The 1985 Canadian federal budget for fiscal year 1985-1986 was presented by Minister of Finance Michael Wilson in the House of Commons of Canada on 23 May 1985. This is the first federal budget under the premiership of Brian Mulroney, and generally increased taxes.^[2]

Background

The budget is the first presented in the 33^rd Canadian Parliament following the 1984 federal election during which the Progressive-Conservatives won a landslide majority. The previous fiscal year (1983-84) saw, at the time, the largest post-war deficit of the federal government at 37.16 billion.^[1]

Taxes

We're asking that Canadians pay 1$ more per day in taxes to make a better world

— Micheal Wilson, 1985 Budget speech

Personal income taxes

The budget brought significant changes to income taxes, notably:

• Introduced the Lifetime Capital Gains Exemption (LCGE)^[3]
  • The budget provided for a $500,000 exemption lifetime exemption for capital gains^[a] to encourage investment and risk-taking.
  • To account for the LCGE several other tax incentives were abolished or rolled back^[4][b]
• A new tax credit of up to 20%^[c] is allowed for investments in Labour-Sponsored Venture Capital Funds (LSVCF) with the following limitations:^[5]
  • The federal credit is capped at $700 by year.^[6][7]
  • The credit is conditional upon the province of the taxpayer providing at least a 20% tax credit.^[6][8]
• Repealed the Registered home ownership savings plan (RHOSP) that was created in 1974.
  • Starting the day after budget day, RHOSP contributions would not be deductible and no contribution can be made after 31 December 1985.^[d][9]
  • Funds left in RHOSP after 22 May 1985 could be withdrawn tax-free.^[10][11] Income earned in a RHOSP after 31 December 1985 was to be included in the owner's taxable income, effectively ending the last desirable feature of RHOSPs.^[12]

Several revenue increase measures were also announced:

• Full tax indexation is dropped starting in 1986 and replaced with a partial indexation whereby tax brackets and the basic exemption are indexed on the CPI increase in excess of 3%. No indexation is to take place if CPI is below 3%.^[13]
• A temporary 5% surtax is implemented on federal tax between $6,000 and $15,000 and 10% on tax in excess of $15,000. The temporary surtax was slated to last between 1 July 1985^[e]and 31 December 1986.
• The federal tax reduction is repealed starting in 1986.^[14]

Corporate income taxes

A temporary 5% surtax on large corporations was announced, effective between 1 July 1985 and 30 June 1986. The surtax does not apply to income eligible to the small business deduction.^[15]

Capital tax

A temporary 1% surtax on the capital tax payable by large financial institutions effective between 1 January 1986 and 31 December 1987. The surtax is calculated as 1% of capital in excess of $200 million. The surtax was deductible for corporate income taxes^[16]

Other taxes

Federal Sales Tax

The Federal Sales Tax rates are increased on 1 January 1986:^[17]

• From 6 to 7% for construction goods, cable and television services;
• From 13 to 14% for alcoholic beverages and tobacco;
• From 10 to 11% for all other taxable goods.

The previous 1% temporary increase, slated to end on 31 December 1988, is permanently extended.^[17]

The federal sales tax exemption is repealed for the following goods:^[18]

• Candy and confectionery, soft drinks ;
• Pet food ;
• Hygiene products (soaps, shampoos, creams...) excluding feminine hygiene and contraceptives ;
• Surgical and dental instruments ;
• Wood-burning stoves, heat pumps, solar heaters and similar goods.

Excise taxes

Various excise taxes were increased in the budget:

• Tax on gasoline is increased by 0.02$ per litre starting on 3 September 1985, to avoid the increase affect the summer vacation season;^[17]
• Automatic indexation of excise taxes on alcohol and tobacco is dropped however:
  • Excise tax on alcoholic beverages is increased by 2%;^[19]
  • Excise tax on tobacco is increased by 1%.^[19]

Energy taxes: Western Accord implementation

The budget follows the signature of the Western Accord between the federal government and the governments of Alberta, British Columbia and Saskatchewan that was slated to enter into force on 1 June 1985.^[20] The budget introduced measures to implement the Accord, notably:

• Phased-out repeal of the Petroleum and Gas Revenue Tax (PGRT) between 1 January 1986 and 31 December 1988;^[21]
• Retroactive repeal of the Incremental Oil Revenue Tax (IORT) for production after 31 December 1984 ;^[22]
• The Canadian Ownership Special Charge (COSC) is suspended by regulation starting on 1 June 1985. The legislative measures and the Canadian Ownership Account special fund to be deleted at a later date ;^[22]
• Amendments to the Excise Tax Act to repeal the sections related to the Natural Gas and Gas Liquids Tax (NGGLT).^[22]

Reactions

The budget garnered generally mixed reaction. On 24 May 1985, several newspapers' main headline focused on the tax increases:

• La Presse : “Wilson Taxes Everywhere” ;
• The Globe and Mail : “Ottawa increases the tax load”;
• The Gazette : “Taxes up, up, up as budget hits ordinary Canadians hard”

Columnist Alain Dubuc of La Presse pointed out that the budget was disappointing in that it did not drastically reduce the federal deficit while containing few measures for job creation and several tax increases.^[23] Most French-language columnists pointed out the uncertainty over the success of the measures announced in the budget.^[24]

Jeffrey Simpson of The Globe and Mail painted a nuanced picture of the budget pointing overall that the return to “fiscal sanity” was long overdue.^[25] L. Ian MacDonald of The Gazette expressed that the budget was a risky gamble, increasing taxes on the middle class and providing tax incentives to businesses could provide politically explosive should the recovery not materialize.^[26]

The budget garnered a very positive reaction from former Quebec finance minister Jacques Parizeau. He applauded the courage of the deindexation and the repeal of the RHOSP as a way to inject $2 billion into the economy.^[27]