On March 22, 2016, Liberal Finance minister Bill Morneau delivered the first budget for the Trudeau government. As was widely expected, it followed through on a number of spending initiatives announced in the election campaign as well as massive wealth redistribution efforts. The 2016 budget forecasts a deficit of nearly $30 billion and forecasts are for large deficits annually for the next 5 years, which are expected to add almost $120 billion to Canada’s national debt. The numerous spending initiatives are being covered heavily by the press so I thought I would just focus on the tax and benefit changes that could impact you the most:
Introducing the Canada Child Benefit
The government will be rolling out a new tax-free Child Benefit, starting July 2016, that will replace the current system of child benefits, some of which are income-tested and one of which is paid out universally, regardless of income. The new Canada Child Benefit will be targeted to lower and middle income families; higher income families (generally over $150,000 in family income) will receive less, or none. It is expected that 9 out of 10 families will see higher benefits after tax than they did under the old system.
The new Child Benefit will provide a maximum annual benefit of up to $6,400 per child under the age of 6 and up to $5,400 per child for children aged 6 through 17. The highest benefit will be given to families with less than $30,000 in net income
Eliminating the Children’s Fitness Tax Credit and the Children’s Arts Tax Credit
To help pay for the enhanced Child Tax Benefit, and to simplify the tax code, the government has pledged to cancel the Children’s Fitness and Arts Tax Credits by reducing these to half for the 2016 tax year and to zero for 2017 and beyond. These credits currently give a benefit of up to $150 per child for expenses up to $1,000 for the Fitness Tax Credit and $75 per child for eligible expenses up to $500 for the Children’s Art Credit.
Eliminating income splitting for couples with children
Another policy objective to help pay for the enhanced child benefits is the announced removal of income splitting for couples with children under the age of 18, starting with the 2016 tax year. PENSION income splitting will not be affected by this change.
Changes for students
To reduce dependence on repayable student loans, the budget announced that it will be increasing the amount available as Canada Student Grants by 50 percent as per the following:
- from $2,000 to $3,000 per year for students from low-income families;
- from $800 to $1,200 per year for students from middle-income families; and
- from $1,200 to $1,800 per year for part-time students.
To help new graduates struggling to find optimal employment in the workforce, the government will no longer be requiring repayment of student loans issued under the Canada Student Loans Program until graduates are earning at least $25,000 per year. In addition, there will be a new flat-rate student contribution introduced to determine eligibility for Canada Student Loans and Grants, replacing the application system which assesses student income and financial assets.
To help pay for the enhanced student grants for low and middle income families, the government will be eliminating the Education Tax Credit and the Textbook Tax Credit starting in 2017.
Extending Employment Insurance regular benefits in affected regions
The budget update also includes changes to the Employment Insurance system in various regions across the country. The duration of EI regular benefits will be extended by 5 weeks in the 12 EI economic regions that have experienced the most severe increases in unemployment, up to a maximum of 50 weeks of benefits. These changes go into effect in July 2016 and will be retroactively applied to all eligible claims as of January 4, 2015.
In addition, they have offered up to an additional 20 weeks of EI regular benefits to long-tenured workers in the same 12 EI economic regions, up to a maximum of 70 weeks of benefits.
Changes for Seniors
As expected, the government formalized their intent to roll back the age of eligibility for Old Age Security (OAS) payments, to age 65 from 67, and the Allowance, to age 62 from 60.
The Budget also proposes to increase the Guaranteed Income Supplement (GIS) by up to $947 annually for single seniors with annual income (excluding OAS and GIS benefits) of about $4,600 starting in July 2016.
The Government announced that it will be looking at creating a new Seniors Price Index that more accurately reflects the real-world cost of inflation experienced by seniors, rather than using the broad measure of the Consumer Price Index that measures the broad change in inflation in the economy, excluding food and energy. This new Index will apply to annual increases to OAS and GIS benefits, not CPP or government pensions.
Changes for small business owners
The budget also made clear the government’s intent to “crack down” on small business owners and professionals who were using their corporate structures to potentially reduce or defer tax. While no changes have taken effect yet, disappointingly, a few of these measures may negatively impact strategies we regularly engage in with small business owners and professionals, including:
- Possible changes to the tax treatment of investments paid from an operating company to a Holding Company for investment purposes;
- Limiting the fairly common practice of allowing life insurance policies that had been funded with corporate after tax dollars instead of personal after tax dollars to be paid out tax free to beneficiaries through the company’s capital dividend account.
Taxation of corporate class funds
In a very disappointing, and surprise, move the government announced that they will be disallowing the practice of tax-deferred switching between funds inside a mutual fund corporate class structure. This corporate class structure provides the following tax benefits:
- Potentially lower distributions;
- Preferential treatment of distributions or withdrawals;
- Tax-deferred fund switching and portfolio rebalancing.
After September 2016, an exchange of shares of a mutual fund corporation that results in the investor switching between mutual funds will trigger a capital gain or loss, the same as the sale of individual shares or a mutual fund trust. For clients with non-registered portfolios, any rebalancing decisions will have to be made prior to October 1st, 2016, otherwise they will be taxable.
In many ways, this change impacts seniors the most as they have not had the bulk of their investment years to have benefitted from the tax advantages of the TFSA and in many cases have built up considerable non registered investment portfolios with after-tax dollars. Similarly, it will impact business owners who have chosen to set up their financial affairs to invest corporately.
If you have any questions or concerns about how this budget update could affect your or your investments, give me a call or email!
The federal government announced its annual budget on March 22, 2016. This article doesn’t contain a complete list of proposals, but outlines the ones that may be relevant to the financial service industry. Please note the announced budget contains proposals that may undergo revisions before becoming law. You may wish to keep in mind that any planning based on proposed rules may need revision should the proposals undergo any changes or are not enacted. Since the government has a majority it’s likely that most proposals will eventually become law.