On October 19, 2015, the Liberal Party of Canada was elected to lead the next government.
The following are key points from our recent advisor conference call, featuring Todd Mattina, Chief Economist and Strategist on the Mackenzie Asset Allocation Team and Frank Di Pietro, Director of Tax and Estate Planning.
Elections 2015: Predicting the Liberals’ Impact
Chief Economist and Strategist, Mackenzie Asset Allocation Team
With the election of a majority Liberal government, many investors are asking how the new government’s policies will impact the Canadian economy and markets. Effective implementation of the Liberal government’s new economic program could set the stage for a helpful shift in the macroeconomic policy mix, potentially boosting domestic demand and longer run productivity. Immediate market reaction has been relatively limited and we expect this to continue going forward.
The focal point of the Liberal platform was deficit financing of higher infrastructure investments. In the short term, these investments will boost domestic demand and stabilize the economy, although the impact could be relatively limited given the envisaged size of the budget deficits. As other analysts have also remarked, a return to modestly sized fiscal deficits may reduce pressure at the margin on the Bank of Canada to further lower interest rates to stimulate the economy, reducing some downward pressure on the Canadian dollar. Longer term, budget deficits are unlikely to increase permanently, which avoids the risk of excessive government borrowing, a lower credit rating or reduced economic growth. Higher capital spending will decline naturally as investment projects are completed and is easier to reduce in the future than social spending. The market should also be able to absorb additional AAA-rated government bonds of a country with the lowest net general government debt in the G-7, particularly given the glut of global savings.
The impact on longer run public debt and economic growth will hinge largely on the quality and effective implementation of selected infrastructure projects. Front-loading essential investments when real long-term interest rates are exceptionally low could save taxpayers money in the long run. Higher infrastructure spending can also raise productivity, boosting business investment and raising tax revenues from the increase in economic activity. But doubling infrastructure investment to $125 billion could be more rapid than the additional spending can be effectively absorbed, putting upward pressure on construction-related costs.
A key macro policy priority that went largely unaddressed during the campaign was high government debt and frothy housing valuations. Canada now has the highest debt in the G7, about 165% of household disposable income, which is heavily driven by housing related debt. A further slowdown in the economy would raise the vulnerability of high household debts. The new government will need policies to encourage gradual deleveraging in household debt contain the risk of a sharp decline in housing prices in the process.
Enhancing Canada’s longer-run productivity and competitiveness should be another macro policy priority. The Liberals’ infrastructure plan will certainly help boost productivity, but it is really only part of the complete solution. Other policies are also needed, including measures associated with the other parties, such as the NDP’s child care policy to encourage greater labour force participation and the Conservatives’ focus on the TPP to enhance trade competitiveness.
Frank Di Pietro, Director of Tax and Estate Planning
Elections 2015: Weighing Potential Tax Changes
Here are some of the proposed tax changes that may impact your clients:
Changes to personal tax rates
- Tax rate cut for middle income tax brackets from the current 22% tax rate to 20.5%. This will cut taxes for those with income above $44,700 and up to income of $89,400.
- A new income tax bracket of 33% for those who earn more than $200,000. Investors who live in provinces that have introduced increased tax rates on high income earners will likely be more affected.
- Some clients’ marginal tax rates will start to exceed the 50% barrier, meaning that more than $0.50 of every dollar of income earned will go to income tax. This will occur for higher income earners in Manitoba, Ontario, Québec, PEI and Nova Scotia. Residents of New Brunswick, whose income exceeds $250,000, will have a marginal tax rate of 58.75%.
- Clients within marginal tax rates in excess of 50% may start considering the use of aggressive tax planning techniques to try and reduce their tax burden. Investable money may also start to move offshore to avoid the high Canadian tax environment.
Cancellation of tax loopholes and benefits for wealthiest Canadians
- While the platform documents were light on details as to which “tax loopholes” they wish to target, they did identify a couple of areas.
- Shareholders of a Canadian-controlled Private Corporation (CCPC) – The Liberals plan to target those who use the CCPC status to reduce personal income tax obligations through income splitting. Place a cap on how much can be claimed through the stock option deduction.
- Income splitting for incorporated business owners may come under scrutiny.
- Changes to the stock option deduction will not affect start up companies who rely on stock options as a way to recruit top talent. Employees with $100,000 in annual stock options gains will also be unaffected.
- Clients may face higher taxes when they exercise stock options Specific details are not provided.
Cancellation of Tax Free Savings Account limit increase to $10,000
- Unclear at this point if the Liberals will honour the $10,000 limit for 2015 and make changes beginning in 2016 or whether the changes will be in effect for 2015.
Cancellation of the Family Tax Cutand other tax breaks and benefits for the wealthy
- Unclear if Family Tax Cut will be available for 2015.
- Pension income splitting will still be available for seniors.
Cancellation of the Universal Child Care Benefit (UCCB) and other associated benefits (Canada Child Tax Benefit and the National Child Benefit Supplement)
- Introduce a new tax-free and income-tested program to be called the Canada Child Benefit. Prime Minister-elect Justin Trudeau has indicated this is an immediate priority, which he will address within his first 100 days of office.
Reduction of Employment Insurance premiums
- Lower EI premiums from $1.88 per $100 of insurable earnings to $1.65.
- For an employee earning at least $49,500, this change represents approximately $114 in EI premium savings. The Liberals have vowed to increase CPP retirement benefits, but the contributions to CPP will also increase.
Benefits for teachers
- Introduce the new Teacher and Early Childhood Educator School Supply Tax Benefit, a refundable tax credit of up to $1,000 of school supplies each year.
- Teachers and educators will receive $150 in tax savings per year if the Liberals move forward with this election promise.
Cancellation of the education and textbook tax credits
- These non-refundable tax credits will be replaced with higher levels of grants.
Changes to the Home Buyers Plan (HBP)
- Modernize current HBP rules so people can withdraw from their RRSPs, without penalty, if they are impacted by sudden and significant life changes. These changes may include job relocation, the death of a spouse, marital breakdown or the accommodation of an elderly family member.
Immediate reinstatement of tax credits for contributions to labour-sponsored funds
- Restore the Labour Sponsored Venture Capital Corporations (LSVCC) tax credit, which provides a 15% federal tax credit on investments up to $5,000 in labour-sponsored funds.
- $450 in federal tax savings.
In favour of the Conservatives reduction of RRIF minimums
- If a client has taken money from their RRIFs according to the old, higher RRIF minimum schedule, it appears clients may still re-contribute the excess RRIF minimum back into their RRIF by February 29, 2016.
Reverse changes to Old Age Security (OAS)
- Return OAS eligibility to age 65.
Increase the Guaranteed Income Supplement (GIS) by 10%
- GIS will give low income single seniors up to $1,000 more each year in tax-free benefits.
Keep Budget 2015’s scheduled reduction in small business income tax rates
- Gradually decrease the small business rate from 11% to 9% over a four year period, starting on January 1, 2016 and fully implemented by 2019.
- Maintain adjustment of the gross-up factor and Dividend Tax Credit (DTC) rate applicable to non-eligible dividends. However, this was not mentioned in the Liberals’ platform documents.
Improve the CRA service model
- Proactively contact Canadians who are entitled to, but are not receiving, tax benefits.
- Offer to complete tax returns for some clients, particularly lower income Canadians who are on fixed incomes and whose financial situation does not change from year to year.
- Deliver correspondence that is straightforward and easy to read.