The federal 2007 bud-get was a surprise, both for what it did and didn’t do. While it delivered on some promises, it ignored others, leaving unclear what future tax policy would look like under a majority Conservative government.

It also leaves unclear — should the Tories call an election this year — whether the promises they did deliver on will be popular enough to offset those they have ignored and win them the coveted majority.

Finance Minister Jim Flaherty did deliver on an election promise to fix the federal/provincial fiscal imbalance, although he reneged on excluding natural resources revenue from the equalization formula.

The budget did not deliver, however, on a promise to eliminate capital gains for items such as cottages, heirlooms and fishing licences. And it did not live up to the hopes of many Tory supporters that income-splitting for all couples would be introduced. Indeed, neither of these issues were mentioned in the budget speech or the budget documents.

No one is sure if income-splitting for couples is even on the Conservatives’ agenda. It may be that they are holding off on until they have a majority government. The move would certainly anger voters who are single tax filers, as they would have to pay more taxes to make up the revenue lost by lower payments by couples.

Indeed, the Tories would be wise to move slowly if they intend to introduce income-splitting. Such a major change in the tax system deserves serious study and public consultation. But, with the decision to allow pension income-splitting, the Tories are stuck with expectations on the part of important supporters that it will happen.

The other surprise was that the budget did not raise the basic personal exemption or lower the lowest tax bracket to the levels at which they were under the Liberals. This will allow the Liberals to point to the higher tax burden under the Conservatives in an election campaign.

It wasn’t that money was lacking. Thanks to much stronger than expected revenue growth, Ottawa is racking up a $9.2-billion surplus in the fiscal year ended Mar. 31 — even with full forward funding of the $1.5-billion Eco-Trust, to be used by the provinces for environmental purposes. For both fiscal 2008 and 2009, the federal government projects it will have more than $7 billion to play around with, after setting aside $3 billion for debt reduction. And it has found ways to spend it.

The biggest tax measure is the proposed annual $2,000-a-child non-refundable child tax credit. Families will receive the money and include it in income. The tax credit is calculated by multiplying the payments received by the lowest personal tax bracket, currently 15.5%. This is in addition to the $100 a month for each child under six years of age introduced by the Tories in the 2006 budget.

The new budget also proposes increasing the tax credit for spouses and dependents to $8,929 in 2007, the same level as the basic personal exemption, as well as increasing the maximum contribution that can be made to an RESP to $50,000 a child from $42,000.

For low-income taxpayers, the budget proposes a working income tax benefit that could provide up to $500 for individuals and up to $1,000 a year for couples in low-paying jobs. This is accompanied by a disability supplement for each individual other than a dependent who is eligible for the disability tax credit. The age credit for low-income seniors is also raised to $5,066 from $4,066, as of 2006.

Only an election will tell if these measures are enough to offset the disappointment about no action on — let alone no mention of — broad income-splitting or be enough to offset the negative impact of lower personal exemptions and a higher tax rate for low-income taxpayers than under the Liberals.

One group particularly favoured in the budget were farmers, with $400 million in one-time payments and $600 million in seed money for a revised income stabilization program. As well, the budget proposes to increase their lifetime capital gains exemption to $750,000 from $500,000. This exemption increase also applies to small businesses and fishing.

The only action on the capital gains exemption election promise was for charitable donations. Those made to public charities were made exempt last May; the budget now makes those given to private foundations exempt, as well. But charities don’t vote, and the move will hardly satisfy those waiting for an exemption before selling cottages, heirlooms and fishing licences.

@page_break@There were also some measures that could prove troublesome in an election. One is the new “green” levy of $1,000-$4,000 on fuel-inefficient cars for each of these vehicles delivered into the Canadian marketplace. Voters in communities in which such vehicles are made will not be happy. On the other hand, a rebate of up to $2,000 a vehicle is proposed for fuel-efficient vehicles, which could have positive impact.

But the biggest irritant could be for voters in provinces that don’t like the new equalization program introduced in this budget. The governments of Newfoundland and Labrador, Nova Scotia and Saskatchewan have already expressed their unhappiness with the proposals.

This is more than offset by the enthusiasm the proposal has met with in Ontario and Quebec. However, enough displeasure in smaller provinces could make the difference between a minority and a majority government.

The proposed new equalization formula is based on the 10-province average fiscal capacity, as calculated using 50% of resources revenue, rather than the previous five-province average, which excluded Alberta and the Atlantic provinces but included all resources revenue.

There is also a cap on entitlements that will ensure that equalization payments don’t give a province more fiscal capacity than that of any of the non-receiving provinces under the equalization formula, regardless of how it is calculated.

In 2006, Newfoundland and Nova Scotia signed special eight-year renewable deals with the Liberal government to exclude all of their offshore resources revenue when calculating their equalization entitlements. The two provinces have the option of staying with that deal or going with the new one at any time they choose.

The new equalization program is only part of the Conservatives’ solution to the federal/provincial fiscal imbalance problem. The budget introduces equal per-capita payments in the Canada health transfer. Previously, some provinces, notably Alberta and Ontario, received a good deal less. It also adds $250 million to the Canada social transfer for creating daycare spaces; a separate $500 million is proposed for labour market training.

Combined with the previously announced $1.5 billion for the Eco-Trust, from which provinces can draw for environmental initiatives, Ottawa is providing an increase of $8.2 billion in provincial transfers over the next three years, ending Mar. 31, 2009.

It won’t be clear for a time whether the proposed higher level of transfers solves the fiscal imbalance problem from the broad provincial point of view, whether or not there is unhappiness on the part of some of the provinces about the details.

Another item missing from the budget was the next one percentage point cut in the GST. But this wasn’t really expected; the Tories had promised to do it within five years.

Nor was there a lot for business in the budget. Manufacturing and processing got an increase in capital cost allowance rates, to 50% for machinery and equipment purchased before the end of 2009, and for non-residential buildings, to 10% from 4% with no time limit. CCAs for other non-residential buildings go to 6% from 4%, and a number of energy-related investments got higher CCAs, although the accelerated CCA for oilsands projects is being gradually phased out.

The budget also proposes cutting the corporate income tax rate to 18.5% in 2011 from the 19% it is scheduled to be in 2010. But that’s a long way off.

There was also little additional money for national defence. But the Conservatives committed to $5.3 billion over five years in the 2006 budget, which, in turn, was on top of $12.8 billion over five years in the 2005 Liberal budget.

There were a number of noteworthy measures that affect the investment industry.

Besides pension income-splitting, which will ease the financial situation of older clients, the budget proposes increasing the conversion age for RRSPs, RPPs and deferred profit-sharing plans to 71 from 69, thereby providing two more years for clients to invest. In addition, phased-in retirement is proposed, whereby employees can receive both pension and earned income and continue contributing to their pension.

The temporary 15% mineral exploration tax credit for individuals investing in flow-through shares used to finance mining exploration is to be extended by one year to March 31, 2008.

A registered disability savings plan is proposed for parents with children suffering from severe disabilities, with a lifetime maximum contribution of $200,000.

The budget proposes extending RRSP investment eligibility to any debt obligation that has an investment-grade rating and is part of a minimum $25-million issuance, as well as any security (other than a futures contract) that is listed on a designated exchange. This means Canadian-dollar bonds issued by foreign entities would be eligible, increasing the fixed-income choices. IE