Budget 2016

The new Liberal government delivered its first federal budget on March 22 in Ottawa. Prime Minister Justin Trudeau spent heavily in this budget, leading to a projected $29.4-billion shortfall this year. The larger deficits mostly reflect the implementation of commitments outlined in last year’s election campaign. Chief among these promises are additional infrastructure spending, changes to employment insurance, and support for indigenous peoples.

Deficits of more than 1% of GDP persist for the next several years, but the federal debt burden remains relatively low and stable. Revenue projections include a sizeable margin of prudence.

Part of this new spending may benefit you, here is the good news:

  • OAS eligibility returns to age 65 – Federal budget 2016 restores the eligibility age for Old Age Security and Guaranteed Income Supplement benefits to 65 and Allowance benefits to 60. This cancels the previous provisions that increased the age of eligibility to 67 and 62, respectively. - Great news for folks born April 1, 1958 or later.

  • The Canada Child Benefit replaces the Canada Child Tax Benefit and the Universal Child Care Benefit. The CCB is tax-free, unlike before, and government says nine out of 10 families will receive more in child benefits than under the current system. We will discuss these changes in more detail in our next newsletter when more details are available

  • No increase in the Capital gains inclusion rate – rumours were mere speculation.

  • Stock options will not be capped and Minister Morneau says, “changes are not in the plan”.

The bad news is the government also took things away:

  • Switches between corporate-class funds will no longer be tax-free after September 2016. A switch between series within the same fund will not be viewed as a disposition so investors can still benefit from the favourable taxation on redeeming income from these types of funds.

  • The promised small business tax cut has been frozen at 10.5% – this is not an increase but rather elimination of further reductions.

  • Changes have been made to taxation of insurance policy transfers to corporations. If you own a business and were planning on doing such a transfer, it’s no longer a tax-advantage.

  • The Children’s Fitness and Arts Tax Credits will be phased out by 2017. The fitness credit is reduced to $500 from $1,000, and the arts tax credit is reduced to $250 from $500 for 2016. Both credits will be eliminated for the 2017 and subsequent taxation years.

  • There will no longer be education and textbook tax credits as of January 1, 2017, but the impact should be relatively minor.

Many analysts feel that the moderate deficits announced strike a good balance between injecting short-term stimulus, generating long-term benefits through infrastructure enhancement, and maintaining a credible longer-term fiscal path.

Given that these announcements were fairly well telegraphed in advance, analysts expect little market reaction. In terms of economic impact, the blend of transfer payments, tax changes, and additional infrastructure spending should deliver a boost to the economy of about 0.1 percentage points this year, rising to 0.3 percentage points in 2017. This does not represent a massive game changer, but does provide a nice boost to an economy that appears to be increasingly benefitting from rising exports.

All told, this budget is consistent with a growth outlook that will see the Bank of Canada on hold well into 2017. I hope you find these highlights useful. If you’d like to discuss these and other federal budget initiatives and how they affect your financial plan, please don’t hesitate to contact us.