Elections & Taxes: How Much Will Be Left?

Financial advisors have a big role to play in helping their clients understand and explore the effect of the proposed tax and financial issues as part of their year-end tax planning activities. There have been tax cuts, but more alarming, the potential of really big tax hikes for today’s wealth holders. Are you and your clients up-to-speed on the effects on boomers in particular? Here’s what we know so far:

Tax and The New Senior Demographic – the Boomers. Taxes will be a significant factor for this big voting block. According to Statistics Canada , 24% of Canadians will be over the age of 65 by 2036. This is twice the number of seniors that we had in 1999. They have been the largest taxpaying base, and looking forward, expenditures for Old Age Security, health care and other senior-related expenditures will increase 5.8% per year according to the last federal budget. The universal OAS payments currently cost $56.2 billion; in 2024 that will rise to $70.6 billion and by 2030 over $100 Billion.

Yet, the Liberal Party has pledged a 10% increase or $729 a year in the OAS (Old Age Security) benefits for those over the age of 75. This is a universal benefit – paid to everyone – but it is taxable and subject to a clawback, currently set at 15% if net income exceeds $77,580, with a complete phase-out of the OAS occurring when an individual’s net income exceeds $125,937[1]. The increase for those over 75 will be indexed after 2020 under these proposals. The promise will cost another $2.56 billion a year more by 2023/24 over and above the already scheduled increases.

The Liberals have also pledged to raise the Basic Personal Amount (BPA) to $15,000 and keep the lowest tax rate at 15% for taxable incomes under $47,630. But you have to be careful to read the fine print here: this increase in the BPA will apparently not apply to people whose income is over $147,667. That automatically means greater complexity on the tax return going forward.

For those that qualify, the tax-free zone for seniors would be $15,000 plus the current age credit of ($7494 less a clawback of about $1382) or $6112 [2] for a total of $22,494 (plus up to $2,000 if there is eligible pension income). Net taxes saved are approximately $469 over current rules. Note that the clawback of the age amount currently starts at income levels of $37,790 and phases out at $87,750. If passed, the age amount and respective clawback zones would be indexed.

The Conservative Party, meanwhile, is promising to increase the current age credit of $7494 by $1000. This is in addition to the lowest tax rate cut from 15% to 13.75%, which affects the value of all non-refundable tax credits including the age credit. Assuming the BPA stays at its current level of $12,069 for all taxpayers (subject to indexing in future years), seniors would be able to earn $20,563 tax free (plus up to $2,000 if they have eligible pension income) A senior earning $47,000 would be about $472 better off, taking the clawback of the age credit into account. That’s a bit better than the Liberal plan by our calculations.

However, there are several other provisions affecting pensioners that require a revisit. They do not yet appear on any promise lists. For example, that $2000 pension income amount is not indexed to inflation. The same is true for the $3000 threshold used to jump-start quarterly tax instalment payments. The pension income splitting rules need to be harmonized for all taxpayers to enable income splitting with spouses at any age of retirement. Current rules allow those with employer-sponsored pensions to do so, but not those with an RRSP, who must wait to age 65. This unfairly affects small business owners who must fund their own retirement.

New Taxes on Wealth. Canadian investors – especially the Boomers - have navigated through all kinds of asset-building obstacles over the last several decades including most recently a devastating recession in 2008. Looking back at the ’80s, they paid high fees for MERs on mutual funds, high double digit interest costs on mortgages, and suffered an increase in capital gains inclusion rates from 50% to 66 2/3% in the ’80s.

The ’90s brought 30% foreign investment limits for RRSPs, hidden taxes on the de-indexing of tax brackets throughout that decade, together with a series of surtaxes on federal taxes payable. Worse, inflationary gains on assets were taxed at a 75% capital gains inclusion rates for the whole decade. No adjustment for inflation was factored into the adjusted cost base of those assets either. Further, the capital gains exemption of $100,000 on qualifying investments was also eliminated in 1994.

Now, some political parties are now proposing to change the tax rules on capital gains: one suggesting a 75% income inclusion rate (NDP) and another 100% (Greens). It would be very important to keep an eye on these proposals to make sure, if any such increases come to pass, they come with provisions to adjust cost bases to inflation and deduct all expenses incurred to create value.

Tax Fairness Requires an Open and Ample Discussion. Ideally, Canada’s tax system should be fair, equitable, simple enough to make compliance easy and above all, certain. This is a system based on self-assessment, which requires a broad-based understanding of tax laws so that Canadians can plan to take responsibility for their financial future with confidence and trust.

To that end, no major tax changes should ever be legislated retroactively, or without ample consultation periods, as demonstrated with proposed corporate tax changes in the summer of 2017. Taxpayers cannot do retroactive tax planning. Likewise, governments should not be able to undo planning initiated by the taxpayer in good faith. Further, if tax change is required, so are grandfathering provisions. Any recharacterization of gains to income, increased taxation of capital gains or changing of income inclusion rules should not apply to accrued values before the change; that is simply unfair.

Finally, to make the tax system fairer, it’s time to bring back income averaging. Income spikes due to significant life events, for example taxable severance packages on retirement, the sale of business interests, the sale of assets to fund the cost of catastrophic hardship like disability, or the inclusion of untaxed pension on final returns should not be subject to taxes at the highest marginal rates.

Above all, tax provisions can have both positive and negative effects on our economic ecosystem. Some of the promises are eyebrow-raising to say the least. The Greens have raised eyebrow the most for us with several proposed tax increases:

• Increase corporate tax rate from 15% to 21%. How will this affect job creation and investments in innovation?
• Implement a tax for large corporations equivalent to the income tax paid by employees who have been laid off due to artificial intelligence. Money to be used to fund retraining programs for laid-off workers. Why not provide an incentive for the company to pay for retraining?
• Implement financial transactions tax of 0.2% in the finance sector. Will consumers pay for this?
• Free University and College tuition for all students. Forgive existing portion of student debt held by federal government. Introduce Pharmacare for everyone, and free dental care for low-income Canadians. How will this be funded?
• An increase to the target income replacement rate for CPP over time (undefined), from 25% to 50% of income received during working years. How will this be funded?

Stay tuned for more tax and economic promises as they happen in the Federal Election Round-Up chart, our take on them, and hopefully, yours too.

Bottom Line: Boomers want to be clear about the taxes payable on retirement income and the assets they intend to transfer to their heirs. The new question for their advisors to answer is: “ Will there be enough and exactly how much will be left?”

Evelyn Jacks is Founder and President of Knowledge Bureau and author of 54 books on personal tax planning and family wealth management. She tweets @evelynjacks

Additional educational resources: Help your clients get the most of their retirement income. Take Tax Efficient Retirement Income Planning as a certificate course or as part of the MFA™-Retirement & Succession Services Specialist Designation . Enrol or take a free trial today.

COPYRIGHT OWNED BY KNOWLEDGE BUREAU INC., 2019.

UNAUTHORIZED REPRODUCTION, IN WHOLE OR IN PART, IS PROHIBITED.