How Taxation Changes Will Affect Canadians

Posted 12 Feb 2016 by Rick Irwin, CFP, CLU

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There is an old saying that the new broom always sweeps clean. This is certainly true in politics. Last year Trudeau’s Liberals won a decisive victory and promised sweeping changes for Canadians, including in their tax policy.  Here is a look at some of the proposed tax changes based on the specific groups that they will impact:

Middle class taxpayers

The federal second tax bracket (known as the “middle class bracket”) will be lowered from the current rate of 22% to 20.5%. The middle class bracket includes income between $45,282 and $90,563 and will provide a maximum tax break of $679/year for individuals who earn at the highest end of this range. There were no tax breaks for those earning less than $45,282.

To help pay for this modest tax cut a new tax bracket of 33% for annual incomes over $200,000 has been introduced. Previously those who earned over $200,000 were taxed federally at 29%. When combined with the provincial tax rate, this will push the effective tax rates on higher income to well over 50% in several provinces (Nova Scotia being one of the highest at 54%). Several commentators have suggested that the government will likely not collect as much tax revenue as expected from this higher bracket as higher income individuals will have behavioural responses to earn less, or augment their financial positions in other ways, to stay below this limit. Many have also suggested that having a tax bracket north of 50% puts Canada at a competitive disadvantage globally. Another, perhaps unintended, consequence is the number of estates of middle class Canadians that will have at least some portion, and perhaps a fairly large portion, of the estate taxed at this new higher rate. Perhaps some consideration will be given in future to an intended tax increase to higher income individuals punishing middle income Canadians upon their passing. 

Income Splitting

The Family Tax Cut, in force for just one year which allowed families with young children and spouses who had a large dispersion in income between them, to reduce taxes by up to $2,000, will be cancelled. This probably has a fairly limited impact as this program was not being utilized by the vast majority of working families.

Do keep in mind that pension income splitting for seniors remains unchanged.

Families with young children

The government announced that it intends to create a new Canadian Child Benefit which is a monthly tax free payment that will replace the current mix of programs that include the Universal Child Care Benefit (a non-income tested program) and the Canada Child Tax Credit & National Child Benefit Supplement (both income tested programs). The new benefit will be income tested and will provide a maximum benefit of $11,800 for families with two children where household income is $15,000 or less. This benefit is clawed back as income increase and will disappear completely when combined family is $200,000 or more.  For combined family income between $90,000 and $140,000, the income will be similar to what was provided under the former UCCB (though it is now a tax free payment.) More details and a calculator to see what your new estimated entitlement will be can be found here: https://www.liberal.ca/realchange/helping-families/

Lower Income Seniors

As a positive for soon-to-be retirees, the government announced that it will roll back the eligibility age for the Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) to 65.  (It was planned to be phased out to age 67 under the Conservatives).

The Guaranteed Income Supplement, which is an enhancement to OAS that is payable to low income seniors, will be increase by 10 percent.

Another positive development is the introduction of a new “Seniors Price Index” which will ensure that OAS and the GIS payments keep pace with the real world inflation experienced by seniors on things like food, heating and prescription drugs; the costs of which have historically exceeded the basic inflation rate. (It is not currently expected to be linked to CPP.)

Students

The government plans to eliminate the education and textbook tax credits. Combined these credits were $465 per month of full time enrollment and $140 month of part time enrolment. For a typical 2-term school year this means a diminished tax credit of $3,720 per year.

Better news is that an overhaul of the student loan system is likely; ensuring that a graduate will not have to make any repayment until they are earning at least $25,000/year.

First Time Home Buyers

This program is also likely to be given a facelift. Currently you can only use the program for your first home or if you haven’t owned a home in the preceding 5 calendar years. The government proposes to make the plan more flexible, to better respond to sudden life changing circumstances such as caring for an elderly relative.

Investors

As expected, the government rolled the TFSA contribution limit back to the previous limit of $5,500 and re-introduced indexing (meaning that every four years the limit should see an increase of $500). As of 2016 the allowable lifetime contribution limit is now $46,500 per person. 

If you would like any further details on any of the above, and how they might impact your financial situation, do not hesitate to get in touch.   

 

 

The information provided is based on proposed and current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.