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A budget in the spring, an election in the fall… Political analysts were asking themselves a lot of questions before the latest federal budget was tabled. Now the answers are here.

The budget tabled on March 19 by federal Finance Minister Bill Morneau carries on where the three previous budgets left off, as far as managing the budgetary balance is concerned. Deeming the national debt – which stands at about 30% of GDP – to be within its established guidelines, the government has presented a fourth deficit budget in as many fiscal years and doesn’t seem to consider a balanced budget to be a priority for the next five years.

This recourse to deficit spending may be what has allowed the government to propose a number of new tax measures for individuals.

1. To begin with, the government would like to encourage Canadians to develop their careers by acquiring new professional skills. With the new Canada Training Credit, individuals will accumulate a yearly credit balance, up to a lifetime limit of $5,000, that could be used to cover part of the cost of job training. Individuals with an annual income of $147,667 or less (i.e., the third tax bracket) will be eligible and must use their credit balance before the end of the year in which they turn 65. Another training support measure: a new Employment Insurance benefit will now provide four weeks of income support for people taking a training leave from work.
2. On another note, one new measure may give business owners an incentive to replace their fleets with zero-emission vehicles. Newly purchased electric battery, plug-in hybrid or hydrogen fuel cell vehicles will now be eligible for a full tax write-off in the year they are put into use. Light-, medium- and heavy-duty vehicles will all be eligible. Note that for passenger vehicles, capital costs will be deductible up to a limit of $55,000 plus tax. Canadian individuals, on the other hand, will be eligible for a purchase incentive of up to $5,000 for electric battery or hydrogen fuel cell vehicles with a manufacturer’s suggested retail price (MSRP) of less than $45,000. Note that, for individuals, hybrid vehicles are not eligible.
3. Young high-growth companies and startups that include stock options in compensation packages for key employees may want to talk to their tax specialists about the new rules the government has announced in this area. More details should be forthcoming in the next few months.
4. With regard to other specialized financial products, note that if you hold units in mutual fund trusts, it might also be appropriate to consult your tax specialists, since the minister has announced a tightening of the tax rules for this product.
5. The government has taken note of the situation of retired people who have significant retirement savings, but are worried about their longevity risk – i.e., the possibility that they will outlive their money. New rules have been announced to allow savings in registered plans to be used to purchase a deferred life annuitythat would take effect at an advanced age – 85, for instance – to provide a guaranteed lifetime income from that point on.
6. Among the measures intended to allow households to build their financial assets, two in particular are aimed at people looking to buy a first home. The first is an increase in the amount that can be used for this purpose under the Home Buyers’ Plan (HBP): it will now be possible to use up to $35,000 from an RRSP for this purpose (the current limit is $25,000). The provision that will draw the most attention, however, is the new program enabling the Canada Mortgage and Housing Corporation (CMHC) to offer a “shared equity mortgage” as a way of reducing the borrowing costs for a residence. Under this lending program, up to 10% of the cost of buying a home would be shared between the purchaser and the CMHC. The program will be called the “First-Time Home Buyer Incentive.”
7. Many Canadians, even those with substantial incomes, have people close to them whose personal finances are more vulnerable, such as aging parents or people with disabilities. If you are in this situation, you might want to learn about the new provisions that could make a difference for such people, and ensure that they take full advantage. In particular, these include an increase in the Guaranteed Income Supplement for seniors who continue to work and improvements to the Registered Disability Savings Plan.
8. Finally, if you have a business or home in a remote or rural area and the quality of your Internet connection is a concern, be aware that the government is aiming for 95% of Canadian homes and businesses to have access to Internet speeds of at least 50 Mbps by 2026.

A variety of other measures could be of interest to you, especially if you are in the farming business, where a $3.9 billion support program has been announced. For anything not covered here, don’t hesitate to consult the federal government’s budget website!

Published By: Insurance Journal

Author: Andrew Rickard 

Date: June 28, 2016  09:53 a.m.

Will you die in the class you were born? Research conducted by Statistics Canada on intergenerational earnings has found that Canadians do not have the kind of upward mobility that previous generations may have enjoyed.

Comparative studies of intergenerational earnings and income mobility tend to rank Canada as one of the most mobile countries among advanced economies. However, in the Statistics Canada research paper Intergenerational Income Transmission: New Evidence from Canada, authors Wen-Hao Chen, Yuri Ostrovsky, and Patrizio Piraino argue that literature dealing with the subject has not paid enough attention to the relationship between the lifetime earnings of children and their parents. The problem is one of lifecycle bias, which is to say other studies considered earnings levels at certain ages (e.g., when people were younger and therefore earning less money) and failed to account for income in later life.

To link together Canadian children and their parents

The researchers used tax records to link together Canadian children and their parents, and observed that intergenerational persistence tends to be greater when market income (i.e., the sum of earnings, self-employment income and asset income) is measured. “This suggests that other mechanisms, such as transmission of jobs or entrepreneurial skills, may also be at work,” say the authors.  While the paper found that path to the top of the scale of was “quite challenging” for sons born to low-income fathers, it also found that these same sons still appear to have a good chance of moving into the middle class; the authors say this may be due to the influence of social institutions.

If a father and son have an intergenerational correlation rate of 0, that means the parent’s circumstances has no influence at all over the child’s future income level; the higher the correlation rate, the more influence a parent’s background has on the child’s future earnings and the more static the class system. The study found that Canada still has a very low correlation rate, but concludes that it is not quite as low as some other studies have found.

Canada is still a mobile society

“The results from the analysis suggest that Canada is still a mobile society, but not to the same extent as previously thought,” reads the report. “The new estimate of the father–son earnings elasticity is about 0.32, which is noticeably higher than the values previously reported in the literatures (which have been in the neighborhood of 0.2): lifecycle bias alone explains about two-thirds of the discrepancy between the early estimates and the new result.”

Published By: Insurance Journal

Author: Andrew Rickard 

Date of Publication: July 18, 2016  01:29 p.m.

The Fraser Institute argues that Australia’s system of mandatory individual retirement saving accounts is preferable to the Canada Pension Plan’s (CPP) collective model.

In an article posted to the Fraser Institute web site last week, authors Charles Lammam and Hugh MacIntyre describe the recent agreement to expand the CPP as “wrong-headed” and “largely unnecessary” on the grounds that most Canadians are already adequately prepared for retirement.

The Australian model

Instead of relying on the existing collective CPP model for additional mandatory contributions, the authors say that if politicians really wanted to improve the Canadian retirement system they “should have looked beyond our borders and considered pension models from other countries requiring their citizens to save for retirement”. In particular, Lammam and MacIntyre point to Australia’s retirement scheme which requires employers to contribute 9.5% of an employee’s ordinary earnings to individual retirement accounts.

Transferable to dependents

The article notes that Australian accounts are more flexible in that they have limited rules around asset allocation and investment strategy, and also allow withdrawals prior to retirement for medical emergencies and during times of financial hardship. What’s more, at death Australians may transfer their full account balance to their dependents as a tax-free lump sum.

“These important benefits are unavailable in the collective CPP model. Indeed, the CPP lacks the flexibility and choice that Canadians enjoy from private saving vehicles such as RRSPs, TSFAs, and other investments,” reads the article. “This is particularly relevant in light of the fact that higher mandatory CPP contributions will be offset by lower private savings. Employing the Australian model could at least minimize such drawbacks.”

Published By: Insurance Journal

Author: Andrew Rickard 

Date Published: July 22, 2016  01:34 p.m.

The Ontario Securities Commission (OSC) says some advisors are not collecting and maintaining adequate Know Your Client (KYC) information, and is warning against the inappropriate use of client testimonials. The regulator is also concerned about the quality of advice that is being offered to seniors and other vulnerable investors.

In its annual summary report on compliance and registrant regulation, the OSC says that the inadequate collection, documentation, and updating of KYC information “continues to be a significant and common deficiency” in the industry. Among other things, compliance reviews have found that advisors have failed to gather information about their clients’ other investments. Without this information, the regulator warns that “a registrant does not have an adequate understanding of the client’s financial situation and whether the proposed transaction may result in undue concentration risk in securities of a single issuer, group of related issuers, or industry.”

Client testimonials

The OSC is also keeping an eye on client testimonials. Although Ontario securities law does not prohibit the use of testimonials, the OSC says advisors need to make sure that they are balanced, fair, and not misleading. “Registrants should be able to substantiate all claims that they make in their marketing materials,” reads the report. “Further, there is a risk that misleading or inaccurate testimonials will be communicated to investors, unless the registrant has procedures in place to conduct an adequate review and approval of the use of testimonials.”

Vulnerable investors

In addition, the regulator says its compliance reviews uncovered instances in which advisors failed to provide appropriate services or products to vulnerable investors. The OSC is particularly concerned about how seniors are being treated, and is developing guidelines and best practices for those who provide advice to older clients. “In the interim, we remind you that you are responsible for the adequacy of your firm’s policies and procedures for the protection of investors, including vulnerable investors,” reads the warning to investment dealers. “You should assess your firm’s business model and policies and procedures.”

These are just some highlights from the 99-page report, which the OSC “strongly encourages” advisors to read and use in order to gain a better understanding of their obligations.