2019 Federal Budget
The 2019 federal budget included a number of tax measures affecting Canadian taxpayers. This report will focus on the tax measures we feel are of most interest to our clients. The full 2019 “Budget” can be read by clicking here.
Please note that certain items in this report start immediately, some begin later this year and some not until next year or later. If you have questions or would like more information on anything below please feel free to give us a call or send us an email and we’ll be happy to discuss.
Limits on Stock Option Tax Incentives
Currently, when an employee exercises qualifying stock options they receive tax preferred treatment because only half of the benefit is subject to tax which is meant to mimic the 50% capital gains inclusion rate on the sale of shares. The new Budget eliminates the extent of this favorable treatment by capping the amount benefiting from the lower rate at $200,000 annually. Any excess amount will be taxable as if it were normal employment income. This will apply to employees of large, mature companies. The existing rules will continue to apply to start-ups and other firms that are still growing.
Canada Training Credit (CTC)
This credit is aimed at providing financial support to help cover eligible tuition and fees associated with training.
How does it work?
Eligible Canadians will begin to accumulate $250 annually (to a maximum of $5,000) in a notional government tracking account that can be accessed in a future year to help cover the costs of training.
The amount claimed will offset, dollar for dollar, your personal tax otherwise payable (or will be refunded if the amount exceeds your tax payable.)
How do I accumulate credits?
1) You must file a tax return,
2) Be between 25 and 65 years old
3) Be a resident of Canada throughout the year and have employment (or self-employment) income of $10,000 or more in the year (but have total net income below $147,667 in 2019).
Does this affect my tuition tax credits?
The portion of the tuition fees refunded through the CTC will not qualify for the tuition tax credit but any excess fees above those refunded by the CTC would qualify. Note that although the annual accumulation to the notional account begins in 2019, the credit will be available for the first time in 2020.
Home Buyers’ Plan Changes
There are two major changes to the Home Buyers’ Plan in the 2019 Budget
Withdrawal Limit
Under the current tax rules first-time home buyers could withdraw up to $25,000 tax free from their RRSP (total of $50,000 combined with a spouse or partner). The amount withdrawn must be repaid over a period of 15 years beginning the second year following the year in which the withdrawal was made.
The Budget proposes an increase to the withdrawal limit to $35,000 (potentially $70,000 for a couple). The new limit applies to 2019 and subsequent calendar year with withdrawals made after March 19th, 2019.
Technical Change for Divorce or Separation
In an effort to help Canadians who separate or divorce maintain home ownership an individual will be able to participate in the home buyers plan even if they are not a first-time home buyer. The new rules dictate that provided that individuals are living separate or apart from their spouse or partner as a result of a breakdown in their marriage or partnership for at least 90 days, they will be eligible for the home buyers plan.
Annuities for Registered Plan Holders
Under the current tax rules, you can use your registered plan to purchase an annuity to provide income in retirement, subject to specified conditions. The annuity must provide a stream of periodic payments, generally for a fixed term or for the life of the holder (and sometimes, his or her, spouse or partner).
The Budget is proposing to allow Canadians “greater flexibility in managing their retirement savings” by permitting two new types of annuities:
Advanced Life Deferred Annuities (“ALDA”)
An ALDA will be life annuity which may be deferred up to the end of the year in which an annuitant reaches the age of 85. This is an effort to help Canadians deal with longevity risk and ensure their retirement savings isn’t depleted unlike the current structure of a RRIF. Currently retirement savings in a registered plan is effectively depleted by the time an individual reaches age 85.
Variable Payment Life Annuities (“VPLA”)
A VLPA, which will only be available under pooled registered pension plans and defined contribution registered pension plans, will provide payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of VPLA annuitants. These options will begin to be available starting in 2020.
Registered Disability Savings Plan Changes
To open an RDSP, an individual must be eligible for the Disability Tax Credit (DTC). When a beneficiary no longer qualifies for the DTC, the RDSP rules previously required that the plan be closed, and that grants and bonds be repaid to the Government of Canada.
To address concerns that this treatment does not appropriately recognize the financial impact that periods of severe, but episodic, disability can have on individuals the Budget proposes to eliminate the requirement to close an RDSP when a beneficiary no longer qualifies for the DTC. Doing so will allow grants and bonds that otherwise would be required to be repaid to the Government to remain in the RDSP.
For the years throughout which the beneficiary is ineligible for the DTC the assistance holdback amount rules still apply and withdrawals may prompt the repayment of grants and bonds; however, once the beneficiary turns 51, and over the following ten years, the assistance holdback amount will be reduced based on the grants and bonds paid into the RDSP during a reference period.
Tax Credit for Digital Subscriptions
The Budget also announced a temporary, non-refundable 15% tax credit on amounts paid for eligible digital news subscriptions. This will allow you to claim up to $500 in costs paid towards eligible digital subscriptions in a taxation year, for a maximum tax credit of $75 annually. In the case of combined digital and newsprint subscriptions you’ll be limited to claiming the cost of a stand-alone digital subscription.
The credit only will be available for amounts paid from 2020 through 2024.
Automatic Enrolment for Canada Pension Plan
While the standard age to start collecting CPP benefits is 65, you can begin collecting CPP as early as age 60. You may also start receiving your pension later with a 0.7% monthly increase based on the number of months after 65 up to age 70. If you start receiving your CPP retirement pension at 70, your pension amount will be greater by 42% (0.7% / month x 60 months) than if you had taken it at 65.
In the Budget, the government acknowledged that a small number of Canadians are currently missing out on receiving their CPP benefit because they applied for the benefit late, or not at all. To ensure that all Canadian workers receive the full value of the CPP benefits to which they contributed, the government announced that, starting in 2020, it would proactively enroll CPP contributors who are age 70 or older but have not yet applied to receive CPP.
Donations of Cultural Property
To encourage Canadians to donate cultural property of “outstanding significance” and “national importance” to certain designated institutions in Canada, such as museums and public art galleries, the government provides a special tax incentive to encourage donations of cultural property to these institutions “to ensure that such property remains in Canada for the benefit of Canadians.” The enhanced tax incentives include the donation tax credit (for individuals) or deduction (for corporations), which can be used to reduce or eliminate the donor’s tax liability for a year (with a five-year carryforward of unused amounts).
Donating property triggers a deemed disposition, which could result in a capital gain. Under the current law the capital gain that may be realized on donation of certain cultural property is not taxable. To qualify, the donated property must be of “outstanding significance” by reason of its close association with Canadian history or national life, its aesthetic qualities or its value in the study of the arts or sciences. In addition, it must be of “national importance” to such a degree that “its loss to Canada would significantly diminish the national heritage.”
A recent court decision related to the export of cultural property interpreted the “national importance” test as requiring that a cultural property have a direct connection specifically with Canada’s cultural heritage, as opposed to being solely of “outstanding significance” but of foreign origin. To address this concern, the Budget proposes to amend the law to remove the requirement that property be of “national importance” in order to qualify for the enhanced tax incentives for donations of cultural property, for donations made on or after March 19, 2019.
Conclusion
The 2019 Budget includes a number of other items not pertaining to our clients such as closing loopholes that a select number of mutual fund trusts were exploiting, increasing the earnings exemption for Guaranteed Income Supplements for extreme low income individuals, and closing a loophole scheme (already overturned in court) for transferring the full commuted value of a defined benefit pension plan on a tax free basis into an Individual Pension Plan by establishing a new corporation.
Being an election year it is no surprise that the 2019 Federal Budget has avoided anything controversial. If you have questions about any of the above points or anything else in the 2019 Budget please don’t hesitate to reach out.
This report is intended to provide general information and should not be construed as specific legal, or tax advice. Individual circumstances and current events are critical to sound planning; as always we are available to confirm any specific changes to your personal plan.
