Welcome back to the blog!
In addition to working with clients on investment and wealth management, I write a quarterly blog on tax tips and tidbits. In this edition, I’ll outline some thoughts on what tax goodies we might expect in the upcoming spring budget.
The “new” Liberal minority
The Canadian general election is in the books, the Speech from the Throne delivered, and the federal budget now looms. It’s therefore time for tax geeks to shine their crystal balls and start guessing what to expect with Trudeau back in residence at 24 Sussex, albeit with a minority government this time around.
In Canada, a minority government is not rare as 10 of the last 23 elections have resulted in minority governments, and historically, they remain in place for 2 years before failing a confidence vote. The outcome does answer some key questions, however, it also raises new ones stemming from regional divide and political divisions. It therefore remains to be seen how much a Liberal minority might be able to accomplish while in power.
It is important to note that the markets tend to shrug off Canadian elections as the results rarely drive a deviation from the current trajectory. Further, it is interesting that the market does not necessarily prefer a majority government as the data suggests differently.
If we take a trip down memory lane to revisit last year’s budget you may recall that it was full of spending initiatives without personal or corporate tax rate changes or any mention of overall comprehensive tax reform.
Election campaign pledges
Now before I outline possible and not yet announced policies, I’ll highlight a few tax promises on which the Liberals campaigned:
- Increase the basic income tax deduction to $15,000 gradually from 2020 to 2023 for everyone but the “wealthy”.
- Introduce a new 10% tax on luxury cars, boats and personal aircraft over $100,000.
- Increase Old Age Security payments for seniors by 10% when they turn 75.
This is by no means an exhaustive list as there were many other personal, corporate and other tax policy measures outlined too.
Top tax changes to look for
Okay, so what can we expect and plan for?
The Liberals now need cooperation from outside their caucus to pass budgets and other essential legislation, a substantial shift that limits the government’s authority. Accordingly, it is unclear to what extent election promises may need to be modified to achieve the necessary majority support to pass.
So with that, here are 3 possible policy changes to look for in the budget this spring:
Increase in capital gains exclusion rates
A bit of history on capital gains first.
In Canada, capital gains were not taxable prior to 1972, the year a 50% inclusion rate was enacted. The inclusion rate bounced up to 2/3 and as high as 75% before it was eventually reduced to 50% in 2000, the rate at which it stands today.
Now the Liberals did not mention possible changes to the capital gains inclusion rate in their election platform this past fall. However, nearly every year, tax professionals predict the inclusion rate is going up. In fact, some accountants even make a business out of planning around this. So, could this be the year? Maybe…
Interestingly, the NDP’s platform advocated for an inclusion rate increase to 75%, which is estimated to raise tax revenue by $8B. Given the promise to eliminate unfair tax breaks for the wealthy, the projected increasing budget deficits, and the need for other party support to pass legislation, there is a distinct possibility that we might see this change this year.
It is anyone’s guess as to whether it could be an across the board increase or one that might apply only to higher-income earners.
We’ll just have to wait and see. 1
Private corporation taxation
If you don’t own shares in a private business or holding company, skip ahead…
In 2017, the Liberals proposed significant changes to the taxation of small businesses, focussing on income splitting, passive investment income, and surplus stripping.
The Liberals eventually abandoned the latter proposal as a result of significant push back from business owners and entrepreneurs. However, complex legislation was enacted to limit income splitting and restrict small business tax rates where annual passive investment income exceeded $50,000.
There were no policy initiatives targeted at small business taxation in the Liberals campaign, however, I wouldn’t be surprised to see surplus stripping proposals revisited.
The initial and now abandoned proposals resulted in it being less tax efficient to consider business succession planning with next-generation family members in comparison to unrelated corporate enterprises, which just doesn't make sense.
It wouldn’t surprise me if better thought out proposals are eventually released to limit surplus stripping in other scenarios.
Principal residence exemption (PRE)
The sacred principal residence exemption…
In the last few years, tax policy has focussed on closing tax loopholes and ensuring the rich pay their fair share. I’m not suggesting that the exemption is a tax loophole, however, it is estimated to cost the government $6B a year. It is clearly a significant amount that likely wasn’t imagined in the 1972 tax reform that kept principal residence dispositions tax free.
In comparison to other countries, Canada is perhaps overly generous with its exemption as there is no limit to the tax-free gain. Now that we’re out of an election year, it wouldn’t surprise me if there is a proposal tied to a sliding scale based on the period of ownership, the size of the capital gain, or taxable income that serves to limit the tax-free amount.
Given that the principal residence exemption is often viewed as sacred, it could be politically difficult to pursue in a minority government, however, even if it is unlikely, it is not entirely inconceivable either.
If you have questions or are interested in exploring planning opportunities, I’d be happy to chat further.
I can be reached at firstname.lastname@example.org or 604.981.6681.
1 Subsequent to the initial draft of this blog I've heard and read that a change to the capital gains inclusion rate is less likely to be considered in the 2020 budget, however, I expect that it isn't entirely off the government's radar in the short to mid-term.
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