How the major parties’ proposed tax changes will affect your wallet

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The federal party leaders’ debates are now behind us and the federal election is just over a week away, so what better time to take a brief look at a few of the tax policies announced by each of the three major parties? Let’s dive in.

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Liberals

First Home Savings Account: The Liberals plan to introduce a new tax-free First Home Savings Account to help younger Canadians afford a down payment faster. This tax-preferred account would combine features of both the registered retirement savings plan (RRSP) and the tax-free savings account (TFSA), or, as the Liberal platform describes it, “Tax-free in, tax-free out.”

The account would permit Canadians less than 40 years old to save up to $40,000 towards their first home. Like an RRSP contribution, the funds contributed to the account would generate a tax deduction, thus allowing a qualifying individual to effectively contribute up to $40,000 of their pre-tax income to the new plan.

The money can compound and grow tax free inside the plan until you withdraw up to a maximum of $40,000, tax free. There would be no requirement to repay it, unlike amounts withdrawn from the current Home Buyers’ Plan. That plan allows qualifying individuals to withdraw up to $35,000 tax free from their RRSP to buy a first home, but the withdrawal must generally be repaid over 15 years.

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If the funds in the proposed new account are not used for a home purchase by the age of 40, they convert back to normal RRSP savings.

Tax credits for homebuyers and multi-generational renovations: The Liberals also promise to double the Home Buyers’ credit, which allows first-time homebuyers to claim a non-refundable credit when they buy a home. They would double the amount to $10,000, from $5,000, which at 15 per cent would be a total of $1,500 meant to help pay the extra costs of buying a home, including closing costs, legal fees, transfer taxes and inspections.

The Liberals would also introduce a new home renovation tax credit to help families add a secondary unit to their home for an immediate or extended family member. Families would be able to claim a 15-per-cent tax credit for up to $50,000 in renovation and construction costs, saving taxes of up to $7,500.

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Home office expenses: Finally, for those of us still working from home as a result of the pandemic, the Liberals promise to extend the simplified method for calculating work space from home expenses for an additional two years (through 2022) and bump up the maximum deductible amount to $500 (from $400).

Conservatives

Enhanced Canada Workers Benefit: The Canada Workers Benefit (CWB) is a refundable tax credit that supplements the earnings of low- and modest-income employees. Under current rules, the CWB grows by 26 cents for every dollar of “working income” (generally employment and business income) in excess of $3,000, up to a maximum entitlement of $1,395 for single individuals (without dependants), or $2,403 for families (couples and single parents). The benefit is then reduced by 12 per cent of net income in excess of $13,194 for single individuals without dependants, or $17,522 for families.

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The Conservatives promise to double the CWB, which would have the greatest impact on lower-income working Canadians. Under the revised program, an individual earning $14,000 per year of employment income would receive $2,800 of CWB per year (up from $1,400). A family with a total income of $23,000 would receive $5,000.

Reduced tax penalties: Regular readers will be keenly familiar with some of the harsh tax penalties levied by the Canada Revenue Agency when it comes to such things as innocent RRSP or TFSA overcontributions. The Conservatives promise to revise the CRA’s penalties so that first-time problems or errors receive only minor fines, with increasing severity for repeat offenders.

GST holiday: If elected, the Conservatives promise a month-long GST holiday at some point this fall. During this month, all purchases made at retail stores would be tax free, a measure designed “to help families and … our hard-hit retail stores recover.”

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Increased disbursement quota: One of the requirements under our tax law is that registered charities must spend a minimum amount each year on their own charitable programs or on gifts to other charities. This required spend is known as the disbursement quota (DQ) and is based on the fair-market value (averaged over a 24-month period) of a charity’s property, such as real estate or investments, that are not used for charitable activities or administration. Currently, the DQ for Canadian charities is set at 3.5 per cent.

To boost charitable donations, the Conservatives would increase the DQ for charitable foundations to 7.5 per cent, a move meant “to unlock billions of dollars built up tax free in foundations and put this money to work to help Canadians.”

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NDP

Increase the capital gains tax: Currently, only 50 per cent of capital gains are taxable when investments are sold at a profit in a non-registered account. The NDP platform would increase this rate to 75 per cent, which the party claims would “make our tax system fairer and ensure that the wealthiest individuals are paying their fair share.”Individuals concerned about a potential hike in the capital gains inclusion rate may wish to wait for the results of the election before taking any specific action, such as realizing accrued gains today.

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Bump up the top rate: The current top federal tax bracket of 33 per cent kicks in at income of more than $216,511. The NDP platform has this rate increasing by two percentage points to 35 per cent. This would bring the top combined marginal tax rate, including both the federal and provincial components, to approximately 55.5 per cent in British Columbia, Ontario and Quebec, while Nova Scotia’s would be 56 per cent.

It seems unlikely the NDP will garner enough support to form the next government, but the party’s policies could be relevant should their support be needed to bolster a minority government.

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto. [email protected]
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