Federal Budget: Tax Reforms Coming Soon

A tell-tale sign the federal budget is right around the corner was the February 12 meeting of the Finance Minister with private sector economists for their forecasts on the Canadian and global economies. This this year, a number of significant tax changes are expected, if the newly elected Liberal government’s election platforms are implemented.

The private sector forecasts have been used as the basis for fiscal planning since 1994 bringing to the budgetary process an “element of independence”. The last time the forecasts were updated was in November, and the outlook then was gloomier than in the April 21, 2015 budget.

Unfortunately, it has dimmed even more since then. The good news, apparently, is that Canada’s underlying economic and fiscal fundamentals are sound, and as a result, the government has gone ahead with its middle class tax cut; but in addition, the increase in taxes to 33% for those with taxable incomes over $200,000.

What remains to be seen is what other proposed provisions will make the grade in this budget.  While the date is yet to be announced; it is expected that a myriad of tax change will emerge. Amongst them:

1. The Canada Child Benefit (CCB), to be implemented in July, based on family net income reported in the 2015 tax year.  The benefit replaces the Universal Child Care Benefit and income splitting under the Family Tax Cut, which Canadians will see for the last time on the 2015 tax return. According to the Liberal Party Platform, a typical two-parent family with two children, earning $90,000 per year together will receive $490 per month tax free or $5875 per year.  Ultimately, the amount received will depend on how evenly the income is earned between the spouses, whether the family invests in RRSPs, how much is paid for child care and the number of children.  Families with household incomes over $150,000 are expected to receive significantly less than under the previous family tax provisions.  For specific scenarios, try the CCTB WorkSheet calculator in the article “Max the RRSP Now to Maximize the New CTB” in this issue.
2. Changes to the Old Age Security and Guaranteed Income Supplement to return the age of eligibility to 65, from age 67, as per the previous governments’ plans.    It will be interesting to see if a new Senior’s Price Index will be announced, and the details behind it.  The objective:  to ensure that guaranteed public pensions keep up with actual rising costs.
3. GST on the capital investment in affordable rental housing for low income individuals is expected to be removed.
4. The RRSP Home Buyer’s Plan is expected to be “modernized” to allow those affected by sudden changes in their economic circumstances due to job relocations, death of a spouse, marriage breakdown or caregiving in the home of an elderly disabled person, to access funds on a tax free basis, albeit with a repayment schedule, if the existing mechanics of the plan are retained.    
5. For students, expect that the education and textbook credits – but not the tuition fee amount – will be cancelled in favor of a more generous, non-repayable Canada Student Grant.   RESP and Canada Learning Bond application processes will also be made simpler.  A Veterans Education Benefit is also expected to be announced and whether it will be taxable or not. 
6. The federal Labor Sponsored Tax Credit is expected to be reinstated in full; as opposed to being fully phased out.
7. A Teacher and Early Childhood Educator School Supply Tax Benefit – a refundable amount of up to $150 – was to have been implemented for the 2015 tax year; but didn’t make it into the Income Tax Act.  It will be interesting to see if this is announced in the federal budget for tax year 2016 forward.  
8. The Northern Residence Deduction has hovered at $8.25 a day for the past several years; the Liberal government has pledged that it should rise to $22 a day and be indexed to inflation.  That would bring the annual maximum deduction in the Northern Zone up to $8,000 from $6,022 and to $4,000 in the Intermediate zone, from the current $3,011.

However, potentially most significant is the review the government is proposing to “complex tax expenditures” that help high income earners. There will be a close watch particularly on proposed changes to the stock option deduction; with the potential of taxing benefits in full as opposed to the current treatment that aligns with capital gains provisions. Employees with up to $100,000 in stock option gains would be unaffected.

Knowledge Bureau Report will provide full coverage of the Federal budget and the technical details of the provisions and their effects on tax and financial planning will be covered at the Distinguished Advisor Workshops Being held in four cities:  May 24 to 31. Registrations are available at early bird tuition fees until May 15.

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