The Investment Dealers Association of Canada is calling on the federal government to deliver a pro-growth budget this year, based on tax cuts, tax reform and higher RRSP contribution limits.

In its pre-budget submission to the Standing Committee on Finance, the IDA sets out its agenda for the Feb. 23 budget. The IDA’s recommendations are premised on the government maintaining a balanced budget. Within that constraint, it would like to see the government spending any surplus with pro-growth initiatives such as cutting personal and corporate taxes, hiking RRSP limits, reforming dividend taxation and leaving income trusts untouched.

“Strengthened business confidence and pro-business public policies have resulted in a period of robust capital spending and healthy job growth,” the IDA says in the submission, made in November. “To maintain these positive trends, there is a need to provide renewed impetus to business capital spending that can lead to further gains in employment and national growth.”

The IDA argues that tax relief can help spark capital investment, which in turn boosts productivity and increases living standards. “Accordingly, it behooves the government to include additional tax relief in future fiscal plans. This will send positive signals to businesses that pro-growth policies will continue and will renew and extend the economic benefits that flowed directly from the tax reductions achieved over the last five years.”

With that in mind, the IDA calls for personal tax cuts, within the confines of a balanced budget. “We would endorse a multi-year plan of personal tax rate reductions that would allow Canadians to keep more of their earned income, thereby providing an immediate improvement in living standards,” it says, noting that narrowing the gap between U.S. and Canadian marginal rates will keep professionals and entrepreneurs from migrating to the U.S. for tax reasons.

The IDA also recommends lower corporate income tax rates and that the elimination of capital taxes should be accelerated.

Last year’s budget proposed to phase out the federal Large Corporations Tax over five years. The IDA argues that the phase-out period is excessive and it recommends the government speed up its planned elimination. It also recommends that the government reduce corporate income tax rates further and that it continue to examine and adjust depreciation allowances so that effective corporate tax rates in Canada can be brought down to levels more comparable to U.S rates.

As for other tax measures, the IDA calls on the government to reduce the capital gains inclusion rate from 50% to 25% on shares of small publicly listed companies. It argues that the current system offers tax relief for small private firms, encouraging companies to stay private longer. The IDA says that by cutting the capital gains inclusion rate to 25% for gains on initial public and treasury offerings of shares in small, publicly listed companies, “Targeted relief can be channeled in this way, at a negligible cost to the government which we estimate at a maximum $20 million per year, to the benefit of increased small business funding in public markets.”

The IDA recommends reform of the double taxation of dividends; a fact that has been partly responsible for the income trust boom, and lower demand for dividend-paying stocks in Canada relative to other countries. It recommends that the government increase the dividend tax credit to cut or eliminate duplicative taxation. The IDA says that research from the C.D. Howe Institute has shown that raising the federal dividend tax credit from about 13% currently to 18% would cost $200 million per year in lost tax revenues.

While reducing the double taxation of dividends may also reduce the pressure for companies to convert to trusts, the IDA also argues that the government should not attempt to limit pension funds owning business income trusts (it proposed some limitations in the last budget, before backing off amid an industry outcry).

Finally, the IDA says the government to hike RRSP contribution limits to $27,000 over the next few years. The current limits are slated to rise to $18,000 in 2006. But, the IDA warns, ”these new levels still fall well short of levels required to maintain adequate income support in retirement for many Canadians.”

It suggests raising the RRSP contribution limit to a level of $20,500 in this budget, followed by annual increases until it reaches $27,000.