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April 2016

Fresh Budget, New Rules

What the changes in Ottawa mean for your family’s finances…so far.

Fresh Budget New Rules The new federal government has been busy putting its stamp on taxation and family benefits.

Gone is the Family Tax Cut. On the way out are those friendly tax credits for your kids’ sports and arts activities. At the same time, if you’re a middle-income earner you have something to cheer: a cut to your marginal tax rate.

While there’s a lot of opinion about these and other steps the government has taken, what really counts is how the facts impact your family’s bottom line. Here’s what you need to know.

A middle class tax cut

The Liberals campaigned hard on a promise of a middle class tax cut. It means if you have taxable income between $45,283 and $90,563 in 2016, you’ll see your marginal tax rate fall from 22% to 20.5%. That’s annual tax relief worth up to $680 per individual or $1,360 per couple.

The news isn’t so great if you’re a high income earner. There’s a new tax bracket for those making more than $200,000. If you fall into this group, your federal tax rate has just jumped to 33% from 29% last year.

Reworking the Brackets

After provincial taxes are tacked on, as a top earner in British Columbia you’re now at risk of losing nearly half of your last dollar of income to tax.

Policy rewind: goodbye higher TFSA limit and Family Tax Cut

The new government has done away with two high-profile initiatives brought in by the Conservatives: the $10,000 annual Tax Free Savings Account contribution limit and the Family Tax Cut.

Beginning with the 2016 tax year, the Family Tax Cut is no more, eliminated in favour of more broadly based measures. Similarly, the TFSA contribution limit has been rolled back to $5,500 effective January 1st of this year. Also returning is the indexing of future contribution limit increases to inflation, in $500 increments.

The TFSA rollback has not been applied retroactively; the $4,500 boost to the contribution limit added for 2015 stays. That means if you’ve been eligible to contribute to a TFSA all along, you now have a maximum of $46,500 in cumulative contribution room available.

The new Canada Child Benefit

Reforming taxation isn’t the only way the new government is realizing its vision for helping families. There are also important changes to the benefit side of the equation.

The single-payment Canada Child Benefit (CCB) replaces a combination of programs including the Canada Child Tax Benefit and Universal Child Care Benefit (UCCB).

The new CCB is geared to lower and middle-income households. Generally, if your annual household income is under $150,000, expect to see more money each month with the CCB versus the old system. For example, if you’re a family earning $90,000 with two kids, you could receive nearly $2,600 more in benefits each year, tax free1.

It’s another story if your household income is over $150,000. As a general rule you’ll receive less, with the CCB phased out completely if your income is high enough. That’s a big change. Under the old program you would be entitled to as much as $1,920 annually per child from the UCCB regardless of your income.

1Liberal Party of Canada. Fairness for the Middle Class (page 4).

Child Benefit Calculator

Check out the Canada Child Benefit Calculator to estimate how much you’ll receive in benefits each month.

Corporate Class Shares lose an important advantage

The key announcements surrounding Budget 2016 were mostly expected – but not all. One surprise? News that switches between corporate class shares will no longer escape capital gains taxation.

A popular reason for owning mutual funds using the corporate class share structure has been the ability to exchange one share type within the corporate class family (e.g. equities) for another (e.g. bonds), without triggering capital gains. This mechanism enabled investors to rebalance their portfolios on a tax-deferred basis. As of October 1st, that advantage is no more.

Note the rule change doesn’t apply if you simply switch from one series of the same corporate class shares to another, say to a low-fee or no-fee version, where the underlying portfolio remains the same.

Digging Deeper into Budget 2016

Budget 2016 and December’s Bill C-2 amending the Income Tax Act were sprinkled with numerous tax and benefit revisions. While far from an exhaustive list, here are a few more noteworthy changes.

  • The children’s fitness and arts credits are being phased out. These credits are reduced by half for this year, before being eliminated entirely in 2017. For 2016 you can claim a maximum of $500 for the fitness tax credit and $250 for the arts credit.
  • The education and textbook tax credits are eliminated next January 1st. However, unused credits carried forward into 2017 and beyond can still be claimed. No changes have been made to the tuition tax credit.
  • Old Age Security eligibility is held at 65. The Liberals have reversed the Conservative government’s decision to raise the qualifying age for OAS to 67.
  • Donation tax credit hiked for high earners. Gifts of more than $200 will now receive a federal tax credit of 33% applied to the portion of taxable income that’s over $200,000. The larger credit only applies to donations made after 2015.
  • Reversal of planned tax relief for donating real estate, private corporation shares. Plans set out in Budget 2015 to exempt qualifying dispositions of real estate and private corporation shares from capital gains tax when the cash proceeds were donated to charity, won’t proceed.

Dealing with the new rules

What can you do to better navigate the changing landscape? Here’s where to start.

1. Revisit your tax plan

If you’re a high earner, the new 33% tax bracket, the TFSA limit rollback and the cancellation of the Family Tax Cut threaten to expose more of your income and investment capital to tax. Now’s the time to revisit your investment strategies with your advisor to keep those taxes to a minimum.

Remember, with the new top tax tier, RRSP contributions can produce more in tax savings. For instance, if you earn more than $200,000 making a $10,000 contribution to your RRSP now knocks $3,300 off your federal taxes.

2. Look into other ways to split income

Income splitting didn’t begin and end with the Family Tax Cut. You can still reduce your taxes as a household by transferring income from a higher-earner to other family members by:

  • Splitting your pension with your spouse. Up to half of pension income eligible for the pension income tax credit can be split, including your employer pension. The same goes for RRIF withdrawals once you turn 65.
  • Contributing to a spousal RRSP or helping out with your partner’s TFSA. If you expect your spouse will be in a lower tax bracket than you in retirement, consider contributing to a spousal RRSP. You’ll get a tax deduction. And, helping your spouse grow their RRSP will help equalize your incomes in retirement, reducing your household’s overall tax bill. What’s more, offering your partner funds they then contribute to their TFSA allows you to shelter up to $11,000 annually as a couple.
  • Lend money to lower-income family members to invest. Today’s rock-bottom interest rates make this an attractive strategy. Loan funds at the Canada Revenue Agency’s current prescribed interest rate of 1% to your spouse, adult child or minor child (through a trust) and any income generated, net interest expense, will be taxed at their lower marginal rate.

Income splitting can be tricky, so consult your advisor first. Running afoul of the tax rules could mean having the income you’re trying to split attributed back to you and taxed in your hands after all.

3. Don’t give up on corporate class shares

If you hold corporate class shares, a top priority should be to complete any portfolio rebalancing before October 1st to avoid triggering taxable capital gains.

But even with the loss of tax-deferred switching, there can still be good reasons to stick with corporate class shares.

Corporate class shares are held under the umbrella of a mutual fund corporation which can creatively manage its income and expenses with tax-efficiency for the investor as a goal. For example, highly-taxed interest income can be converted to tax-advantaged dividends and capital gains prior to distribution.

Before you decide corporate class shares no longer have a place in your portfolio, stop and review your circumstances with your advisor.

4. Take advantage of the children’s fitness and arts tax credits – one last time

Although the children’s fitness and arts tax credits have been reduced by half for 2016, they’re not gone quite yet. Don’t forget to track your kids’ expenses throughout the year to claim next tax season.

5. Expecting more with the Canada Child Benefit? Think about how to put that money to work

If you have children 17 and under, you could see extra cash each month once the Canada Child Benefit kicks in this July. Plan now for how to best use that extra income. Help your children by beefing up their RESP contributions. Or, do your family’s balance sheet a favour and use the funds to pay off high rate debt.

Let’s talk

Even if you don’t think the new federal government’s recent moves around taxation and benefits are game-changers, there’s still plenty of substance to affect your finances.

Figuring out where you stand is as simple as spending a few minutes with your BlueShore Financial advisor. We’re here to help you see the full picture. Contact us today to arrange an appointment.

The information contained in this report was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This report is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any mutual funds or other securities.
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