If you have been following financial news last week, you may have noticed quite a bit of coverage for the highly anticipated 2016 Federal Budget. The Liberal’s platform is to spend our way to economic prosperity with deficits expected for the foreseeable future.
For me, I’m interested in the budget for the financial impacts of financially conscious people, like the readers of MDJ. It is pretty clear that the Liberal’s are aiming improve the finances of the middle class. Already, they have:
- Reduced the TFSA from $10,000 back to $5,500 (you still get the keep the $10k for 2015);
- Incomes between $44,700 and $89,401 will see a tax cut to 20.5% from 22% (7% reduction). To pay for this, those earning $200,000 or more will see a new tax bracket of 33%.
Highlights from the 2016 Budget:
Parents – Canada Child Benefit (CCB)
It appeared to me that the budget was mostly aimed at middle class parents.
Implementation of the CCB will give parents, starting July 2016, a tax-free monthly payment that varies based on family income.
For example, say a family that makes $100k annually, and has two children aged 4 and 7. Under the old Universal Child Care benefit, the parents would receive $220/month ($160/month for 4 year old and $60/month for 7 year old, all taxable). Starting July, these same parents will receive about $423/month (tax free). In this scenario, it appears that under $160,000/year in net family income is where the new system beats the old. Family income of $200,000+ would have the benefit clawed back to $0.
Important: Note that CCB calculations are based on NET family income. Which means that tax deductions like RRSP contributions and daycare costs may help in increasing what you receive from CCB.
But not all is rosy. Something has to give in order to pay for this. The old UCCB will be eliminated, along with family income splitting (pension income splitting remains). But what surprised me is the elimination of the child fitness tax credit ($1,000 per child worth $150/year) and the child arts tax credit ($500 per child worth $75 per year). Not the end of the world, but in the end, the new benefits will give a slight advantage over the old system.
Before the budget, there was a rumour that government could potentially increase the capital gains inclusion rate from 50% to 66% or even as high as 75%. For example, if you had a capital gain (profit) of $1,000 from selling a stock or house, then $660 would be included as income (and taxed accordingly). Thankfully, the inclusion rate stayed at 50%, which in the example above, means $500 would be included as income and taxed at your marginal rate. More on how capital gains tax works.
The surprise from the budget came from the elimination of the tax exemption when changing mutual funds within corporate class mutual funds. Before, in this tax efficient mutual fund strategy, investors could change mutual funds within the same family without any tax consequences in non-registered accounts. I can see some financial planners scrambling a bit try to reduce the financial impact on this new policy.
Due to the oil downturn over the past couple years, there are many regions that have been significantly impacted by unemployment. To help out with this, employment insurance waiting period has been reduced from 2 weeks to 1 week, and benefits extended by an extra 5 weeks in 12 regions that have experienced the most severe increases in unemployment (NL, Sudbury, northern Ontario, northern Manitoba, Saskatoon, northern Saskatchewan, Calgary, northern Alberta, southern Alberta, Whitehorse, Nunavut). For long-tenured workers in these regions, EI will be extended by an extra 20 weeks (70 weeks total). One more bonus is that starting 2017, EI premiums will be reduced to $1.61 per $100 income (currently $1.88/$100).
Boosting the middle class is continued with post secondary education. While the tuition tax credit will remain, the education and text book tax credits will be eliminated. Instead, Canada Student Grants program will be boosted for low and middle income families (varies by province). Full time students from low income families will receive $3,000 (vs. $2000), and students from middle income families will receive $1,200 (vs. $800). More details on the budget here.
Those were the highlights that caught my eye in the budget. Am I missing anything?
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