Author: Chris Wiens, MBA, CFP® – Certified Financial Planner®

Finance minister Bill Morneau tabled the 2019 Federal Budget last week.  Leaving personal and corporate tax rates unchanged, there was instead a focus on providing assistance to Canadians in areas like home buying, skills training and retirement.  Another focus was closing tax loopholes, which primarily targeted small business owners, professionals and high-income individuals.

Here’s a summary of the key takeaways:

Updating the Home Buyers’ Plan – Currently, the Plan allows first-time homebuyers to withdraw $25,000 from their RRSP to purchase or build a home tax-free. The withdrawal must then be repaid over a 15-year period, or included in the taxpayer’s income.

Budget 2019 proposes to increase the withdrawal limit to $35,000 per taxpayer ($70,000 for a couple).  This increase will apply to 2019 and subsequent calendar years.  Further, it proposes that individuals who experience a breakdown of marriage or common-law relationship be permitted to take advantage of the plan, even if they do not meet the first-time requirement.

• First Time Home Buyer Incentive – This is a new provision that would give eligible first time homebuyers (with household income less than $120,000) the ability to lower their borrowing costs through a shared equity mortgage with CMHC (Canada Mortgage & Housing Corporation). Although more details are to come, the incentive is functionally an interest-free loan where repayment isn’t required until years down the road.

Introducing the Canada Training Credit – Although the government has been in the practice of repealing tax credits in recent years (education, child fitness, public transit), this proposal reverses the trend.

For taxpayers age 25 to 64 with income in the $10,000-$147,667 range, eligible workers would accumulate a credit balance of $250 per year ($5,000 lifetime limit) in a notional account.  Starting in 2020, Canadians would be able to apply their accumulated Canada Training Credit balance against up to half the cost of training/education costs at eligible institutions providing occupational skills training.

Registered Disability Savings Plans (RDSP) Enhancements – Typically, an individual must be eligible for the Disability Tax Credit (DTC) to open a RDSP. Further, when a beneficiary no longer qualifies for the DTC, the RDSP must be closed and grants/bonds repaid to the Government.

Budget 2019 proposes to eliminate the requirement for a RDSP to be closed when a beneficiary no longer qualifies for the DTC.  In addition, the Assistance Holdback Amount would start to be reduced annually at age 51 (softening of ‘10 year’ rule for beneficiaries age 51-59).

New Deferred Annuity Options for Registered Plans – To help address longevity risk in funding Canadians retirement plans, Budget 2019 proposes two new types of annuities that can be deferred until age 85 (previous requirement was commencement by age 71) from registered plans (RRSP, RRIF, DPSP, RPP):

• A) Advanced Life Deferred Annuities (ALDA) – A life annuity that can be deferred until end of the year in which annuitant attains 85 years of age. Among several additional requirements and limits, there is an ALDA limit equal to 25% of all assets in the plan or $150,000 (indexed).
• B) Variable Payment Life Annuities (VPLA) – These annuities will provide payments that vary based on investment performance of underlying annuities fund and mortality of annuitants.

Changes to Taxation of Employee Stock Options – Current tax legislation gives employee stock option grants preferential tax treatment in the form of a deduction that effectively cuts the normal tax rate in half, similar to capital gains.

Budget 2019 proposes for employees of large, long-established, mature firms a $200,000 cap on the portion of stock option grants given this preferential tax treatment.  For start-ups and growing Canadian firms, this benefit remains uncapped.

Additional issues addressed in Budget 2019 include:

• 15% non-refundable tax credit introduced for eligible digital news subscriptions (max $75 tax credit)
• Closing various tax loop holes:
  • Refine rules surrounding taxation of redemptions from certain mutual fund trusts, whereby ordinary income is converted inappropriately into capital gains (which is taxed at lower rate)
  • Update rules meant to prevent use of derivative transactions to convert fully taxable ordinary income into capital gains
  • Stop the use of individual pension plans (IPPs) as a vehicle to avoid prescribed transfer limits (which would prevent inappropriate tax deferral) when individuals commute assets out of defined benefit pension plans.
• CRA to devote additional resources to real estate audits, specifically in BC and Ontario, focusing on the following scenarios:
  • Ensure sale of principal residence reported
  • Capital Gains are reported when property is not a principal residence
  • Income reported from real estate flipping

Please don’t hesitate to give us a call if you have questions, would like help assessing the impact of these proposals on your personal or business affairs or would like to discuss how you can take advantage of their benefits or ease their impact.

Featured image: Finance Minister Bill Morneau speaks to reporters in Ottawa on March 19, 2019. (Photograph by Blair Gable)