Canada Savings Bonds are dead, but the same cannot be said of speculation about an increase in capital gains taxes.
The federal budget is putting CSBs, a once-proud franchise in sad decline, out of their misery. One wishes the same could be said of the rumours about a higher inclusion rate on capital gains. The budget did not increase the inclusion rate, but neither did it do much to ease the concerns of people who own non-registered assets that are worth more than the purchase price.
If you're in this group, it's time for a sitdown with your accountant and investment adviser to strategize. Sell now, while just 50 per cent of a capital gain is taxable? Wait for a date long in the future and hope for the inclusion rate to be at current levels or better? Ironically, either approach highlights the challenges of boosting taxes on capital gains. By not being definitive, the government has given people the chance to prepare for any measures to come.
The Liberal government makes a point of talking a lot about prosperity and tax fairness for the middle class. But one of the most notable tax measures in the budget axes the public transit tax credit, which could be worth $200 or more per year in a larger city if you buy monthly passes. You won't be able to claim this credit after June 2017. Also on the way out is the first-time donor's super credit, which was scheduled to disappear in 2017 and will not be renewed. For first-time donors, it boosted available tax breaks on charitable donations by as much as an extra $250.
Another tax measure that will affect all kinds of people: Federal excise duty on booze has increased by 2 per cent and will rise annually by the inflation rate every April 1 starting next year. Also, ride-sharing services like Uber will be required to start charging GST or HST as of July 1.
Bay Street's anxiety over a possible increase in the capital gains tax rate in the budget reached an unusual level of intensity in recent months. A clear signal from the government about its intentions would have been welcome. Instead, taxpayers are left to sift through various clues in the budget and global economy.
Arguing for the government to do nothing for at least the next while is the fact that U.S. President Donald Trump has promised to lower taxes on both individuals and corporations. The federal Liberals would be heavily criticized if they were to raise taxes on capital gains here while Americans paid less tax. Such a disconnect could undermine the government's innovation agenda if the tax burden in Canada discourages investment and entrepreneurialism.
For now, the government is focusing on closing tax loopholes and addressing tax reduction measures that primarily benefit high net worth families. For example, the government will review the use of private corporations by high earners to minimize taxes: A paper will be released in the months ahead to propose future policies.
One of the strategies under review is called income sprinkling, where a private corporation can be used to shift capital gains or dividends from an individual at a high tax rate to a family member who pays less tax or no tax at all. This approach can be used by family owned businesses of all types.
To fight tax evasion, almost $524-million will be invested over five years on improved tax surveillance and enforcement. The government is dead serious here – it expects to bring in $2.5-billion over five years by cracking down on tax evasion and tax avoidance. Don't be surprised to be asked by the Canada Revenue Agency for documents supporting tax returns this year and beyond.
While there's still $5-billion or so invested in Canada Savings Bonds, the program is no longer economical for the government to run. Sales of CSBs will stop this year, but outstanding bonds will continue to be honored.
Recent CSBs have offered rates of 0.5 or 0.8 per cent, depending on the type of bond. You can get 1 to 2 per cent in a high rate savings account with comparable levels of safety thanks to deposit insurance and easier access to your money. If you're a stubborn CSB loyalist, it's time to let go.
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