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2009 Federal Budget — A Wide-Ranging Government Response

Date

January 27, 2009

AUTHOR(s)

Robert D. Chapman
Harold R. Huber
Shea T. Small
Anna M. Tosto
Henry J.P. Wiercinski


The Conservative Government’s Budget tabled in the House of Commons contains economic stimuli, tax cuts and other measures. Later this evening, we will be sending a separate legal update describing and analyzing the tax components of the Budget. In this update, we describe the Budget’s other elements, which we believe will be of interest to our clients and friends.

Budget 2009 is the latest chapter in the short history of the 40th Parliament, which the Conservative Party leads as a minority government. It follows the aggressive response from the opposition parties to the Economic and Fiscal Statement presented in the House of Commons by the Government on November 27, 2008. In that document, the Government described actions it would take to protect Canada’s "hard-won fiscal advantage and reinforce the stability of our financial system." The Economic and Fiscal Statement contained modest economic and fiscal initiatives, but also contained announcements to end government funding of political parties as well as certain measures relating to public sector employees — including a three-year ban on the right to strike and limits on the ability to sue for pay equity.

The opposition parties responded immediately and vigorously with an accord between the Liberal Party and the New Democratic Party, signed on December 2, 2008, to form a coalition with the support of the Bloc Québecois. Together, they were at the ready to take over the Government at the earliest opportunity following a threatened non-confidence vote in the House of Commons. The Government responded on December 4, 2008, with an historical prorogation of the First Session of this Parliament by the Governor General, at the request of Prime Minister Harper and on the promise that the Government would resume Parliament with a Second Session on January 26, 2009 and present a Budget on January 27, 2009.

The Government confirmed its pre-budget communication to Canadians that, as a result of a decrease in expected revenues and the provision of the stimuli in Budget 2009, it projects a deficit of $34 billion in 2009 and $30 billion in 2010. Without the economic stimuli, the Government would have forecast deficits of $15.7 billion in 2009 and $14.3 billion in 2010. Its projections of stimulus expenditures in 2009 and 2010 equal in total 2.5% of gross domestic product (3.2% after taking into account leverage from stimulus provided by other levels of government), and this level honours its undertaking to the G-20 countries to inject a one-time fiscal stimulus of 2% of Canadian GDP.

Below we describe, in particular, the Budget measures for the Canadian financial system, infrastructure spending and other sectors of the economy.

CANADIAN FINANCIAL SYSTEM

Stating that Budget 2009 begins where the global recession began — namely, with financial markets — the Government describes a global envelope of up to $200 billion, labelled the Extraordinary Financing Framework, being provided to "improve access to financing for consumers and allow businesses to obtain the financing they need to invest, grow and create jobs." The envelope includes:

  • Creating the Canadian Secured Credit Facility, with up to $12 billion to allow the Government to purchase securities backed by loans and leases to consumers and businesses on vehicles and equipment. Federally regulated financial institutions are immediately eligible, as are provincially regulated financial institutions (with Government approval) and also unregulated financial institutions who submit an acceptable plan.
  • Authorizing the purchase of an additional $50 billion of insured mortgage pools under the Insured Mortgage Purchase Program through Canada Mortgage and Housing Corporation (CMHC) in the first half of 2009, adding to the $75 billion of purchases already authorized in 2008.
  • Extending the deadline for the issue of guarantees under the Canadian Lenders Assurance Facility (CLAF) from April 30, 2009 to December 31, 2009.
  • Establishing a new Canadian Life Insurers Assurance Facility to guarantee wholesale term borrowings of life insurers, modelled on CLAF.
  • Delivering $13 billion in additional financing by increasing the flexibility and capacities of the financial Crown Corporations, namely CMHC, Export Development Canada (EDC), and the Business Development Bank of Canada. This initiative supports automotive parts manufacturers by improving their access to credit through accounts receivable insurance offered by EDC.
  • Increasing the maximum eligible loan amount a small business can access under the Canada Small Business Financing Program.

Tools will be added to enable the Government to act quickly to protect the country’s financial system if it comes under significant additional pressure, including:

  • authority granted to the Minister of Finance to enter into transactions that promote financial stability and maintain efficiency and well-functioning markets – including providing loans, lines of credit, and the provision and payment of guarantees;
  • authority granted to the Minister of Finance to inject capital directly into federal financial institutions and similar extraordinary authority to Canadian Deposit Insurance Corporation (CDIC) to buy shares in CDIC members; and
  • enhanced powers and financial capacity for CDIC to identify, prevent and resolve issues affecting financial stability and the viability of member institutions.

In an apparent change in long-standing federal policy, the Government has signalled that it may be willing to abolish the current statutory prohibition on Canadian banks conducting a car lease financing business. The Budget papers state that Government will consult with market participants on the merit of changing the regime governing car leasing activities by federally regulated financial institutions.

In a more definitive statement, the Government has also indicated that it will "require" banks to change certain credit card practices relating to grace periods, disclosure, and debt collection.

As foreshadowed in the Expert Panel on Securities Regulation’s January 12, 2009 Final Report, Creating an Advantage in Global Capital Markets, the Government announced its intention to move forward to establish a Canadian securities commission, at the same time respecting constitutional jurisdiction, regional interests and expertise. The Government has stated that it is prepared to discuss financial arrangements with participating jurisdictions. A federal securities act will be tabled in the House of Commons in 2009. The Canadian Securities Commission will be integrated into Canada’s financial stability framework, which includes the Department of Finance, the Bank of Canada, the Office of the Superintendent of Financial Institutions, the CDIC, and the Financial Consumer Agency of Canada.

The temporary solvency funding relief for federally regulated pension plans announced in the November 2008 Economic and Fiscal Statement will be enhanced by increasing, with the appropriate safeguards, the 110% limit on the use of market value above asset value in the application of asset value smoothing.

The Government also proposes to extend the Wage Earner Protection Program to cover severance and termination pay owed to eligible workers impacted by employers’ bankruptcy.

INFRASTRUCTURE

Budget 2009 introduces — and in some cases, resurrects and reinvigorates — previously announced infrastructure investment with a combined stimulus value of some $20 billion including an immediate (meaning over two years) commitment of $10 billion from federal sources. This investment is on top of additional spending in support of specific business and community initiatives (described in greater detail below). The projects highlighted in some cases have already been planned or have been many years in the making; in some cases, the funds are targeting shovel-ready initiatives that could commence in the next few months. Generally, most of the announced infrastructure initiatives are available on a cost-sharing basis, thereby compelling other levels of government to mobilize and allocate resources on an equivalent or at least material basis. Few details are provided in terms of administration of such funds and requisite pre-conditions that will be required prior to disbursement.

Infrastructure investment is divided into four main categories including (i) provincial, territorial and municipal projects; (ii) First Nations infrastructure; (iii) knowledge infrastructure; and (iv) federal infrastructure projects.

Building on already identified significant provincial\territorial and municipal projects, Budget 2009 highlighted a list of possible large-scale infrastructure projects to receive priority funding. "Priority" appears to mean that they would be initiated in the next two construction seasons. Projects in each province and territory have been identified as possible targets. The Building Canada Fund, announced in October 2007 with its own program of $33 billion, will oversee funding. In addition, the Government has pledged to accelerate its periodic payments to provinces and territories for infrastructure needs. The accelerated payments will occur in 2009 and 2010 for payments that had been previously pledged for the fiscal periods through 2014.

Hand in glove with the funding commitments will also be an apparent streamlining of various federal regulatory regimes to ensure that all possible efficiencies (for example, in environmental approvals) are implemented to facilitate completion of priority projects.

Environmental sustainability appears in numerous parts of Budget 2009, particularly in those parts dealing with infrastructure. A commitment to spend $1 billion over five years in a Green Infrastructure Fund focused on sustainable energy infrastructure is made, though it is unclear how the fund will be administered or disbursed.

New funding of $500 million is also dedicated, through the Communities Component of the Canada Building Fund for small communities with unique infrastructure needs. Again the funds would be made available on a cost-share basis and would be available over the next two years.

The largest allocation of direct funds in Budget 2009 is a new $4-billion infrastructure stimulus fund established for the 2009 and 2010 construction periods. Designed for shovel-ready projects, funding will be provided for up to 50% of eligible project costs based on project readiness and merit. Funding, which is designed to be on a shared basis with other levels of government, will be allocated based on population. Budget 2009 suggests that should funds not be used in a timely way, monies will be redeployed to other infrastructure initiatives.

Existing and newly created regional development agencies will be funding vehicles for up to $500 million in spending on recreational facilities, including funds for new construction and upgrades. Up to 50% of total project costs may be eligible, with the balance coming from cost-sharing sources. Facilities owned by municipalities as well as non-government entities will qualify.

On-reserve First Nations infrastructure is also identified with funding of some $515 million over two years, with a focus on schools, water and critical community services.

Knowledge infrastructure is earmarked for in excess of $3 billion over two years of the estimated $20-billion infrastructure stimulus. Up to $2 billion will be dedicated to universities and colleges specifically for repairs, maintenance and construction, with particular emphasis on advancement of research and development in Canadian institutions of higher learning; 70% of the funds will be dedicated to universities and 30% to colleges. Administration will occur through Industry Canada and will be judged based on level of readiness and merit.

A variety of other knowledge-based infrastructure initiatives were also announced, including a much-anticipated commitment of some $500 million into the Canada Health Infoway to modernize electronic records-keeping, as well as a $225-million commitment to developing broadband infrastructure in unserved Canadian communities.

Federal infrastructure projects also factor prominently in the stimulus efforts, with over $1 billion dedicated to specific federal infrastructure projects. Significant examples include an allocation of $282 million over two years for initiatives designed to promote aviation safety and the operations of the Canadian Air Transportation Security Authority, and $212 million to renew the Champlain Bridge in Montreal. In addition, $407 million over an unspecified period of time is to be provided to Via Rail Canada for track renewal and expansion, fleet modernization and station upgrades, including adding sections of triple-track at various locations between Montréal and Toronto.

OTHER INDUSTRY SECTORS

Beyond specific relief to business in the form of enhanced capital cost allowances, as well the auto sector relief previously announced, Budget 2009 also sets out a variety of areas of relief in the way of direct and indirect funding for key sectors.

Forestry and agriculture are the primary recipients of short-term support to promote innovative technologies and products. Shipbuilding is also identified as a recipient of investment with $175 million allocated for the procurement of new and retrofit vessels. Similarly, Budget 2009 provides the Canadian Space Agency with $110 million over a three-year timeframe for the development of space robotics.

Culture and sport will also enjoy heightened infrastructure spending, with $60 million being dedicated to cultural institutions such as theatres, museums and libraries and an additional focus on sport, specifically the 2010 Winter Olympics, as well as tourism.

Green energy initiatives, in support of clean energy technologies, are separately highlighted although they appear to duplicate the Green Infrastructure Fund. Atomic Energy of Canada Limited (AECL) is also earmarked for receipt of $351 million in 2009 for operations. Additionally, Budget 2009 specifically notes the possibility of future private sector participation in AECL, with a review of the AECL structure currently underway.

Two new regional development agencies are to be established to promote economic development in both Southern Ontario and in the North. Each will have various funding and administrative responsibilities.

We hope that this report and our companion report on the tax measures of Budget 2009 will be of value to you.

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