This week we will focus on the just released Federal budget and the various nuggets that are in there. The good news is that the budget does not contain some of the feared new tax measures and is generally bereft of any new nuggets that will have a big impact on our clients. The bad news is that the Liberal/NDP marriage has just begun, so we do have some longer term concerns as it relates to what might be coming in future years.

We are attaching a link to an article put together by our financial planning team that gets into the weeds on the various changes. We will highlight a few of them below (a Coles Notes version), as well as touch on some of the changes that we did not see, but still have concerns about going forward.

Major Changes

• The Canada Recovery Dividend: a 15% one-time tax of Canadian banks and life insurers based on 2021 pre-tax profits (paid over 5-years) and an ongoing 1.5% tax on pre-tax profits over $100 million.
  • What does this mean? So, if a bank/lifeco had say $1 billion of profits in 2021, they will now have to “payback” $150 million of this over next 5-years or $30 million/year. In addition, if a bank/lifeco has ongoing pre-tax profits of say $1 billion/year, it will have to pay an additional $15 million of tax on this.
  • Who is impacted? Basically all of the Canadian banks and life insurers.
  • Is this a big deal? Sort of - it is important to note that the Liberals announced this plan a while ago, so it is not a surprise and is already essentially reflected in the valuations for the various stocks (the market never waits for the actual announcement). Further, when the Liberals originally announced the plan, it had an estimated “cost” of $10 billion over 5-years, but the actual plan is closer to $6 billion, so this was actually not as bad as feared. That said – it does create a permanent tax, which is never a good thing, and it does put our banks and life insurers on an uneven playing field with banks/lifecos in countries that do not have “special taxes” (which no other countries really have).
  • Would we do anything about this? No – the Canadian banks were great businesses before this and they still are – albeit, their earnings and their dividend growth will be a bit lower going forward. That said – all of the Canadian banks are sitting on excess capital, so while dividend growth is likely to be a bit slower going forward (essentially what could be going to shareholders is going to the government), we are still likely to see strong dividend growth.
• Tax-Free First Home Savings Account (FHSA): basically an account that combines the attributes of an RRSP (tax deductible contributions) and a TFSA (tax free withdrawals) for new-home buyers. If you have not owned a home in previous 4-years, you can make tax deductible contributions up to $8,000/year (to a lifetime limit of $40,000) in an FHSA that will grow tax-free and can be withdrawn tax-free in order to help with the down payment on a home.
  • What does this mean? For new home buyers, it creates a vehicle similar to a TFSA that gives them another way to save for a home.
  • Who is impacted? If you have kids or grandkids that are in the early stages of thinking about buying a home, this gives them another vehicle to do so. It is important to note that FHSAs will begin in 2023, so they cannot be opened until next year.
  • Is this a big deal? Considering the price of houses – not really, but every bit helps.
  • Would we do anything about this? If you have kids/grandkids thinking about buying a home over the next few years, this is a vehicle to consider for savings. The one caveat is that if the money is not used to buy a home, it becomes taxable, unless it is transferred to an RRSP, so there should be some commitment to buying a home over the next 5-10 years.

Not in There – But Still A Concern

There were two areas that were not addressed in this budget, but remain a concern.

• Change to Capital Gains Inclusion Rate: The current capital gains inclusion rate is 50%. This means that every dollar of capital gains is essentially taxed at half of your marginal tax rate. We have some concern that the government will raise the inclusion rate to 75%, which would increase taxes on capital gains by 50%. It is unclear whether the government would grandfather prior gains, but given the Liberal/NDP predilection to tax the wealthy, we remain concerned that this will come to pass at some time in the next few years.
• Cap on Principal Residence Exemption: Given the massive increase in home prices and the potential tax dollars that the government is leaving on the table, we have some concern that at some point the government will cap the amount of untaxed capital gain one can realize on their principal residence. There are multiple ways the government could do this, including requiring a minimum holding period to be exempt (the budget did include some measures to combat “house flipping”, capping the gain at some preset amount (for example – the first $1 million is exempt and then the remainder is taxed at the normal capital gains rate), and/or grandfathering existing homes, but putting a tax on any homes purchased from a certain date forward.

  This week we will focus on the just released Federal budget and the various nuggets that are in there. The good news is that the budget does not contain some of the feared new tax measures and is generally bereft of any new nuggets that will have a big impact on our clients. The bad news is that the Liberal/NDP marriage has just begun, so we do have some longer term concerns as it relates to what might be coming in future years.

  We are attaching a link to an article put together by our financial planning team that gets into the weeds on the various changes. We will highlight a few of them below (a Coles Notes version), as well as touch on some of the changes that we did not see, but still have concerns about going forward.

  Major Changes

• The Canada Recovery Dividend: a 15% one-time tax of Canadian banks and life insurers based on 2021 pre-tax profits (paid over 5-years) and an ongoing 1.5% tax on pre-tax profits over $100 million.
  • What does this mean? So, if a bank/lifeco had say $1 billion of profits in 2021, they will now have to “payback” $150 million of this over next 5-years or $30 million/year. In addition, if a bank/lifeco has ongoing pre-tax profits of say $1 billion/year, it will have to pay an additional $15 million of tax on this.
  • Who is impacted? Basically all of the Canadian banks and life insurers.
  • Is this a big deal? Sort of - it is important to note that the Liberals announced this plan a while ago, so it is not a surprise and is already essentially reflected in the valuations for the various stocks (the market never waits for the actual announcement). Further, when the Liberals originally announced the plan, it had an estimated “cost” of $10 billion over 5-years, but the actual plan is closer to $6 billion, so this was actually not as bad as feared. That said – it does create a permanent tax, which is never a good thing, and it does put our banks and life insurers on an uneven playing field with banks/lifecos in countries that do not have “special taxes” (which no other countries really have).
  • Would we do anything about this? No – the Canadian banks were great businesses before this and they still are – albeit, their earnings and their dividend growth will be a bit lower going forward. That said – all of the Canadian banks are sitting on excess capital, so while dividend growth is likely to be a bit slower going forward (essentially what could be going to shareholders is going to the government), we are still likely to see strong dividend growth.
• Tax-Free First Home Savings Account (FHSA): basically an account that combines the attributes of an RRSP (tax deductible contributions) and a TFSA (tax free withdrawals) for new-home buyers. If you have not owned a home in previous 4-years, you can make tax deductible contributions up to $8,000/year (to a lifetime limit of $40,000) in an FHSA that will grow tax-free and can be withdrawn tax-free in order to help with the down payment on a home.
  • What does this mean? For new home buyers, it creates a vehicle similar to a TFSA that gives them another way to save for a home.
  • Who is impacted? If you have kids or grandkids that are in the early stages of thinking about buying a home, this gives them another vehicle to do so. It is important to note that FHSAs will begin in 2023, so they cannot be opened until next year.
  • Is this a big deal? Considering the price of houses – not really, but every bit helps.
  • Would we do anything about this? If you have kids/grandkids thinking about buying a home over the next few years, this is a vehicle to consider for savings. The one caveat is that if the money is not used to buy a home, it becomes taxable, unless it is transferred to an RRSP, so there should be some commitment to buying a home over the next 5-10 years.

• Not in There – But Still A Concern

  There were two areas that were not addressed in this budget, but remain a concern.

• Change to Capital Gains Inclusion Rate: The current capital gains inclusion rate is 50%. This means that every dollar of capital gains is essentially taxed at half of your marginal tax rate. We have some concern that the government will raise the inclusion rate to 75%, which would increase taxes on capital gains by 50%. It is unclear whether the government would grandfather prior gains, but given the Liberal/NDP predilection to tax the wealthy, we remain concerned that this will come to pass at some time in the next few years.
• Cap on Principal Residence Exemption: Given the massive increase in home prices and the potential tax dollars that the government is leaving on the table, we have some concern that at some point the government will cap the amount of untaxed capital gain one can realize on their principal residence. There are multiple ways the government could do this, including requiring a minimum holding period to be exempt (the budget did include some measures to combat “house flipping”, capping the gain at some preset amount (for example – the first $1 million is exempt and then the remainder is taxed at the normal capital gains rate), and/or grandfathering existing homes, but putting a tax on any homes purchased from a certain date forward.

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