The Aftermath

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Canadians spoke loud and clear last Monday by overwhelmingly voting Liberal and punting Stephen Harper straight out of office. After almost 10 years of being the Prime Minister of Canada, Canadians decide it was time for change. The previous tax cutting and smaller government strategy enacted by Stephen Harper’s Conservatives didn’t do much to stimulate the Canadian economy. Now that the Liberals are in power, Canadians are hopeful that Trudeau comes through with his large government spending plan to stimulate job growth and the economy.

During the Conservatives’ time in power, a growing divide in income opened up between the rich and the poor. This was attacked in the policies championed by Trudeau’s Liberal party and was a key message in helping him defeat Stephen Harper and the Conservatives. With the Liberals in power, the demands of Canadians will now be met. Tax the rich and transfer it down to the middle class.

Tax Consequences

If the doctors in Ontario are not feeling the pain from Kathleen Wynne’s rollbacks, by January of next year they will be facing additional taxes by the federal government. The Liberal budget will kick off a new tax bracket above $200,000 so that the upper end of income will now be taxed an additional 4% from the now 29%. This will make the combined personal income tax rate over 50% for many provinces across Canada, which has a somewhat psychological effect for high earners.

The additional taxes collected by the upper 1% individuals will be distributed back down to the Liberal defined middle class. Individuals in the tax bracket of $44,701 to $89,401 will receive a 2.5% tax reduction to a 20% tax bracket. This will save a maximum of $1117.50 for an individual making right at the tax bracket’s maximum. No doubt families in that income tax bracket will appreciate the extra money that they will receive in their pockets.

Decrease EI Premiums

The Employment Insurance program has long been running a surplus of funds. With the restricted eligibility rules brought in by the Conservative government, a lot less money was being doled out to individuals when they lost their jobs. This has led to the ability for the new government to cut EI premiums from the now $1.88 to $1.65 per $100 earned. Overall it should add a few dollars back into your pockets. It might not be much but it will be something.

Clawing Back Your TFSA

british-shorthair-cat-clawingDespite the many objections to rolling back the TFSA account, one of the key main promises made by the Liberal platform was rolling the TFSA contribution limit back to $5500. The media has turned the TFSA into a big rich person’s playground to store away their wealth. I personally think it’s just misunderstood, like a bad kid in the playground.

The reality is that the RRSP account actually benefits the wealthy more than the TFSA. It was perceived that the TFSA could only be used by the rich because no one has enough money to contribute to it. Well that’s because everyone throws their money into the RRSP and even then that wasn’t a lot. The TFSA actually evens the playing field for all individuals because contribution room isn’t tied to income and everyone enjoyed the tax free gains.

The RRSP, on the other hand, defers taxes.  It helps people in higher tax brackets “hide” away their money until they are in a lower tax bracket (ie. retirement) to withdraw their money. Certainly this strategy helps those paying the 26% or 29% tax bracket and is less helpful to those that live in poverty and only pay 15% in tax. Some could argue that someone poor could be taking out money in the future without paying any taxes at all if they fell below the tax threshold; however, I would never wish upon anyone to be living in such poor financial conditions in retirement.

Alternatively, If the RRSP contribution room was clawed back by 5-10% of yearly income it could probably get the same savings in taxes, but given its history that promise would have been extremely unpopular. People still see the RRSP as a retirement savings vehicle, even though most people raid it for home purchases. It’s almost like you can call it the Home Buyer Savings Plan (HBSP).

Regardless, the $10,000 limit will still exist for the remainder of the year and most likely will exist at the turn of the 2016 calendar year. This means during this time it might beneficial to top up your TFSA and ignore your RRSP. Why? It will take over 20 years to see the TFSA reach the $10,000 limit again. Having that room in your TFSA might be more beneficial than using your RRSP.

Any unused RRSP contribution room will just roll over to the next year, but the TFSA room will disappear forever once the federal budget passes early next winter. It’s also very highly unlikely that the law will become retroactive to January so it will be wise to save now and try to contribute to your TFSA this and next year while you still have a $10,000 limit.

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Budget Deficits

It still remains to be seen how budget deficits will affect our Canadian dollar. Canada has been in a period of slow growth and declining employment. It will be interesting to see how the job market reacts with the stimulus the Liberal government plan on bringing aboard.

The impact probably won’t be felt immediately, but if the Canadian economy can do well then it bodes well for investment within Canada and could potentially boost the dollar in the long run. In a shorter time span, the issuance of additional debt will have a negative effect on the dollar which would impact our prices for goods and services. The Canadian bond market may also feel some pressure, but Canada is still seen as a conservative safe haven, and movements will remain subdued.

Despite the change in the Canadian government, it is still safest to remain diversified. Hold equities and fixed income assets. Stay on top of your monthly budget. Most importantly, invest for your future. Everyone should have a 10 to 25 year financial plan, not one that lasts till Christmas.

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