprehensive Economic and Trade Agreement (CETA) with the EU and through the current Trans Pacific Partnership (TPP) negotiations.
No Change to the de minimis Level
What was not in Budget 2015 is perhaps as important as what was in it, namely no increase to the de minimis level, below which courier or postal shipments into Canada are exempt from customs duties and taxes.
Under the Postal Imports Remission Order and the Courier Imports Remission Order, the de minimis level is currently set at $20v. The rationale is that the administrative burden and cost of processing does not justify collecting taxes or duties on small individual shipments, which (below $20) would typically yield amounts below $3 each in tax and duty. It is also presumed that these purchases face shipping and handling costs that would negate the savings in tax and duty, so there is minimal incentive for cross-border online shopping at this price level.
eBay and some courier companies have been pushing for an increase in the $20 de minimis level, citing the $200 level in the US. The issue was also referenced in the Senate report on the Canada-US price gap. CBC covered the issue late last year, including a debate between RCC and eBay on Power and Politics. At least one senior federal cabinet minister is known to have advocated for an increase.
Canada is currently engaged in negotiations in the Trans-Pacific Partnership (TPP). The TPP is a proposed trade agreement under negotiation by Australia, Brunei, Chile, Canada, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. In the TPP context the United States continues to push its counterparts to raise the de minimis levels. US Border State Senators are also pushing this argument.
RCC speaks forcefully to the issue at the departments of Finance and International Trade, noting that a change to the de minimis level would initiate “massive cross-border shopping from the comfort of one’s living room”. RCC expresses its concern on several points:
- de minimis at anything like the $200 US-level would lead to massive increases in cross-border orders, with the obvious negative consequences for Canadian retailers and their employees. Even a seemingly small increase could have a major impact.
- Tax and duties forgone by federal and provincial governments would be substantial.
- The investments being made by Canadian retailers in establishing their online offerings could be in jeopardy, impacting also upon some high wage jobs in IT.
- Internal allocation of capital could become an issue for US firms operating in Canada, as it would be more difficult to persuade headquarters of the need to invest in Canadian online offerings or even in bricks and mortar where customers could just as easily be serviced by US online offerings.
- RCC does not understand the political or economic calculus that would confer a tax and duty advantage (as high as 33% in some cases) on a US warehouse seller who employs few if any people in Canada, at the cost of a Canadian employer who does create jobs and economic activity here, whether in bricks and mortar stores or online.
Budget 2015 maintains the status quo, indicating that the government has heard RCC’s argument and understands the potential consequences. On retailers’ behalf, RCC intends to remain vigilant in the fight against increases to the de minimis level.
If you have any questions or concerns, please don’t hesitate to contact: Karl Littler, Vice President Government Relations and Strategic Issues at: [email protected] or 416-467-3783
iIncluding the surtax then in effect.
iiCommissioner’s Communiqué, February 2015.
iii1.60% for small businesses with payroll under $937,500.
ivCommissioner’s Communiqué, February 2015, at p.5
vItems that do not qualify for the $20 exemption include: tobacco; books, periodicals and magazines, alcoholic beverages, and goods ordered through a Canadian post office box or a Canadian intermediary.