Baby clothes and hockey skates are the innocent face of a budget with a nasty side for high-net-worth individuals using a range of strategies to minimize the taxes they pay.
The government’s focus on middle-class families accounts for several small measures, but the most popular will be a move to eliminate import tariffs of as much as 18 per cent on baby clothes and sports equipment. The government says it will monitor the result of the tariff cuts to see if they’re an effective way to address the higher prices Canadians pay for some goods compared with their American neighbours.
The new First-Time Donor’s Super Credit is designed to encourage first-time charitable donors through an enhanced tax incentive. The standard tax credit for a donation is 15 per cent of the first $200 and 29 per cent for amounts beyond that level. The super credit, which the government describes as being temporary, would add an extra 25-per-cent tax credit for cash donations up to $1,000.
Bottom line, the new credit would give first-time charitable donors a 40-per-cent credit for the first $200 or less and a 54-per-cent credit for amounts between $200 and $1,000.
There are some other small measures for families, including an enhanced adoption tax credit that can be used to help offset costs incurred before parents are matched with a child. In addition, the government will expand the sales tax exemption for publicly funded homemaker services to include personal care services like bathing and feeding that are supplied to people who require assistance at home due to age or disability.
The budget also continues the federal government’s efforts to make the financial services industry more customer-friendly. Progress has already been made on issues like disclosure of mortgage penalties. Now, there’s a vague commitment to create a financial consumer code that would replace today’s scattered regulations and address issues like digital banking and financial abuse of seniors.
Also on the agenda is a review of federal financial regulations to ensure they allow new banks to enter the marketplace.
High net worth individuals and their advisers will want to give this budget especially close attention because the government’s indebtedness isn’t just reflected in the lack of personal income tax relief and dearth of enhancements to savings programs like the tax-free savings account. Tax loopholes are being closed, big time.
High on the list are strategies where borrowed money and life insurance policies or annuities are combined in a way that enables someone to go further in avoiding taxes than the government is comfortable with. Families that use testamentary trusts as a way to arrange their financial affairs and minimize taxes after they die should take note of an announcement in the budget that the government is looking at how it taxes these structures.
The most significant tax measure in the budget could be an adjustment in the dividend tax credit as it affects non-eligible dividends, or those paid by small businesses (not publicly-traded blue chip dividend stocks). The change will result in more taxes being paid on non-eligible dividends paid after 2013. A small offset: The $750,000 lifetime capital gains exemption on the sale of small business corporation shares as well as qualified farm and fishing properties will be increased by $50,000 for the 2014 tax year.
The budget also addresses labour-sponsored venture capital funds, a once very popular investing product. The government is proposing to gradually eliminate the federal tax credit on investments on these funds starting in 2015. Ontario has already eliminated a similar credit, but some provinces retain theirs.