Election Expenditures: The Promises to Discuss Before Year-End

Highlights of some of the important tax expenditures planned by the new government, which translate into the promises made for targeted recipients, will form an important part of year-end tax planning this year. Tax and financial advisors may wish to discuss what’s coming up with their clients now, and review financial decision-making with new insights into the promises made by the Liberal government.

The proviso is that these provisions will require legislation and Royal Assent to be passed into law, which can be trickier with a minority government. Still many of the provisions are specific enough to warrant tax and financial planning discussions.

The Basic Personal Amount: The broadest tax reduction is planned for those with incomes below $214, 557 in 2020. See the earlier article and Expenditure Plan Details below.

Provisions for New Parents: The Canada Child Benefit (CCB) will be enhanced for newborns, there will be new Child Care Fee reductions, and EI parental leave will be extended to introduce a 15-week leave for adoptive parents.

Specifically, the CCB will be enhanced for parents of newborns beginning in July of 2020 to bring the base benefit up to $7750. This will be income-tested based on the 2019 tax return.

Planning Opportunity: For the upcoming RRSP season, make sure new parents understand the value of an RRSP deduction in maximizing benefits from the CCB, which is based on the family’s net income. When this income is reduced below the income testing thresholds, clawbacks are reduced too and that maximizes the into CCBs with an RRSP strategy to ensure that the maximum CCB can be maximized in the next benefit year. The clawback is based on the results of the 2019 tax return.

For the current benefit year, the clawback zones, which are expected to be indexed, are the following:

Note: If the child is disabled, the Child Disability Benefit of $2,832 in 2019 is paid and is reduced where family net income exceeds $67,426. The reduction rate is 3.2% for families with one child and 5.7% for families with two or more eligible children.

EI Benefits and Premium Increases and exempting a portion of parental maternity employment insurance (EI) from tax will entail a premium rate increase to EI for all employers and employees. EI sickness benefits will also be extended from 15 to 26 weeks; again, EI premium rate increases will result.

This comes at a time when CPP premiums will also rise under previously announced rate increases, phased in over the period 2019 to 2025.

Planning Opportunity: Clients who are contemplating the financial implications of new life events – the birth of a baby and the onset of illness – need more information about these new benefit programs. However, as important – self-employed people need to get a handle on the new costs that will come their way as remittances of higher statutory expenses emerge on the horizon. What’s affordable? Will new human resources include more employees or more subcontractors? What is the difference, especially if the small business employs family members? Advisors need to be able explain.

Seniors will benefit from a significantly enhanced CPP survivors’ benefit — $2080 more; although this falls short of allowing survivors to collect on the full CPP retirement benefit the deceased taxpayer would have been entitled to. OAS recipients over the age of 75 will also receive more — $729 a year. This is a universal, but income-tested benefit.

Homeowners: The government promises to provide an interest-free loan of up to $40,000 with a 10-year repayment term to support home retrofits following a free energy or flood audit program. Other provisions include support of new home retrofits with a cash grant valued between $250 to $750 for installations and renovations plus a grant of up to $5000 for all homebuyers of NetZero homes.

There is also an enhancement to the First Time Home Buyers’ Tax Credit for those living in Toronto, Oakville, Vancouver, the Lower BC mainland, Fraser Valley, and Victoria.

Cell Phone Services: it is expected that the new government will target cutting costs of wireless services by 25% by using government regulatory powers; that change may save a family of four about $1000 a year. The goal is to bring Canadian cell phone service costs more in line with costs in other countries.

Provisions for Business: It will be interesting to see if the new minority government will attempt to mend fences with the business community in this term. Recall the highly unpopular changes to the small business taxation in July of 2017 and the resulting new rules known as Tax on Split Income (TOSI) and, starting in 2019, the new rules for passive investment income earned on capital retained in small business corporations, which, if over $50,000, will result in increased taxes on actively earned small business income. There was not much by way of promises in the election platform, but three of note:

Small business: There is very little tax relief for small business owners – only $250 is allocated as a “voucher” for new businesses to expand their online services; a remarkably low number. No further details have been provided. An e-payroll system will be initiated to electronically file source deduction remittances and some new initiatives will include funding for new indigenous-led businesses. All fees for business advisory services from the Business Development Bank of Canada, Export Development Canada and Farm Credit Canada will be eliminated.

Reduced GST/HST: Businesses will save significant dollars on reduced “swipe fees” on credit card transactions as the government plans to eliminate fees charged on GST/HST portions of transactions. The Canadian Federation of Independent Business expects this will save businesses about $500 million in fee costs.

Incorporated businesses: In addition, the federal costs of incorporating a business will drop from $200 to $50. It will be important to watch the outcomes of intergenerational transfers, which are expected to be revisited in this mandate. The Tax on Split Income Rules and passive investment income provisions will remain intact.

For corporations with net interest expenses of more than $250,000, a limit will be placed on deductibility of interest to no more than 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA), starting in the 2019-2020 tax year.

Planning Opportunity: Advisors working with small business owners will want to review documentation to support compensation paid to family members to make sure the business is ready for audit activity over the next several years. As well the TOSI rules allow for income splitting when the source or active individual in the firm turns 65. There is no limit to how much be paid in dividends to the non-active spouse. Therefore retirement planning for the boomer business owner should be at the forefront of year-end discussions.

Executives can expect changes to taxation of stock options to proceed; income gained on options valued over $200,000 at the time they were granted, will attract a 100% income inclusion, after 2019.

Planning Opportunity: Stock option planning for senior executives is a critical part of 2019 year-end tax planning discussions. Compensation models will need to be reviewed, as taxes will definitely rise for these individuals in the future. Note that these rules will not apply to start ups.

Students: The election platform specifies several provisions for students to essentially pause their student loan repayments during various life events, plus some additional money under the Canada Student Grant structure. Here’s a synopsis:

• Increased Canada Student Grants. Up to $1200 more per year for full time and part-time students will be made available with some interesting repayment terms. No repayment is required for two years after graduation. This will be an interest-free period and the repayments will not be required until income is at least $35,000. Additional compensation will be offered to provinces and territories that do not participate in the Canada Student Loan Program.
• Payment Pauses for Low-Income Periods. Further repayments will be put on hold if income “ever falls” below this level. There are no details on whether interest will be payable in the pause periods and whether there is a time limit in a student’s lifetime for these criteria.
• Payment Pauses for Parents. “To make it easier for parents to focus on their families rather than their debt”, student loan repayments will again be paused, interest-free until the youngest child reaches age 5. New parents who have graduated but haven’t finished paying can do the same.

Education Planning: Is it wiser to save for education using an RESP or other savings vehicle, or simply to get a Canada Student Grant/loan with interest-free repayment and pause periods, or both? What are the criteria for qualifying for these loans? Should/can previous student loans be consolidated under these new debt arrangements including new pause periods? Is this possible for recent graduates with a large student loan burden? It’s math that advisors will want to proactively look into for graduating students, especially professionals, to ensure this large debt is properly managed and that any possible savings are applied across the board.

Knowledge Bureau Report will be presenting more in-depth coverage on the details of these programs in the weeks to come.

Expenditure Plan Details. Here are some of the costs of the more significant “investments” to be made by the government:

Source: Liberal Party Platform

Additional educational resources: Learn more about how to help investors and small business owners with year-end tax planning at the Fall CE Summits. You can still register online or by calling 1.866.953.4769 today to attend in Winnipeg, Toronto, Calgary or Vancouver workshops happening next month!

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