Canadians Underwhelmed by Tax Cuts

When it comes to taking care of personal finances, Bohdan Dolban, 32, and his wife, Mary, 35, are about as good as it gets. His job as a sales representative for a Toronto packaging company and hers as a systems analyst give them a family income of about $85,000, and every cent is put to good use. They spend only about $30 a week on food, a feat accomplished by buying groceries in bulk and preparing food in large, economical batches. Unlike many Canadians, they pay their credit-card balances every month and they top up their RRSP contributions every year. So when the Dolbans looked over the federal budget last week, they were eager for signs that Ottawa would make good on its promises to help out middle-class families. But they were not impressed - their annual income tax reduction will amount to only about $400. "It's a step in the right direction," says Bohdan, "but the recent increases in the price of gasoline alone wipe out any benefits for us. It really doesn't help much."

So it goes - for many Canadians, the modest cuts in last week's budget, coupled with other realities like rising fuel costs and interest rates, mean that they feel no further ahead. Many, like Dolban, applauded what is a clear policy change when it comes to personal taxes - the biggest cuts since 1973 - and greater spending on fundamentals like health care and education. But deeper, broader cuts are still needed before average middle-class workers will see any real improvement in their standard of living. In fact, financial planning experts say the brightest spots in the budget do not concern personal tax rates or deductions at all: small- to medium-sized businesses, especially in the high-tech sector, are the biggest beneficiaries. "Most people will not have another $3,000 to spend," notes Vancouver financial planner Douglas Macdonald of Macdonald, Shymko & Co. "But it's better than an increase, and some of the measures aimed at creating more investment capital for small business are very positive. That is where all the new jobs are."

It can be difficult to look at the big picture, though, when the end of every month demands a financial balancing act, especially for parents. Halifax couple John Bonnell and Cathy Lumsden-Bonnell, both 43, are carrying the kind of load that typifies too many Canadian middle-class families. Both work at full-time jobs - John is a vice-president at a medical distribution company and Cathy owns and runs a day-care centre - as well as raising four children, 11, 13, 14 and 15. Their family income is about $100,000 and John estimates that the budget's changes will save them only about $750. That, despite a lowering of the middle tax bracket rate, a reduction of the surtax and the reintroduction of indexing for inflation, eliminating so-called bracket creep.

Like others, John welcomes the shift to reducing taxes instead of hiking them, but he says that pennies a day will make almost no difference to his family. It would have been better, he adds, to move to lower rates more rapidly. "I was particularly unhappy that the surtax is not coming off until 2004," he says. "I see that as a tax that was put on at a time when it was needed to address the deficit, but that time is past." He is also worried that the provinces will raise their own tax rates to make up shortfalls created by lower federal rates (most provincial taxes are levied as a percentage of federal taxes), as well as lower than expected transfers for necessities like health care. "My impression is that the government could have done more than they did for the average person," he says.

Toronto financial planner Janet Freedman agrees. The tax-cutting budget was made possible by the sacrifices of ordinary Canadians, she says, adding that Finance Minister Paul Martin should have acknowledged as much. "I wish he had said 'Thank you,' instead of taking the credit," she says. "The last five years have been a nightmare - we have been way overtaxed in all sorts of areas." Freedman includes low-income families in that critique, arguing that taxation should begin at an income of $20,000, rather than the budget's $8,000 (by 2004). Although Martin took credit for helping the poorest Canadians, their savings, too, are initially underwhelming. A single parent with one child, earning $30,000, will keep $183 extra after filing a 2000 return, just 50 cents a day. The bigger cuts start in 2001, when the single parent would keep $373 more, rising to $986 in 2004.

Small-business owners, especially those who work in Canada's booming high-tech sector, are far happier. Ottawa-based Buy-stream Inc., which helps e-commerce companies find out why some Web site visitors make purchases while others do not, is typical of companies that are riding the new wave of wealth creation fuelled by the Internet. Although it has been in existence for only seven months, Buystream already has 60 employees, including six in the United States. Such companies depend on stock options and capital gains to attract and keep the best employees, says president Randy Woods. Under the budget's new rules, stock options will not be taxed until shares are sold, instead of when the option is exercised, and only two-thirds of capital gains will be included in income, down from three-quarters. "A lot of people take a lower salary in exchange for stock options," Woods explains. "These changes were critically important when it comes to competing with the U.S. for staff."

Woods, 32, understands the situation well: almost all of his own net worth is tied up in speculative ventures. In addition to Buystream, he maintains an interest in another high-tech company he started five years ago. So Woods gains from the budget both personally and professionally, and he appreciates that Canada's social safety net helps save his businesses money - the cost of paying U.S. employees' medical benefits is "painful." But he argues that the high-tech sector needs all the fiscal support it can get. "Canada has an enormous opportunity here," he says. "The Internet could become the core of our economy and we need to let innovation in this area grow." Many other Canadians, though, wish the government would extend such encouragement to all taxpayers, no matter how they earn a dollar.

A Little Extra

Tax savings, compared with the 1999 tax year, for a family of four with two working parents:

Income: $15,000; 2001: $607; 2004: $896

Income: $20,000; 2001: $675; 2004: $964

Income: $25,000; 2001: $675; 2004: $1,088

Income: $30,000; 2001: $735; 2004: $1,433

Income: $35,000; 2001: $547; 2004: $1,255

Income: $40,000; 2001: $367; 2004: $827

Income: $50,000; 2001: $343; 2004: $692

Income: $60,000; 2001: $501; 2004: $970

Income: $75,000; 2001: $681; 2004: $1,150

Income: $100,000; 2001: $923; 2004: $1,302

Income: $125,000; 2001: $1,337; 2004: $1,888

Source: Finance department

Maclean's March 13, 2000