2019 Provincial Budgets: Good News Possible
June 13, 2019
Clare O'Hara: Finance Minister Bill Morneau unveiled the Liberal government's final budget before the fall election this past March 19th. It seems to offer a mixture of both benefits and consequences for Canadian stakeholders across a broad spectrum. As financial advisors meet with their clients in the weeks and months ahead, they will need to understand the government's budget proposals and to counsel them on how to take advantage of the changes while avoiding pitfalls. Some say this recent budget was a no-news budget, and others will argue that there are elements of this budget that require examination. We will unpack it all on today's panel and examine what in this budget deserves a second look.
Clare O'Hara: Today, joining me is Frank DiPietro, assistant vice president in tax and estate planning with Mackenzie Financial, Wilmot George, vice president, tax, retirement, and estate planning with CI Investments, and Georgina Blanas, executive director and vice chair of Private Capital Markets Association of Canada.
Clare O'Hara: Welcome, everybody. Right. So, Wilmot, I'm going to start with you. We understand that there were no changes to personal or corporate income tax rates in the budget, but was this expected, and should we expect changes in this area in the near future?
Wilmot George: Yeah. Well, it really was expected from our perspective. We didn't expect any major changes to tax rates in this budget, largely because this government already made their changes. When this government was first elected in 2015, one of the first things that they did was they decreased the tax rate for middle-income Canadians, and they also increased the tax rate for the higher-income Canadians. They made that change almost right out of the gate, so we really didn't expect to go into this budget and see further changes on that front. Let's not forget that the government also made some corporate tax changes recently by decreasing the small business tax rate federally.
Wilmot George: Again, we expected to go into this budget. We expected to see some changes across federal tax rates, not necessarily income tax rates, but there's always things in budgets to talk about, and we're going to talk about some of those things here today. But we didn't expect any movement on the income tax rates personally or corporately.
Clare O'Hara: Right. So, Frank, are you of the same opinion, or are you seeing something different?
Frank DiPietro: Yeah, I would agree with Wilmot. We, as well, didn't really expect to see significant changes in the tax rates themselves. There's always some tinkering going on that always adds tax revenue to the government's coffers, but the tax rates themselves, we didn't expect any changes. Now, let's be mindful. It is an election year, and if the Liberals are reelected, we do know they have a mindset to have higher-income earners pay a higher proportion of their income to taxes. Assuming they are reelected, we may expect to see more changes down the road, but certainly for the 2019 budget, didn't expect anything major.
Wilmot George: One other point that I'll make there to follow up on Frank's comment, for the past number of years, we've heard about a potential increase to capital gains inclusion rates. It seems like, for the past two years, we've walked into the budget, and there's been rumors around that. So, it's important to note for our listeners that there was no change to capital gains inclusion rate. To be frank, to be honest, we're not expecting any movement in that regard. We know the Finance Minister in the past has indicated that that was not necessarily something that was on the table, but it's a rumor that kind of picked up steam. But we didn't see those changes.
Georgina Blanas: Well, let's face it. It is an election year, and those changes may come about after October. With everything that's being faced right now in front of the government with SNC-Lavalin and to key people leaving the cabinet, they're not going to make any changes and try to keep everything at par and at good standing, in terms of what has to be done. You know what? It's a long way for the budget to be passed as well, and the election cycle is long drawn out until October. So, no news is good news, in some ways, in terms of the bumps and humps that we might have expected, but be rest assured, for anyone that's looking to support this government, there's really no good news here.
Frank DiPietro: I'll be honest with you; I don't know where that rumor really surfaced. We're pretty in tune with the areas that the Liberal government wanted to address from a taxation standpoint. There are certain things ... I'm sure we'll talk about them today, like employee stock options ... that the government for years has said they wanted to make changes. The change to capital gains inclusion rate, I really never saw it formally presented anywhere as something that they wanted to address, but it's certainly picking up steam in rumors. Again, I don't expect it, but that doesn't ... It could happen.
Clare O'Hara: Right.
Frank DiPietro: We just don't know.
Clare O'Hara: Well, let's dig into some issues today. There's a lot of attention being paid recently to the Canadian housing market, particularly in cities like Toronto and Vancouver. From a tax perspective, how does the budget address this issue? Frank let's have you start.
Frank DiPietro: Sure. Well, there was certainly one measure that wasn't necessarily tax related, but I think it's important. The government has proposed to introduce the CMHC First-Time Home Buyer's Incentive. This is a shared equity mortgage where a Canadian who would be a first-time home buyer eligible under this program would be able to share in the cost of the purchase of their first home with CMHC. The way that they've presented it in the budget is that the CMHC will offer up to 5% in a down payment on the value of the resale home or up to 10% for new construction. This really is designed to increase the down payment that the first-time home buyer would have and reduce the monthly mortgage cost.
Frank DiPietro: But I guess the devil is in the details. Not really much in the way of details in terms of how this shared equity mortgage is actually going to work. All they really have indicated is that there's no monthly payments on the CMHC portion that's going to be required, but repayment will be required at some point, perhaps in the future when that home is sold. But again, lots of questions unanswered there, in terms of how exactly this will work, but the concept being that it's going to provide a mechanism to give funding for eligible first-time home buyers to help them purchase their first home.
Clare O'Hara: Right, and Wilmot, your thoughts on that?
Wilmot George: Yeah. I mean, that's a great incentive, and it's certainly going to help to make home ownership more affordable. Another change that the government made was they increased the amount that first-time home buyers can take out of their RRSP on a tax-deferred basis. Now, the home buyer plan has been around for some time. Under pre-budget rules, first-time home buyers, the defined term, would be able to withdraw up to $25,000 from their RRSP without having to pay tax. That would give them the cash flow that they needed to buy a primary residence, a principal residence. That's always been there. That's a good thing. I mentioned that it's tax-deferred because you certainly have to pay it back. The expectation is that that money is to be used for retirement. So, the expectation is that it would be repaid over a 15-year period.
Wilmot George: Now, again, to make home ownership more affordable, to give Canadians access to their money so they can buy a home, the government is increasing the Home Buyer's Plan withdraw limit to $35,000 as opposed to $25,000. So that's certainly going to help if you qualify as a first-time home buyer. To qualify as a first-time home buyer, there's this four-year rule. You must not have occupied a home that you own, or a spouse or common law partner has owned in the year of withdraw or any of the prior four years. As long as you satisfy that definition and as long as you don't have a preexisting Home Buyer's Plan balance, then you'd be able to access up to $35,000, and that's a good thing.
Clare O'Hara: Is there any negative impacts to increasing that amount?
Wilmot George: Well, look. I think it's good for people who have money in their RRSPs, because this is only a good program if you've got the cash there that you can access. For those individuals who have been saving over the years, saving for a down payment for a home and saving in their RRSPs, this is a good thing to the extent that they have the money there.
Wilmot George: Now, for financial advisors, financial advisors, in promoting the Home Buyer's Plan, which we think is a good thing for Canadians ... For financial advisors in recommending the Home Buyer's Plan, certainly it's going to mean that there's going to be assets that may come off the book for advisors because Canadians are going to use that money to buy a home, and that's a good thing. But financial advisors, in turn, can just rest assured that the money does have to be paid back over 15 years, and it's good for advisors to communicate that to clients so they don't get caught with an income inclusion that they weren't expecting.
Georgina Blanas: Frank and Wilmot raised some very good points in the budget. I don't feel it's gone far enough. The amount is quite small, and especially for first-time home buyers, especially in the Toronto GTA area, doesn't allow them enough dollar-wise. You also have to consider where they're coming from in an economic point basis and what kind of capital they have to access. Where it kind of comes into play is if you're looking into smaller parts in smaller towns around our country where that may have an impact based on the cost of a home, if you're in, say, for example, Windsor or outside of Montreal, in terms of purchasing a home, where that may have an impact.
Georgina Blanas: Going forward, I think one thing we could look at is perhaps increasing that to really have a better impact on our economy to really provide that open market for people to really invest in moving forward. Since the changes were made in the marketplace, it's still been going very positively, needless to say, but I think it could have gone a little bit further, even though it's a good, little bump. But I think ...
Frank DiPietro: I would agree with that, Georgina. I mean, modernizing the Home Buyer's Plan was something the Liberal government talked about. We were expecting something bigger than a $10,000 bump. In conversations with financial advisors, they said $50,000 would have been helpful. To your point about negative or drawbacks to this, I mean, it's never good to take money out of your RRSP-
Georgina Blanas: No.
Frank DiPietro:... from a financial planning perspective. I mean, that's for retirement savings, so you don't want to promote that per se, but for those situations where it is difficult to get into the real estate market due to house prices in specific segments, a larger balance to extract would have been more helpful in some situations.
Wilmot George: Right.
Clare O'Hara: Right. So, switching gears over to tax-free savings accounts, a topic that's always interesting to advisors and investors, Wilmot, 10 years the TFSA has been around. It's a popular saving vehicle for adult Canadians of all ages. At the same time, though, we've heard ... We've written about it as well ... is that the CRA is still owed around $110 million in audit since inception, and those are penalties related to inappropriate use of the TFSA. In this budget, it was a small piece, and some people kind of missed it or overlooked it, but the federal budget made reference to them, in particular to those penalties. So, can you talk a little bit about that and what it means for Canadians?
Wilmot George: Yeah, for sure. Like you said, there's millions of dollars that the CRA is looking for as a result of inappropriate use of TFSAs. Now, it's important to note that not all of these penalties are the result of people who were deliberately exploiting the rules and doing what they shouldn't be doing. Some of this was overcontributions that were made in error. Some is the holding of prohibited investments where folks didn't realize that their investments that they were holding were not allowed. But like you mentioned, a lot of it ... I think 20% of that amount or there about ... is a result of what some would refer to as running a business within your TFSA.
Wilmot George: Now, the TFSA, like I said, is a great vehicle, tax-free vehicle, and Canadians are embracing it more and more, Canadians of all ages, adults of all ages. If you talk to the typical Canadian, they'll say, "Yeah, this is great. This is a tax-free vehicle," but the reality is when you look at the Income Tax Act, the TFSA can become taxable. If you're using it inappropriately, all of a sudden, the TFSA becomes taxable and it's not tax-free.
Wilmot George: What has been talked about to a great extent over the past number of years is this concept of running a business in your TFSA. What does that mean? Is that even possible? Well, the CRA has indicated that it is possible, and they believe that if you've got great experience in markets and they are frequently trading securities within your TFSA and if you've got great experience in day trading, for example, and you're sitting and you're day trading within your TFSA, the CRA deems that to be a problem. The income within your TFSA will become taxable.
Wilmot George: In the budget, the government made a little tweak. This concept of running a business in your TFSA is not new. So, I don't want to make it sound like this change in the budget was something that's new, but the change that they made is they said, "Look. Well, if you're day trading within your TFSA and your TFSA becomes taxable, the TFSA has to pay the liability." Right? The money's got to come out of the TFSA to pay that fee, but to the extent that the money is not in a TFSA anymore, who pays that tax bill? Under pre-budget rules, a lot of people don't realize it was the financial institution, the TFSA issuer, that was required to pay that tax bill.
Wilmot George: So, there were some situations where some individuals would move money out of their TFSA before that tax bill is paid, and that bill could fall on the financial institution. So, the budget has made an attempt to correct that by ensuring that the TFSA holder, the person who's actually doing the "day trading" is now going to be liable as well for that penalty to the extent that that money is not in the TFSA to pay that penalty.
Clare O'Hara: Interesting. Frank?
Frank DiPietro: That's very well explained, Wilmot. I agree with everything you said there, and I think it's important to recognize TFSAs are utilized by many Canadians, and this is really a small segment of individuals that are abusing the structure. I think what you'll see as we talk about more and more of the budget proposals is the government focusing in on closing what they consider to be tax loopholes, refining rules that they deem to be inappropriate, misuse, abuse by individual tax payers. This is one very prime example of a niche situation that the government felt the rules need to be tightened a little bit better.
Clare O'Hara: Right. Georgina, any thoughts on the TFSA?
Georgina Blanas: Yeah. In terms of what Frank and Wilmot are saying, this really helps to bring boundaries in around how businesses can conduct themselves in this pool. It'll be interesting enough if this particular piece actually gets passed in the budget. I think that's one underlying question, is now that the boundaries are put in place and things have been tightened up a little bit and people know how to function within that, is will it actually pass, and will that actually move forward? It's always good when boundaries are put in and people know what the rules are, because then you know how to function as opposed to not knowing what your abilities are in certain tax circumstances as well. So that provides a little bit more clarity, but again, to your point, Frank, you said earlier it's in the details, and Wilmot, you explained it really well earlier as well, really is what's going to happen moving forward and what the impact is actually going to be on the scale of things, in terms of our economy and our businesses and those who are investing and really looking at that opportunity.
Wilmot George: This is really a wildcard year. With the election coming up, it's going to be interesting to see what happens. Usually, what we've seen ... Frank would know this, Georgina. Usually, when there's a budget, certain measures get included in a first budget bill that usually gets passed in and around the summer some time, and then there's usually a second budget bill that gets tabled usually later in the year, in the fall. If we follow the pattern of past years, that first budget bill may very well pass because it's before an election, but that second budget bill might not. I mean, if the government gets reelected, then fine. Maybe these things pass. If the government doesn't get reelected, then what? Right? Then all cards are [crosstalk 00:18:18]
Frank DiPietro: But it is important to note, though, Wilmot ... That's a great point, but even though it hasn't been passed and received Royal Assent, tax payers are able to act on proposed measures.
Wilmot George: They are.
Frank DiPietro: Right? So, to your point earlier about the Home Buyer's Plan limit being raised to $35,000, it may not have received Royal Assent, but as a Canadian, you can act on that and move forward to apply to withdraw $35,000 from your RRSP today. Canadians are entitled to do that.
Wilmot George: That's right.
Clare O'Hara: I want to jump just back to the TFSA for one second because you point out something, Wilmot, about the devil is in the details, and something about the amount of money that's in penalties is that while the CRA has given loose definitions of what carrying out a business is, that the advisor themselves is also at risk, because when you go down the checklist of knowledge about the market, frequent trades, how much money ... and the big question that we've heard for the investor is, what amount of money is in my account before the CRA audits me? Do you have any thoughts on what that limit is? I've heard random numbers. If you're more than $100,000 ... Is it higher than that?
Wilmot George: I hesitate to give a number. I really do because some would say the CRA's unpredictable, and if they want to run an audit, they're going to run an audit. They've said clearly that in situations like this, it's a question of fact. They're going to look at a number of factors to determine whether or not a business is being run in this account. While you might have one TFSA holder and he's engaging in two or three of these factors, and you have another TFSA holder who's engaging in another two or three, it's quite possible that this TFSA holder is going to be subject to the tax and this one's not. So, it's really tough to say because the CRA, they said, "Look. We're going to look at all the factors together and then we're going to make a decision as to whether or not we feel, in looking at these factors together, that a business is being run out of this TFSA." So, it really is a question of fact. I tend not to just look at a particular dollar amount and say, "Yeah, this is going to be a target."
Clare O'Hara: It's going to be a case-by-case basis.
Wilmot George: Right. 100%.
Clare O'Hara: Right.
Wilmot George: Yeah.
Clare O'Hara: Great. Frank, moving over to you, I want to talk a little bit about RDSP. The government wants to help Canadians with disabilities or if they have a loved one with a disability. They want to help them save for long-term financial security, and one way that this can be achieved is through the Registered Disabilities Savings Plan, or RDSP. Can you talk a bit about what that is and what modifications were proposed in the federal budget to make it easier for families to use this?
Frank DiPietro: Yeah, absolutely. The Registered Disabilities Savings Plan, or RDSP, is a savings vehicle designed to provide for family members with severe and prolonged disabilities. Family members, or anyone for that matter, can make contributions to this plan, and much like an RRSP, that money can grow on a tax-deferred basis while inside the plan. The government also provides very generous financial support for RDSPs in the way of two incentives: through the Canada Disability Savings Grant, as well as the Canada Disability Savings Bond. On a combined basis, both of these incentives provide up to $90,000 in financial support over the lifetime of someone with a disability who has set up one of these plans. It's been around since 2008, so we've got ... in the 11th year. Every year or two, the government makes modifications, trying to encourage more and more Canadians to utilize this vehicle to help those who are dealing with physical or mental disabilities, and 2019 was no different.
Frank DiPietro: The budget proposed two additional modifications in an attempt to make it more accessible and easier to use for families who are looking to utilize this plan. The first one has to do with eligibility. One of the prerequisites for setting up an RDSP is that the individual needs to qualify for the Federal Disability Tax Credit, or the DTC. Once an individual goes through the process of setting up an RDSP, they're DTC eligible. Circumstances may change for that individual to the point where perhaps they are no longer eligible for the DTC in the future. Well, under pre-budget rules, what would happen is that individual would be forced to collapse their RDSP and, more importantly, would be forced to repay all of those government grants and bonds back to the government.
Frank DiPietro: It really was a sting for a lot of families, particularly in some situations where the degree of disabilities may change over time where for a few years you may have an individual who's suffering from a disability and are prolonged and severe enough that they are DTC eligible, and then perhaps their condition improves but then worsens down the road. Those individuals, under existing rules, would be forced to start all over again. So, the budget proposed to make a change to this area where they suggest that if an RDSP beneficiary no longer qualifies for the DTC, they will no longer be required to collapse their plan. So, they'll be able to keep their RDSP in place and, more importantly, be able to keep all of the government grants and bonds in the plan. Now, they won't be eligible for further grants and bonds, but they will at least get to keep what's already been set aside for them. We see that as being a very positive change for those families with members who are disabled.
Frank DiPietro: The second one was around creditor protection. Okay. So, RRSPs have a certain level of creditor protection. Federal rules allow RRSPs to be exempt from seizure in bankruptcy. RDSPs up until now did not have that same level of protection. To sort of level the playing field, the federal budget proposed to make RDSPs also creditor-proof, the same way that RRSPs are. Again, two modifications that we see as being very positive and make them more accessible and easier to use.
Clare O'Hara: Right. Georgina, thoughts on that?
Georgina Blanas: Yeah. No, I think you were very thorough in that explanation, Frank, and we can thank the former Minister of Finance, Jim Flaherty, God bless his soul, and thank Minister Morneau for enhancing it. I think it was a great move and very positive and very much needed to enhance it. I think it's a very important thing for people with disabilities and to help in that in making that more accessible and broadening it so that it's more inclusive and open and includes more in that. Yeah, I thought that was well done, in terms of the budget and putting that forward, and thanks for that very thorough explanation as well, Frank. You really went into depth to that, and sometimes, unoften enough, we don't accredit that, and we need to actually do more.
Wilmot George: Yeah, and it brings peace of mind to a lot of families, right? It's tough to care for somebody who is living with a disability. For parents who have children with disabilities and parents who are getting older and want to ensure that there's going to be enough for their loved one, this plan is going to help. Like Frank said, contributions are made to the plan, and then the government puts the money in on top of that. We think that's a good thing for Canadians.
Clare O'Hara: Were advisors and clients hearing pre-budget that when they lost the eligibility for the DTC and they had to collapse their plans ... Was that a deterrent to even attempt to reopen them, even if they became eligible again?
Frank DiPietro: It absolutely was. We saw cases of financial advisors wanting to set them up, but conditions change, and they were concerned whether it was even beneficial to set up to begin with. Great, we can get access, but they felt like, for their particular client's scenario, that the disability would improve, and it was a type of disability that gets better, and then it could potentially get worse. Those are the people you want to help, but the way the rules were structured, you couldn't really help them to the degree that they wanted to. Yeah.
Clare O'Hara: Right. Jumping around again because it's sort of the way that it is with this budget, but Wilmot, we know the largest age cohort in history, the baby boomers, those born between 1946 and 1964, they're starting to transition to retirement, and many of these boomers are members of pension plans and for which they make decisions at the time of retirement. We understand that the budget made reference to individual pension plans, or IPPs. Can you speak to us a little bit about what an IPP is and how it was impacted this year?
Wilmot George: Yeah, absolutely. This is a big conversation, and I say it's a big conversation not specifically because of IPPs. This whole transition to retirement and where cash flow is going to come from in retirement is a very, very big conversation because the baby boomers are transitioning to retirement. For many of these boomers, they worked at companies for a number of years, and they were part of a pension plan, and then they retire, and they're given an option. That option is you can stay with the pension plan and receive periodic payments from that plan, or maybe the option's there for you to commute, to transfer that money to a locked-in RRSP where you would have some continued control or better control over that money going forward, and you've got some additional flexibility.
Wilmot George: Now, there are pros and cons to both sides. Staying with the pension plan or commuting the money, there are pros and cons. We won't get into all the pros and cons now, but that's a big decision. Now, one of the cons associated with commuting that many advisors have communicated to us on behalf of their clients is this concept of a taxable surplus. So, you've got a pension member, part of a defined benefit pension plan for a number of years, and now they want to commute. They want to transfer that money to a locked-in RRSP because maybe they want to have an inheritance for their family members down the road or they want to have greater control over that money down the road. The challenge with commuting a defined benefit plan into a locked-in RRSP is that sometimes the amount that you commute, not all of it can be sheltered on a tax-deferred basis, because there's some specific rules in the Income Tax Act that define the amount that you can transfer on a tax-deferred basis.
Wilmot George: So, there's a lot of clients who can retire, and they've got this large commuted amount, but not all of it is going to be transferable on a tax-deferred basis. So, the question is, what do you do about that taxable portion? Is there any opportunity to commute and have some tax relief for that surplus? The truth is there aren't many vehicles available to help you to shelter that amount. Maybe you have some RRSP room, probably not a whole lot because contributions to a pension plan reduce your RRSP route. Maybe you can use flow-through investments to a certain extent for the tax breaks you get with them, but there are not many options.
Wilmot George: One suggestion that had been promoted quite aggressively for a little while was this concept of just transferring your defined benefit amount into an IPP. The reason that was being suggested is because an IPP, by definition, is a defined benefit pension plan, and the Income Tax Act says you can move money from one defined benefit pension plan into another defined benefit pension plan on a tax-deferred basis. So, there are some promoters out there that were saying, "Hey, look. Well, you're retiring. You're retiring from your job. Maybe you're a teacher. You're a firefighter. You're a police officer. Why don't we commute your defined benefit pension plan into an IPP? But in order to do that, when you retire, you've got to set up your own corporation. When you set up your own corporation, your corporation has to sponsor the IPP. And then once the IPP is set up, you can do the transfer."
Wilmot George: Well, while on the surface that sounds like a great strategy, the CRA is not too fond of that strategy. They view it as something that people would engage primarily to shelter that surplus. For a little while now, they've communicated their displeasure with this type of strategy. So, what the budget has done now is the budget has said very clearly that if you're setting up an IPP for that purpose, the CRA has the legislative tools, or will have the legislative tools in short order, to be able to crack down on that strategy. To the extent that that transfer is deemed a non-qualifying transfer, presumably because you've done it to shelter the surplus, then you're looking at that transfer being fully taxable, which is something that many Canadians wouldn't want to engage.
Clare O'Hara: Is there any estimate to how much money right now is in limbo with those accounts? Any estimates out there?
Wilmot George: Well, we know that the CRA has indicated in the past ... This budget announcement is not really new. The CRA has communicated ... You can go on their CRA website, and for at least a couple years, under frequently asked questions, under registered pension plans, they've said, "We don't like this strategy," and they have been challenging these strategies, and people have faced taxation as a result of these transfers. It's just that the CRA didn't have the legislative tools that they needed to make that challenge a little easier. So now the Department of Finance is giving them that tool.
Wilmot George: As far as how much money is in limbo, well, we know that there have been some Canadians that have already faced the brunt of this and have had some punitive taxation, but hopefully, because of the communication that's been going on the past couple years, not too many more people have engaged the strategy recently.
Clare O'Hara: Frank, you must have some thoughts on this?
Frank DiPietro: Well, we talked earlier about closing loopholes. This is a big one. This is a big one they wanted to really tighten the belt on and tighten these rules. I mean, it's interesting. The budget was what? March 21st? I think about a week earlier; I saw in one of the national newspapers this strategy being promoted.
Wilmot George: Right.
Frank DiPietro: It just goes to show how quickly things can change in taxation where such a great concept and an opportunity to really help retirees protect the bulk of their retirement savings could just be wiped away very quickly over a change in a tax rule.
Frank DiPietro: So yeah, I think this is one that definitely is not surprising, because to your point, Wilmot, this is something that have been in the courts for the last 5, 10 years where taxpayers have been battling with Revenue Canada over these types of cases.
Wilmot George: Right, and I think it's important to note that we're not saying that IPPs are bad.
Frank DiPietro: No.
Wilmot George: What we're saying is it's how you use IPPs that can be under scrutiny, right? IPPs can be a great vehicle for the right individual. If I'm running my own business, and it's a legitimate business, and maybe I've had that business for a number of years, or maybe I'm starting that business now, but it's going to pay me a legitimate income on a go-forward basis, then an IPP might make a lot of sense. We're not here to suggest that IPPs are bad. It's just that if you're using an IPP to shelter a surplus from a prior pension plan, that's where you might get yourself into some issues.
Clare O'Hara: Right. Georgina, your thoughts on the whole element around IPPs?
Georgina Blanas: Well, Wilmot and Frank raised some very good points, and the one thing just to stress about this is the rigor that's put around, in terms of the boundaries that are really strapping in pensioners to access their capital that they've worked so hard on and being able to access it during parts of their lives that they'd like to enjoy. It's one more thing that has put burden on capital and being able to open up that capital so people can enjoy, especially such a large population that's affected by this as well at the end of the day. It's good to close loopholes. It's also good to have loopholes and define what they are and everything in that sense, but it's also good to have some capital and flow of capital, especially for pensioners during that time. So, if we're going to be providing vehicles, let's really provide vehicles for those that can access their capital and do what they want to do with their capital as well instead of putting strain on it.
Wilmot George: We can see that there's so many moving parts when it comes to financial planning, right? Tax laws change all the time. Estate planning laws change all the time. There's many Canadians out there that they're overwhelmed by all this stuff, and this-
Georgina Blanas: It becomes confusing at the end of the day, really.
Wilmot George: Yeah.
Frank DiPietro: It really is.
Georgina Blanas: Because everything keeps changing and moving, and we don't allow the marketplace to take care of itself, and sometimes, of course, you can't take risk out of everything. Sometimes you've got to let things flow so that people can actually do what they want to do, because some people are very responsible as well.
Wilmot George: Well, and it speaks to the value of advice. We believe that financial advisors are a key part, or a big part, of the financial security for Canadians. I mean, just in this conversation that we've had, we've talked about different concepts, and we've talked about how complex this stuff can be. We believe that financial advisors deliver some great value, so all of this speaks to value of advice.
Georgina Blanas: Absolutely. Yeah.
Wilmot George: For sure.
Georgina Blanas: No, absolutely.
Clare O'Hara: Right. Frank, just switching over to tax reform for small business owners. We kind of brought it up at the beginning, but it's been a strong focal point for this government. Over the past two years, we've seen significant changes to the taxation of shareholders of private corporations. The budget, did it have any significant additional tax measures for small business owners?
Frank DiPietro: Yeah, great question. I think for the last two years; they've really borne the brunt of a lot of tax reform. Fortunately, in this budget, I would say there was nothing significant that changed, but there's a lot that they still have to take in. Last year's budget was significant for business owners. There were new measures proposed in last year's budget that actually take effect this year. So, I believe that there are a lot of business owners who still don't really understand last year's proposals and how it impacts them this year. Those really have to do with rules around passive investments and restricting their claim to the small business deduction. Basically, if you're a business owner with an active business and using your corporation to save for retirement, these new rules could potentially increase taxes on your business income. If you're in Ontario, by about $30,000. If you're in other parts of the country, substantially more.
Frank DiPietro: As I mentioned, these are rules that are coming into effect for 2019, and business owners aren't going to feel the burn of that until they file their tax return in 2020. There's still a lot of education to be learned about these new rules for business owners, and we think that financial advisors are busy enough right now still working with business owners to help them understand last year's changes. So thankfully, nothing more for business owners in this budget.
Wilmot George: Frank makes a great point about education, and advisors are still learning those rules that were introduced last year. It's going to take some time, not just for financial advisors, accountants as well. It's going to take some time for the industry to digest these new rules. I was having a conversation with somebody the other day, and they said, "Hey. We hear that the plane has landed," and what they were referring to is the government has been talking about these changes for a number of years, and we were anticipating changes in this area for a number of years, and those changes have now been announced. Those changes are now law. So, this individual was saying, "Hey, great. The plane has landed. At least now we know what we need to do on a go-forward basis."
Wilmot George: But then another individual in the same room said, "Yes. The plane has landed, but we haven't deplaned yet." What they were referring to is this stuff is so complicated, and even the CRA is still working out how they're going to enforce and minister this stuff on a go-forward basis. So, while we have some clarity legislatively on what these new rules are, there's still a lot of questions around how they're going to be enforced on a go-forward basis. There's still a lot of education that's going on around these rules, for sure.
Georgina Blanas: Yeah. That's true. There is a lot of education that does still need to take place with the changes that have taken place, and it's been numerous years that this has all kind of transpired and boiled and now come to the surface. It's not an easy one for small businesses, but definitely a lot of education is needed in our marketplace on an ongoing basis moving forward, and it hasn't been an easy run for the small business owner who's taken the brunt and also being seen in terms of the top percentile in terms of wealth, but they're the folks on the street that provide the jobs at the end of the day and put food on the table and make the economy roll. That's one area that we need to really focus on, and there's a lot of work that went into the provincial budget for small businesses and making Ontario open for business, in terms of where we actually need to go.
Georgina Blanas: So for me, that was a positive piece based on the burden that's been placed on small business owners and having that opportunity to take capital out and actually reinvest in their own business. Most business owners take the capital from their business and reinvest and grow their business and provide jobs, and a lot of small business owners, economically, who they employ have employed for 20, 30, 40 years traditionally. So, we really have to consider who's being hit at the end of the day and where we need to go from here. It's a tough one when it comes to that, because while it was no news is good news, there are still things that have been inching up that really have created this in our small business environment.
Georgina Blanas: Going back to your point, more education is needed, and not enough was really done. It's not a pro-business, open up the economy and make it better, in terms of growing our capital in the country, let alone keeping it here at the same time.
Clare O'Hara: And it is an emotional story with the small business owners for the advisors to be having those conversations, because like you pointed out, the 30, 40-year small business owner might be family owned. So, my natural next question, Frank, is going to be like are there future changes on the horizon for these clients?
Frank DiPietro: Yeah, it's a great question. I think, to a large degree, that's going to depend on, again, whether the Liberals will be reelected or not. Certainly, if they are reelected, my own personal feeling is that there are more changes on the way. Specifically, there were the July 2017 proposals, and there was four very specific targeted areas, and there was so much backlash that they decided to retract on two of those. Now, we're fortunate enough to be at the federal budget, as Wilmot is, and have the opportunity to speak to some of the Department of Finance ministers. What they were very clear on was that, with respect to the passive investments, that's done. No more changes in that area, but very silent on anything else.
Wilmot George: Right.
Frank DiPietro: My takeaway from that is if reelected, I have a suspicion that some of those other measures that were in that 2017 consultation paper may resurface in some way, shape, or form. In what way, I'm not sure, but some of those issues around multiplication of the lifetime capital gains exemption, certain technical strategies and ways of drawing capital out of the corporation in a more tax-efficient way, I think will be readdressed if reelected and we have the Liberals back in power.
Clare O'Hara: Right. Wilmot, any ...
Wilmot George: I agree with Frank. I think what we might see, if reelected, there's going to continue to be some tweaking, I think. I don't know that we'll see major, major change like we've seen that was announced in 2017. I mean, those changes that were announced were major, major changes, right? Let's face it-
Frank DiPietro: It was tax reform.
Wilmot George: It's tax reform.
Georgina Blanas: Imagine if there was no consultation of the 15,000 groups that came together across the country, in terms of what could have steamrolled ahead.
Wilmot George: Yeah. Yeah.
Georgina Blanas: When it comes to capital gains, at the end of the day, what we had before worked, and it stimulated the economy, and loosening those strings and putting that back into play provides more wealth in people's pockets and that responsibility with the education of advisors to reinvest in the economy. If this government's reelected, I think more will come out that is going to be very restrictive, in terms of our economy, and I have serious concerns about that because we compete as a country, and a lot of our money flows south to many areas that we're aware of, and we need to create an economy where people can use their capital, grow their capital, and keep it here as well and do as they wish, because we've got enough restrictions within our interprovincial barriers, in terms of how an investor can actually act at the end of the day.
Georgina Blanas: On top of that, thank goodness we have advisors that provide the education to be able to do that at the end of the day as well. But if this government's reelected, I can see a lot of those agenda items being brought forward. Be rest assured, they're on the back burner until after the election, if reelected. I suggest that everybody reconsider and really take a hard look as to what is in this budget and what it actually means for all of us at the end of the day moving forward.
Wilmot George: Well, I think when we talk about those small business changes, those changes were not introduced quietly. It created a spirited conversation right across this country. I'm sure there was a lot of sleepless nights for folks on both sides of the fence, for sure.
Georgina Blanas: Yep, there was.
Wilmot George: Yeah. Whether there are going to be future changes on that level really comes down to the appetite of the government and how much more they can take, right? So, we'll have to wait and see. I mean, that's all up in the air. We've got an election coming up. We need to see what's going to happen with the election first, and then we'll go from there. But to Frank's point, if this government is reelected, my personal guess is I don't think we're going to see any more significant, hugely significant changes on the level of the changes we've just seen. But to Frank's point, I think we will see some tweaking because there are some things that they put to the side for the time being that they might want to address.
Frank DiPietro: Well, I mean, they called it a consultation paper, which, I mean, as the name suggests, it's designed to consult Canadians to get feedback before developing legislation, but in the back of this consultation paper was draft legislation. In my mind, that tells me that a lot of these things, they have their minds made up, and it's something that is very important to them. To me, again-
Georgina Blanas: I agree with you on that, Frank. Yeah.
Frank DiPietro: Yeah. It's a personal opinion, for what it's worth. If reelected, I do think that some of these agenda items will resurface. Again, to what degree, what level, what extent those changes will be, we'll wait and see, but any small business owner should be thinking about this as part of their bigger plan, bigger tax plan, bigger financial plan, and how it might impact them going forward.
Clare O'Hara: And I'm sure we'll hear about it from them because they're definitely not a group that's quiet. They're very vocal-
Frank DiPietro: Absolutely.
Clare O'Hara:... about these changes.
Wilmot George: That's right.
Clare O'Hara: Frank, at the beginning of our conversation, you did bring up the impact of high-income Canadians. We talked about that, and the Liberals have specifically targeted some high-income Canadians, suggesting they need to pay their fair share of income taxes. What measures did the federal budget have for that group of Canadians?
Frank DiPietro: Yeah. Well, there was one other area that actually ... Really, since they've been elected, the Liberals said that they would address taxation of employee stock options, and it's really been quiet on that front since 2015. The whole issue here is there's favorable tax treatment for employees who have stock options, and that favorable tax treatment comes in the form of more favorable tax treatment when you exercise those options. It isn't capital gains treatment, but it's similar taxation where the income inclusion that you would face on exercise would only be half of what it would be in income scenario.
Frank DiPietro: The government feels right now that that preferential tax treatment is really being taken advantage of primarily by employees of large, mature, long-established businesses. This government feels that that preferential tax treatment really should be designed for younger growing businesses. They feel that not the right people are utilizing this preferential tax treatment. So, the government is looking to make changes to ensure that those employees of large, mature businesses don't have access, as much access, to that preferential tax treatment while maintaining those preferences for younger companies that are looking to grow.
Frank DiPietro: Now, what's important to note, there was a lot of media around this after the budget, and it's a very important point to highlight that there was actually no budget proposal. There was no legislative proposal on this, but what they did indicate was that proposals are coming, and they're coming before summer 2019. So, we could legitimately see any day now some legislation around how they are going to change the taxation of employee stock options for Canadians.
Clare O'Hara: Right. Georgina, any thoughts on that?
Georgina Blanas: I think there's too much of a target, and I think if you're going to soften up any tax savings, you do need to help new businesses as well, but I don't think those that are in business and have been in business for a while need to be penalized. I think everybody needs to have skin in the game, so if you're going to tax, tax fairly as well. We also have to realize if we're looking at that 1% of the sector, really who is that 1% of the sector really, in terms of the "wealthiest," which puts the whole conversation into a family class division, in terms of who is what, and how is it redefined? Because, really, we need to be redefining what that is because those earnings, certain incomes today, really fall into the lower-class, middle-class spectrum, and then below the poverty line, in terms of those that are investing and who you're taxing.
Georgina Blanas: At the end of the day, we have to remain competitive with those internationally and also realize the international agreements that we've entered around the world, and what does that mean? If we keep closing things, we're just suffocating our own economy and our own system as opposed to opening it up a little bit more and providing an economically sound economy where people can actually function. I would say don't put burden on those companies that have been around for a long time. Give them more tools to grow and expand and help new businesses and startups be innovative and keep them here and provide that platform to do so. Why have those companies leave? We, in the capital markets area, as you know, as advisors, we fuel that, and to see the money flee when we can be successful here and actually grow is important. We support our advisors, in terms of the education that's given, but when it comes to this, allow more openness instead of strings.
Clare O'Hara: Wilmot, are there any speculation of what the changes coming would be?
Wilmot George: With respect to the stock options?
Clare O'Hara: Yeah.
Wilmot George: Well, the government has indicated that they're going to put a cap on how much of a tax break individual will be able to get. I think that's the long and short of it, right? When you engage or you receive stock options, stock options are taxed preferentially. You've got capital gains type tax treatment. Well, the government is saying, "Look. We don't believe that everybody who has these stock options should receive capital gains treatment. We believe that high-income individuals are benefiting the most from this particular provision," and the government doesn't feel that that's appropriate.
Wilmot George: Whether we agree or disagree with that, that's a political conversation. But the government has decided that they're not going to take away that preferential tax treatment right across the board. They still want to provide that incentive for smaller businesses, but for those who are part of those larger businesses and you're benefiting from stock options, there's going to be a cap on your tax efficiency related to those products.
Frank DiPietro: So the number they floated is 200,000.
Wilmot George: Right.
Frank DiPietro: Right? Based on the value of the stock options at the time of grants.
Wilmot George: Right.
Frank DiPietro: But again, that's just what's been floated in the budget documents. There's no legislative proposals around that, so we'll need to wait and see what their official plan is, and hopefully we'll likely see that soon.
Wilmot George: To come back to something Frank said earlier on, he said the government has these ideas, and they don't always introduce their ideas when it's dreamt up. Sometimes they think about these ideas, and they put little feelers out there, and then they make the change two or three or four years down the road. I remember talking about stock options. I think this governments talked about it for years-
Frank DiPietro: Since 2015.
Wilmot George:... and had an issue with stock options, but it's only now we're starting to get a clearer picture on what they plan to do with it. So, we'll see.
Clare O'Hara: Right. Now I'm going to segue over to the recently tabled Ontario provincial budget for a moment. This budget also did not propose any changes to the personal and corporate tax rates, but it did make a change to the Ontario probate rates. Wilmot, I want to continue with you, and can you describe what probate is and how it's going to impact Canadians?
Wilmot George: Yeah. When I talk about probate tax specifically as it relates to those in Ontario, I often use an example. If I've got $100,000 sitting in a non-registered account in my name, and I was to pass away, well, the first thing is I'd hope that my spouse would take some time to mourn before she contacts the financial institution to move that money. So, let's assume that she does that, and then she contacts the institution and says, "Hey. Wilmot had this account, $100,000, at X financial institution." Financial institution's going to say, "Sorry for your loss." My spouse is going to say, "Hey. Here's his will, and his will shows you that I'm the executor. His will also shows you that the beneficiary of his assets is X person, so I want you to move that money." Financial institution's going to say, "I see you have a will, but because of the value of the account, we would like to see a probated will."
Wilmot George: So now my spouse has to take that will, and she would engage the Ontario government, and the Ontario government would look at it, confirm that's a legitimate will, put their stamp of approval on it, and then my spouse can take that will, approach the financial institution and say, "Here you go. Here's your probated will," and the money gets moved. But, of course, the Ontario government doesn't review that will, put their stamp of approval on it, for free.
Georgina Blanas: No.
Wilmot George: There's a fee associated with that, and that's this probate fee, this estate administration tax, as it's called in Ontario. Under current rules, the tax is half a percent for the first $50,000 of an estate value and 1.5% for amounts beyond that. What this government has said is they said that they want to cut the estate administration tax. So, what they're doing is for the first $50,000 of estate value, they're eliminating that half a percent. The estate tax is going to be on any amounts that are in excess of $50,000, and that'll remain at 1.5%. At the end of the day, what this amounts to is a $250 savings for families, but the Ontario government believes that that is a step in the right direction, they believe, and they believe that it'll be helpful for families at that time, so that's what it is.
Frank DiPietro: And that's beginning next year, right?
Wilmot George: Correct.
Frank DiPietro: That's January 1st of 2020.
Wilmot George: Yes, I believe that's the case.
Georgina Blanas: Yeah. The other positive thing is ... You touched upon it, Wilmot ... is that they've lengthened the time as well to 180 days. You hope somebody has the time to mourn so that they can actually then afterwards do the paperwork. So, the one positive thing as well, it's widened the gap, widened the timeline in order to move that process forward. I thought that was a good touch in that area, because it went from 90 days to 180 days.
Wilmot George: Right. Yeah, there's some paperwork requirements around that, and there was a 90-day timeframe to complete what we call the estate information return. What they've done is they've extended that period from 90 to 180 days, so they provided some flexibility in that regard.
Clare O'Hara: Great. One of my final questions here has to do around, I guess, certain tax advantages in the mutual fund industry. This budget proposed changes for certain strategies that were employed by some mutual funds and exchange-traded funds. That offered investors certain tax advantages in their strategies. I'm just wondering if you can provide a bit of background on that, and where do things stand? Because it is being talked a lot about in the industry, but as we've said in the past, it's all about the details, and it appears that the details are not there yet.
Wilmot George: Yeah.
Clare O'Hara: Wilmot, I'll start with you.
Wilmot George: Yeah. I think when it comes to mutual funds, ETFs, certainly these vehicles want to be as efficient as they can for investors, and there are certain strategies that you can engage to ensure efficiency. When it comes to mutual funds, there are some cases where there's the potential for double taxation, and there are some strategies that you can engage to reduce double taxation. There's a number of strategies that you can engage, but in recent years, there's been a new strategy that's come up that some financial institutions have been using to minimize double taxation. The government apparently doesn't like that strategy anymore, so they've said that they're going to take away that particular strategy, but there's still other strategies that are there, available to avoid double taxation.
Wilmot George: With this change in the budget, I think mutual fund companies, ETF providers, are reviewing these changes, and we will see where we go from there. But I think the important message is that mutual funds, ETFs, again, they strive for tax efficiency, and there's a lot of legal things that we can do out there, and if the government doesn't like a particular strategy, then they try to change the rules. This is just a situation where they don't like a particular strategy, so on a go-forward basis, financial institutions will just have to review these changes, see what it means long term, and then just make changes accordingly.
Clare O'Hara: Right. Frank, from your point of view, anything to add.
Frank DiPietro: Yeah. Just to reiterate, I mean, this is again one of those loopholes that we've been talking about, and the government's trying to close certain loopholes. This is another one that, again, isn't across the board, across all mutual fund providers or all ETF providers. I think if you're a financial advisor, what you want to do is take a look at who the providers you use and what these specific tax rule changes mean to each one of those mutual fund or ETF providers, because they could be very different. For some providers who may have been using these strategies or methodologies for allocating distributions, it could severely impact them, and for others, like in our case, minimal impact. As a financial advisor, you probably just want to scope all your providers and ask the question, how does this rule impact my clients? I think that would be a fair question to ask each one of the providers.
Clare O'Hara: Great. Georgina, I'm going to ask, any final thoughts on the overall budget for this year before we sign off?
Georgina Blanas: Well, federally, the budget, we'll see what happens. It is an election year, going back, so a lot of things, depending on what's going to be passed, is going to look at the technical side of things, where on the provincial side, there's been some good news in terms of reduction of regulatory burden, which they've really listened to what we've had to say, looking at an economic growth strategy within the regulator, which is really important, and then also focusing on the investor, which is always on top of mind of our industry and our advisors as well. So, no news is good news in some ways, but also be aware in terms of who you're reelecting and what you want to consider in terms of where we're going and moving forward.
Clare O'Hara: Great. Wilmot, final thoughts?
Wilmot George: Well, you know what? Every year, there are federal budgets. There are provincial budgets. This stuff is changing all the time. I said it earlier on. I'll say it again. I think that financial advisors deliver great value, and it's tough to stay on top of all this stuff, but your financial advisor is paid to do that. So I think that this industry, as things continue to evolve, things continue to change, you're going to have financial advisors that are going to be educating and helping their clients with this stuff, and you're going to have different groups that are going to push back on the government in certain areas. I think that all makes for a good economy on a go-forward basis anyway.
Clare O'Hara: Great. Frank?
Frank DiPietro: Yeah. I think every year ... It's funny. You hear some colleagues or some advisors or people in the community say, "Well, from a tax perspective, this is going to be a nothing budget." In all the years that we've been doing this, it's never a nothing budget. There's always details. There's always changes to tax legislations, and as long as there will be, you and I will always have a job.
Wilmot George: Right.
Frank DiPietro: But the key to your point is the value of advice. I mean, financial advisors have a tremendous amount of responsibility in trying to stay on top of those changes and delivering true value to their clients, in terms of how to change the plan, tweak the plan accordingly to play within the rules. I think going forward, that won't change. There will always be change.
Clare O'Hara:Great, and I like your final thought of there's never a no-news budget.
Frank DiPietro:Right. There's never a no [crosstalk 01:04:10]
Wilmot George:Yeah, there's always something.
Clare O'Hara:That's a great place to end it. I want to thank all of you for joining us today and lending your voice in this discussion. I'm Clare O'Hara with The Globe and Mail, and you've been watching Asset TV's Federal Budget 2019 Masterclass.