Low oil prices lead to Alberta deficits

“Most Albertans have been proud of having little or no public debt,” says Ian Secord, registered financial planner with Mississauga, Ont.-based Investment Planning Counsel Inc. in Calgary. “They’re worried about how the debt accumulated in the next four years will be paid back.”

The budget made an effort to counter these fears through a new Fiscal Planning and Transparency Act, which will set a limit on government debt at 15% of gross domestic product (GDP).

Alberta’s economy went into recession this year as the plunge in oil prices caused a big drop in investment and scores of layoffs. That situation won’t be reversed quickly. The provincial government is assuming that oil prices will average US$50 a barrel in the current fiscal year and rise gradually to US$68 in fiscal 2018. Furthermore, the province is reviewing the oil royalties that Alberta charges and may bring in a new regime in 2017 that could discourage investment further.

The provincial government expects Alberta’s real GDP to increase by just 0.9% in calendar 2016, even with a big boost in infrastructure spending and a program to provide grants of up to $5,000 for each new job created. However, The forecast is for stronger real GDP growth of 2.4% in 2017 and 2.6% in 2018 due to a combination of higher oil prices and greater impact from infrastructure projects.

The NDP has added $4.5 billion to the infrastructure program that the previous Progressive Conservative (PC) government announced in its aborted March budget. Total spending now will be $34 billion over five years, with more than 75% of that planned for fiscal 2016 and fiscal 2017.

Economists such as Maria Berlettano, head of Canadian government credit strategy with CIBC World Markets Inc. in Toronto, consider the infrastructure spending to be a reasonable stimulative measure, as more infrastructure is badly needed in Alberta – as well as everywhere else in Canada. However, getting projects approved takes time, so the stimulus provided may not kick in as fast as the government assumes.

“Making decisions on infrastructure projects is a long process – and that’s especially so when public money is involved because governments, as the stewards of the people’s economic resources, have to be seen to act responsibly,” says Berlettano.

But there’s little enthusiasm for Alberta’s new jobs grant program, as the grants simply may subsidize jobs that would’ve been created anyway. Companies hire when they need additional employees, not in response to a grant. Such grant programs also are easily abused, with companies laying off people and then rehiring them, or others, to take advantage of the grant. Monitoring can reduce such abuses, but that’s expensive and not all abusers are likely to be caught.

For retail investors, there’s an investment opportunity resulting from Alberta’s travails. Yields on Alberta bonds now are higher than for Ontario bonds, says Berlettano. However, Alberta is in better fiscal shape, even while running deficits, and has a higher credit rating. Thus, your clients can get a higher yield for less risk with Alberta bonds.

Here’s a look at the other measures Alberta’s government has brought in:

– Personal income tax rates were increased for those with taxable income of $125,000 or more as of Oct. 1. (See story, below.) The new rates are 12% on taxable income between $125,001-$150,000;13% on $150,001-$200,000; 14% on $200,001-$300,000 and 15% on amounts greater than $300,000. A flat 10% rate applied previously.

– The corporate tax rate was increased to 12% from 10% on July 1.

– The minimum wage was raised to $11.20 from $10.20, as of Oct. 1, and the NDP plans to increase that threshold to $15 by 2018.

– Carbon taxes will be increased to $20 a tonne from $15, as of Jan. 1, 2016, and to $30 a year later.

– There were other tax increases on tobacco, locomotive fuel and on insurance premiums.

– There’s a new Alberta child benefit, effective July 1, 2016, which will provide families with up to $1,100 a year for one child and up to $550 for each of the next three additional children.

The benefit will be paid out four times a year, with maximum benefits for those with net income up to $25,500 and lower amounts for those with household income up to $41,220.

– The NDP government restored cuts in spending by the previous PC government in the core areas of health, education and human resources (social services) shortly after the provincial election.

– The Ministry of Economic Development and Trade was created on Oct. 22 to help the economy diversify and grow.

TAX RATES TO RISE FOR ALBERTA’S HIGH-INCOME EARNERS

High-income earners in Alberta expect to face a double whammy in their taxation for 2016 as a result of the recent provincial and federal elections.

Personal income tax increases that the new provincial government brought in took effect on Oct. 1. In addition, the recently elected federal Liberal government has promised to introduce a new tax bracket for individuals with taxable income of $300,000 or more.

The result for high-income earners in Alberta is that the personal income tax rate on taxable income of $300,000 or more will rise to 48% from 39% as the federal personal income tax rate increases to 33% from 29% and the provincial rate rises to 15% from 10%.

The 48% top marginal rate still will be among the lowest in the country in 2016; it will be the same as the 48% rate in Saskatchewan and close to the 47.7% rate in British Columbia and the 48.3% rate in Newfoundland’s and Labrador. Elsewhere, top personal income tax rates will range from 50.4% in Manitoba to 58.75% in New Brunswick, although New Brunswick is considering lowering its highest personal income tax rate in the wake of the anticipated increase in the federal personal income tax rate.

Nevertheless, the increase in Alberta is huge. The province previously had a flat personal income tax rate of 10%, which meant that everyone paid the same percentage regardless of income. The flat rate, introduced in 2001, was designed to give people an incentive to work hard because they wouldn’t be penalized for earning a significant amount of money.

The introduction of a progressive tax system will eliminate that psychological edge, considered the centrepiece of the so-called “Alberta Advantage” promoted by the former Progressive Conservative government.

As a result of these measures in Alberta, high-income earner clients in that province will be scrambling to find ways to keep their income as low as possible, says Ian Secord, registered financial planner with the Calgary West office of Mississauga, Ont.-based Investment Planning Counsel Inc. Strategies include the use of corporate-class and T-series mutual funds and careful planning of withdrawals from registered funds.

Alberta’s tax increases make both tax-free savings accounts (TFSAs) and incorporating a business more attractive, says Al Nagy, regional director with Winnipeg-based Investors Group Inc. in Edmonton. That’s because there are no taxes on income generated within a TFSA, and income left in a corporation is taxed at only 27% vs as much as 48% if taken out by an individual in the top tax bracket.

Although the increase in these taxes is aimed at high-income earners, the rise in personal income taxes could affect all Albertans – or, at least, their estates, Nagy says. Specifically, he notes that assets held in RRSPs and registered retirement income funds are counted as income on the final income tax return after death. So, if such assets push income to $125,000 or more, the estate will pay more taxes than it would have previously.

Thus, Nagy suggests that clients consider life insurance to avoid shrinkage in the net value of their estates.

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