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Canadian taxpayers are bracing for changes in the upcoming federal budget that the Liberal government vows will focus on fiscal restraint amid an expected economic slowdown.
Ottawa will also look for ways to shore up revenue to help pay down debt racked up from pandemic-era incentives, while also addressing the impact of surging inflation on lower- and middle-income Canadians.
Advisors say wealthier Canadians will likely be targeted in this year’s budget that will be tabled on March 28.
“We’re talking, particularly, with high-net-worth clients about their wealth and the potential impact to their tax situation, given the government is likely looking to generate revenue to reallocate to other Canadians who might be struggling with the cost of living,” says Wilmot George, vice-president, tax, retirement and estate planning at CI Global Asset Management in Toronto.
Mr. George says advisors should talk to clients about what could be in the budget, including some of the seemingly far-fetched proposals that have been rumoured for years.
“You need to have conversations with clients, putting on the table what may be in the budget, and then deciding the best way forward together,” he says. “Sometimes, the answer is to do nothing and just deal with whatever comes.”
Here are eight measures advisors are flagging for clients:
1. Increasing taxes for the wealthiest
Most advisors expect this year’s budget to include an update to the alternative minimum tax (AMT). In last year’s budget, the Liberal government noted the AMT hadn’t been updated since it was introduced in 1986.
“There are still thousands of wealthy Canadians who pay little to no personal income tax each year,” it stated.
Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth in Toronto, is almost certain the AMT will be updated in the budget. He says Ottawa could also introduce a new “super high-income tax bracket” for Canada’s ultra-rich.
“I’m not advocating that,” he says, pointing to research showing the wealthiest Canadians pay a disproportionate amount of taxes in Canada.
2. Renewing home office expense deduction
The Canada Revenue Agency (CRA) could once again extend the temporary flat rate method of claiming employee home office expenses for the 2023 taxation year, which was first introduced in 2020 when millions of Canadians were forced to work from home during the height of the COVID-19 pandemic.
Previously, an employer would have to sign form T2200, and employees would have to track home office expenses. For the 2020 taxation year, employees could claim a deduction of up to $400 without tracking expenses or having their employer sign the form, based on certain conditions. That was extended for both the 2021 and 2022 taxation years, with the deduction bumped up to $500.
Mr. Golombek says the deduction could be extended again this year, perhaps with a new, higher limit, given rising inflation.
“Or would they make that permanent going forward, realizing the hybrid work environment that many people now find themselves in?” he asks.
3. Raising limits for registered accounts
The federal government increased the annual tax-free-savings account (TFSA) contribution limit to $6,500 from $6,000 for 2023, but some advisors say another increase could be in the cards given stubbornly high inflation.
The government could hint at another contribution limit increase in the budget to help encourage Canadians to save, says Janine Guenther, president of Vancouver-based Dixon Mitchell Investment Counsel.
The contribution limit was increased from $5,500 to $10,000 in 2015 under the previous Conservative government. It was then lowered to $5,500 from 2016 to 2018 after the Liberals took power, and increased to $6,000 for 2019 to 2022.
Ms. Guenther says the government could also look at increasing registered education savings plan (RESP) limits to keep up with the soaring costs of post-secondary education. The lifetime RESP contribution limit per child is $50,000 while the maximum Canada Education Savings Grant (CESG) is $7,200.
“For many families, that’s not enough,” Ms. Guenther says, citing the rising cost of housing and tuition.
4. Hiking the capital gains inclusion rate
Each year, there’s speculation the Liberal government could increase the capital gains inclusion rate on investments, which is the percentage of capital gains included in taxable income. The rate, currently 50 per cent, was as high as 75 per cent in the 1990s.
Mr. Golombek says a hike in the rate is often discussed as it would affect a small number of Canadians with non-registered assets.
“From a strategic perspective, if the government did want to target higher income, capital gains would be a natural,” he says, but adds there would be a lot of opposition given the potential impact on capital flows in the country.
“If I had to bet, I don’t think they’ll do it, but it is certainly possible.”
5. Taxing gains on the sale of a principal residence
Another controversial idea being bandied about is the taxation of the gain on the sale of a principal residence.
“Politically, that would be devastating,” says Mr. Golombek, but he notes the U.S. has an exclusion of gains of $250,000 per person or $500,000 for a couple. Or, he says, the tax could be pro-rated depending on how long you’ve owned the property.
“I don’t think it’ll be there,” he says of taxing gains on a principal residence. “But this is one of those things that some homeowners worry about every year.”
6. Preventing ‘surplus stripping’
Mr. Golombek believes the government could crack down on so-called “surplus stripping,” which is when a corporation does a reorganization to extract its retained earnings at the more favourable capital gains rate instead of a dividend rate.
He notes the Liberal government tried to stop this practice in 2017 alongside other changes for private companies but then backtracked.
“We know the government doesn’t like it,” he says, but adds the transaction would no longer be attractive if Ottawa increased the capital gains inclusion rate.
7. Increasing the GST
The goods and services tax (GST), first introduced at 7 per cent in 1991, has been at 5 per cent since 2008. A recent C.D. Howe report recommending Ottawa raise the rate back to 7 per cent is seen as widely unpopular, but that doesn’t mean it’s off the table, Mr. Golombek says.
“I don’t think this government wants to do it,” he says, given its philosophy to tax the wealthy, but notes most economists agree it’s a good move.
Mr. Golombek says that basic needs such as food, rent and mortgages are exempt from the tax and the government could offset the increase by boosting the GST credit for lower-income Canadians.
“That way, you just tax people based on consumption, which may encourage them to save and invest.”
8. Cracking down on tax avoidance
The Liberal government has also been hosting public discussions on strengthening the general anti-avoidance rule (GAAR), which Mr. George of CI GAM says could show up in the budget.
The GAAR looks to prevent aggressive tax planning and avoidance by individuals and businesses, which Mr. George says has been a priority for the government.
“The GAAR discussion is a work-in-progress,” he says. “We will see what the government has in mind, but that’s certainly something to keep an eye on.”
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