The federal government announced a broad variety of tax proposals in its 2019 budget, introducing new programs and updating existing ones, all with an eye toward an autumn election campaign.
“There were little bits of things for all sorts of people,” says Doug Carroll, head of tax, estate and financial planning at Meridian Credit Union in Toronto, adding that the Liberals’ plan was “very much an election budget.”
Jason Heath, a fee-only certified financial planner and managing director at Objective Financial Partners Inc. in Markham, Ont., says that the feds “continued to close loopholes.” While consistent with the government’s stated goals, it also means that high-earning Canadians now have even fewer ways to reduce their tax burdens.
As financial planners meet with their clients in the weeks and months ahead, they will be in a good position to help clients understand the government’s budget proposals and to counsel them on how to take advantage of the changes while avoiding pitfalls.
Here’s a brief look at three key tax developments in the budget.
> ANNUITIES
The government proposed allowing Canadians to take up to 25% of their savings from RRSPs, RRIFs and other retirement plans to purchase “advanced life deferred annuities” (ALDAs), which would begin paying no later than the end of the year the annuitant turns 85. A lifetime limit of up to $150,000 would apply initially, but the limit would be indexed to inflation and rounded to the nearest $10,000.
The government also introduced “variable payment life annuities” (VPLAs), which would be available only to members of defined-contribution pension plans and pooled registered retirement plans. VPLAs would pay an income that varies depending on the performance of underlying assets and the mortality experience of annuitants.
Both ALDAs and VPLAs would be available starting in 2020.
ALDAs would provide Canadians with more flexibility in terms of retirement planning, Heath says. They could be useful for clients who lack a defined-benefit pension plan and worry about running out of money in their later years. They may also appeal to retirees eager to mitigate the effect of the mandatory minimum withdrawals associated with RRIFs.
“The odd thing,” Heath says, “is that the people [ALDAs] might help the most are the wealthiest, who are in a high tax bracket and who definitely don’t need or want the withdrawals, and may be able to push them off to 85.”
Although clients may now have another retirement planning option in the form of ALDAs, they may remain reluctant to commit a significant chunk of their retirement savings to purchasing a guaranteed income stream that doesn’t begin to pay out until years later, Carroll says: “It is a bit of a leap for a client.”
John Soutsos, a financial advisor with IPC Securities Corp. in Mississauga, Ont., says he would have preferred to see Ottawa reduce the RRIF mandatory minimum withdrawal amounts rather than create the new annuity options, which can be challenging vehicles for clients to understand.
“It creates complexity for estate planning, it’s messy and doesn’t address the real issue,” Soutsos says, which he says is the high tax burden on retirees.
> HOMEBUYERS’ PLAN CHANGES
The government proposed allowing individuals to withdraw $35,000, up from $25,000, from an RRSP to put toward a down payment for a home; a couple would be able withdraw up to $70,000, up from $50,000, from their RRSPs to buy a home. Amounts withdrawn under the Homebuyers’ Plan (HBP) must be repaid over a 15-year period, with unpaid annual repayment amounts added to income.
The HBP remains limited to individuals, and their spouses, who haven’t owned and occupied a home in the current year plus the previous four years. However, under a proposed new rule, Canadians who divorce or separate and live apart from their spouse – and otherwise wouldn’t qualify as first-time home buyers – will be eligible to participate in the HBP.
Financial planners say they would counsel caution regarding the HBP: while it may helpful to young Canadians entering the housing market, it comes at considerable risk to their retirement planning goals.
“You’re borrowing against an amount that you’ve committed to one purpose, [retirement], to use for another purpose, [a home],” Carroll says. “Because of the repayment requirement, it can cause a lot of financial pressure for someone to try to get that money back in [the RRSP].”
Says Heath: “I’m worried we’re creating a generation of young people whose RRSP is their home.”
Heath says, however, that he likes the government’s change allowing recently separated or divorced individuals to quality for the HBP.
“Oftentimes [separated or divorced clients] are in a very difficult financial position, where they have to access money in their RRSP as an outright withdrawal,” Heath says. “So, to be able to do so in a tax-efficient manner, utilizing the HBP [under the proposed rules] is a real benefit.”
> EMPLOYEE STOCK OPTIONS
The government proposed imposing a $200,000 annual cap on employee stock option grants, which are taxed, in effect, at the same rate as capital gains. The change would target executives at “large, long-established, mature companies,” but not apply to employees at “start-ups and rapidly growing Canadian businesses.” The government said it would provide more details about the plan before the summer, with changes applied on a “go-forward” basis.
The proposed changes would fulfill a 2015 Liberal election campaign platform commitment to limit the tax benefit associated with stock option grants. The government indicated in the budget document that the changes would align Canada’s stock option tax regime with that of the U.S.
Advisors suggest that, should the proposed change become law, large firms would likely adjust compensation structures for their top employees.
“It’s going to be more expensive for bigger companies to compensate their senior executives,” Heath says, “and it’s going to be more expensive for those senior executives to pay tax here in Canada.”
The proposed stock option changes fit a continuing theme from the Liberal government of raising taxes on Canada’s highest earners and closing what it considers to be tax loopholes, Heath says.
However, one of the negative effects of this change, in combination with others aimed at high earners, may be a flight of talent and capital out of the country, Heath says: “I have clients over the past few years who have gone south of the border for higher compensation and lower taxes.”
Soutsos agrees that these changes have an effect on economic competitiveness overall: “You’re disincentivizing large businesses from coming to this country.”