Do The New Policies Hurt Or Help You?

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The new Liberal government, headed by Justin Trudeau, released a few new policies on the general Canadian population. Just in time for the Christmas holidays! Along with the 25,000 thousand refugees that he’ll be bringing to Canada, his benevolence extended to middle income earners in Canada, with a tax cut of 1.5% for those earning between $45,282 and $90,563. This all starts at the beginning of 2016. On top of that, additional changes were made to the TFSA, the removal of the popular income splitting for couples and big news for people buying houses. Let’s see how all this affects our finances.

The Tax Cut

The Liberal election platform was based on the fact that money would be passed taken from the rich and passed down to the middle class. This included a 1.5% tax cut for the Liberal defined middle class income bracket of $45,282 to $90,563.

The Canadian tax system uses a gradual income tax system. This means that for you to see any benefit from the tax cut you will need to be making at least $45,282. Unfortunately, those with low income will not see any benefit at all. To see the maximum benefit of the tax cut you would have to make more than $90,563. That’s because for each dollar made over $45,282 you get back a penny and a half. The maximum savings one can get is $679, but the Liberal government has already stated the average savings for an individual will be about $330. That means most individuals won’t be receiving the full benefit of the tax cut.

Despite the fact that the tax cut helps the middle class. Those that benefit the most are the individuals that make over $90,563 and below $200,000. That’s because these individuals will receive the full $679 tax break, but won’t be hit with the new tax hike for those making over $200,000. One could say, the rich are benefiting more from this tax cut than the middle class.

The Tax Hike

To pay for the tax cut, the government decided to increase taxes on individuals earning over $200,000 from 29% tax rate to 33%. Again, this is applied at the marginal tax bracket, so what this means is that for every dollar earned over $200,000 that individual would pay 4% or 4 cents more in taxes.

This doesn’t mean that these individuals are paying more tax for sure, because they also receive the entire tax cut as explained above. Only until the individual makes over $217,000 will these individuals see more tax deducted. That’s because 4% of $17,000 would make up the $679 tax cut.

Unfortunately for the government, there was a miscalculation on just how many people were actually making this much money. The result of the tax cut will cost the government $1.2B in revenue, which means this will have to be made up from somewhere else.

TFSA Cut

I written about how beneficial the TFSA can really be and how to use it effectively, but nevertheless, the TFSA contribution limit was reduced from the $10,000 limit for 2015 back to $5,500 for 2016. Despite the fact that the TFSA might actually be better for the poor than the rich, the limit was reduced because it was politically slammed for being a rich man’s tool.

This doesn’t mean that you will lose your $10,000 2015 limit. Contribution room from the past will stay intact even though you might not have used it all up. Going forward the limit will be reduced back to $5500 and indexed to inflation. There is no need to rush and deposit money right away just to keep the $10,000 room for this year.

No More Income Splitting

One of the more popular forms of lowering taxes for couples was the ability to transfer income from one single high income earner to a stay at home partner. This technique effectively lowered the income of the high earner to a lower tax bracket, thus saving on taxes to the government.

This policy will most likely hurt high income earners with a stay at home parent, but it will also have an effect on families where a partner is on maternity leave or is unable to work. There are pros and cons to this policy, but it’s hard to tell whether the ability to split income was only a function that the rich took advantage of. The tax savings could have been quite significant had this policy not been reversed.

On a positive note, seniors will not be affected by this rule change. They will still enjoy the ability to lower their taxes through the use of income splitting.

Higher Down Payments

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One of the more interesting policies the Liberal Finance Minister rolled out over the last week was the announcement of an increase in the down payment amounts to purchase a home in Canada. Perhaps it was a signal to Canadians to be responsible with their money and stop taking out large amounts of debt.

Nevertheless, the increase on the down payment amount is actually quite small in the large scheme of things. The new down payment increase only affects houses costing more than $500,000 and less than $1M. Effective February 2016, home buyers will be required to make a 10% down payment on the portion of the cost of the house that exceeds $500,000. For example, if the house being purchased costs $700,000, the buyer would need to pay 5% down for the house up to $500,000 which is $25,000 and then 10% on the remaining $200,000. This equates to a total down payment of $45,000 up from $35,000.  In this scenario the down payment has moved from 5% to 6.42%. Quite minor.

This policy has effectively made houses costing $999,999 to require a 7.5% down payment. At its maximum effect, this rule change has only resulted in a 2.5% increase in the down payment required. Depending on where the realtors are, you’ll either hear bad news about the policy, like those in Calgary, or you might hear good news in Toronto and Vancouver where higher down payments will actually drive short term sales.

Regardless of this change, houses over $1M will still require the 20% down payment since CMHC will not insure homes above that value. Individuals should take this as more of a warning shot to the citizens of Canada to be more respectable about their risk for debt. It will most likely have very little effect on housing prices.

 

More To Come

The last two weeks were full of announcements coming from the new federal Finance Minister of Canada, Mr. Bill Morneau. Surely there will be more news to come once the new year rings in. The Spring budget will be just around the corner and will be filled with lots of changes.

There will certainly be more surprises that will come out given that the health of the economy isn’t doing so well in Canada.

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