It’s a Minority Liberal Government – What Can We Expect?

With a Liberal Party minority forming government after this week’s election, the big question on the minds of many taxpayers is, are taxes going to rise and, if so, for whom? This important milestone opens new opportunities for advisors’ discussions on year-end tax planning and important topics like investment, retirement and succession planning.To help you navigate through what’s to come, based on the Liberal election platform, this Knowledge Bureau Special Report runs through some of the more significant provisions announced in the Liberal Election Platform, as costed by Parliamentary Budget Office.

Deficit Spending. Expect continued deficit spending over the next four years: a projected total of approximately $94 Billion over the 4-year period. The party indicates that the net debt-to-GDP ratio, currently at 30.9% is expected to drop to 30.2% over the next four years, which the party says makes the planned deficit projections affordable, based on their projected ability to repay debt.

Provision: Fiscal Plan.

The Revenue Plan: New Wealth Taxes.  The government promises to undertake a new comprehensive review of government spending and tax expenditures, to ensure that wealthy Canadians do not benefit from “unfair tax breaks”. A similar review was committed to in 2015, after which the government identified more than $3 billion a year in tax hikes.  

Broadly speaking, under this new mandate, “the wealthy” will be expected to pay more, and there are few specifics except to say that again, a comprehensive review of government tax expenditures, similar to the one done in 2015,  will be conducted to find “unfair tax breaks”  in the vicinity of $10 billion over the next four years, as outlined below.  This is the biggest line item for new revenues.

It is worth noting that if the minority government must seek the co-operation of the NDP; capital gains inclusion rates could be reviewed.  The NDP suggested a 75% income inclusion rate in their platform.  However, they also stated that they were interested in changing the income splitting rules put into place for incorporated small business owners, based on concerns over fairness.    

The Revenue Plan. Here is how the rest of the proposed new provisions will shake out, to raise revenues for the government, according to the elections platform:

Will capital gains inclusion rates rise?  It is worth noting that if the minority government must seek the cooperation of the NDP; capital gains inclusion rates could be reviewed as part of the tax expenditure review. The NDP suggested a 75% income inclusion rate in their platform. This could make the disposition of assets in future years significantly more expensive. Assets that attract capital gains income inclusion, currently at 50% of the total capital gain include:

• Qualified small business corporation shares
• Qualified farm or fishing property
• Publicly traded shares, mutual fund units, other shares
• Bonds, debentures, promissory notes
• Real estate (but not principal residence dispositions at this time)
• Mortgage foreclosures and conditional sales repossessions
• Depreciable property
• Personal use property and
• Listed personal use property

However, the NDP also stated that they were interested in changing the income splitting rules put into place for incorporated small business owners, based on concerns over fairness.

Rise in EI Revenues Significant. It is also noteworthy that there is a significant projected increase in “self-financing” EI measures.

The Expenditure Plan has several new provisions for training (previously announced), maternity and sickness benefits.  However the cost of funding the EI will rise from $145 Million to $637 a year in 4 years, with a big hike in 2021-22.  EI premiums are funded by employees and employers, who must contribute 1.4% of the premiums payable based on a maximum contributory earnings base, currently sitting at $54,200.  

The Luxury Tax.  The new 10% tax on luxury cars, boats and personal aircraft over $100,000 is expected to raise as much money as the new EI financing.  That’s certainly interesting.

Bottom Line:  It will be interesting to see the first federal budget of this new government mandate. Certainly, rising taxes can affect economic growth; but to what extent, remains to be seen. Wealth must first be produced before it can be taxed and consumed. The question for Canada is whether this minority government can help Canadians to produce wealth, as they face other significant economic issues:  a reduced labour force due to the retirement of the baby boomers, slowing global growth and increasing discussions about a future that could include a recession.

Additional educational resources: How do these changes affect you and your clients? Join us at the Fall CE Summits for more post-election coverage and how you can be best prepared to help your clients navigate through the changes we can expect to come.