The second wave of corporate income tax cuts introduced in the 2007 Economic Statement came into effect Thursday, cutting the rate by half a percentage point to 19%.

The federal government has been whittling away at reducing the corporate income tax rate to 15% by 2012 from 22% in 2007. But Scott Hennig, the director of the Canadian Taxpayers Federation said more cuts are expected in the 2009 federal budget on Jan. 27 as the minority conservative government grapples to stay in power.

"It wouldn`t surprise me to see the government speed up that time line in terms of getting it down to 15%, and hopefully they will. We have some of the highest business taxes in the G7," Mr. Hennig said in an interview Thursday. "That being said, our organization is not calling on the government to be introducing stimulus packages, particularly not stimulus packages that will put us back into deficit budgets."

But with the fate of the Stephen Harper government still in question, the admission the Canadian economy is in recession, an ailing manufacturing sector, and an uptick in unemployment, there is enormous pressure on the government to introduce a highly stimulative budget at the end of the month.

Jim Flaherty, the federal finance minister, has already conceded the budget will fall into deficit in 2009-10 and hinted that new fiscal stimulus is on the way and likely to take the form of increased infrastructure spending. He said this stimulus would be in addition to tax reduction measures implemented since 2006 that will save businesses $31-billion in taxes in 2009-10 -- the equivalent of nearly 2% of gross domestic product.

These previous measures mean that in 2009, businesses will benefit from a reduction to 4% from 7% on the withholding tax on interest payments from Canada to non-arm`s length U.S. lenders. Manufacturing and processing businesses will also benefit from the extension of a provision that allows them to write off their investments in machinery and equipment.

In addition, individual taxpayers can now contribute $5,000 a year to a tax-free savings account and many will benefit from generally lower taxes as a result of higher basic and spousal exemptions.

Mr. Hennig projected an individual earning $60,000 a year would save $168 in taxes in 2009. However, he said that saving has been capped by an increase in payroll taxes, such as the Canadian Pension Plan and Employment Insurance contribution rates. He said this increase is unjustified, even if the government anticipates an increase in unemployment, because the Employment Insurance Fund has been running a solid surplus for years.

Mr. Hennig said any new stimulus measures in the federal budget would likely involve a mix of infrastructure spending, personal and business tax cuts as well as corporate bailouts.

"That`s not what we`d want to see, but that`s what we expect to see," he said, adding that budget deficits generally placed upwards pressure on taxes.

The pressure to unveil a stellar budget comes after the minority conservative government was almost toppled last month when Mr. Flaherty`s annual fiscal update was criticized by Opposition parties for the absence of additional economic stimulus measures and for its decision to end the public funding of political parties. The latter was reversed after the Liberal Party and the NDP formed a coalition, supported by the Bloc Québécois, capable of seizing power from the Conservatives via a nonconfidence vote. The turmoil resulted in Governor General Michaëlle Jean on Dec. 4 approving Prime Minister Harper`s request to prorogue Parliament until after the early release of the 2009 federal budget at the end of the month.

Alia Mcmullen
News source: Financial Post