How has the budget impacted Canadians’ retirement plans?

Tax and estate planning expert weighs in on targeted changes, expanded benefits, and helpful enhancements

How has the budget impacted Canadians’ retirement plans?

It may take some time for Canada’s investment and financial-planning professionals to fully digest the recently released federal budget. Weighing in at more than 700 pages, the budget has already been scrutinized by experts representing Canada’s retirees and pre-retirees – not just for what it includes, but also for what’s been left out.

“Prior to the budget, there was a ton of speculation among the tax community that tax rates would increase, especially for capital gains,” said Mariska Loeppky, director, Tax & Estate Planning at IG Wealth Management. “We currently pay tax on just half the gains, so there’s always a possibility for the government to change that, which they've done in the past (in 2000).”

The budget’s silence on capital gains was a welcome gift for many tax professionals and their clients. And contrary to some expectations set by the fall economic statement, it also left the principal residence exemption untouched, which Loeppky said is favourable for many house-rich Canadians heading into retirement.

“The tax measures were quite targeted, I thought,” she said. “There weren't any wide-sweeping changes, so that’s really helpful for people to know exactly what taxes they can project into the future.”

One notable inclusion in the budget was its tax on luxury vehicles, which includes automobiles that cost more than $100,000 or boats and planes with a price tag greater than $250,000. There’s also the additional tax on vacant real-estate properties owned by non-residents, which is unsurprising as house prices across Canada reach stratospheric levels from a confluence of low interest rates, increased savings among many Canadians, and constrained housing supply, to name just some factors.

In the shorter term, the budget also provided a measure of reassurance for Canadians who have been relying on COVID-related recovery benefits to get by. For seniors over 75 who are receiving Old Age Security, the federal government announced an additional $500 payment in August that won’t be subject to clawbacks or counted toward the threshold for receiving the Guaranteed Income Supplement.

“It feels like seniors might have had increased living expenses as a result of COVID, so that was definitely helpful,” Loeppky said. “OAS payments for pensioners who are 75 years old and above are also supposed to increase by 10% beginning in July 2022.”

Another gift from the federal government was its proposed changes to the criteria for the Disability Tax Credit, which represents a roughly $1,300 income tax deduction to qualified individuals. To qualify for the DTC today, an individual must be confirmed by a medical professional to suffer from a severe and prolonged impairment that limits their ability to perform basic activities of daily living. In the 2021 budget, the government is looking to expand its list of mental functions necessary for everyday life.

“They're using terms that are more clinically relevant, which will hopefully make it easier for doctors to assess whether you qualify, and the Canada Revenue Agency will be more able to easily approve that application,” Loeppky said. “That improves access for people who are eligible and qualify for the benefit.”

Arguably, a national childcare system was the biggest promise presented in the federal budget: it aims to cut childcare costs in half by the end of next year, and reduce it further down to $10 a day by fiscal 2025-26. While that won’t necessarily help pre-retirees in building their nest egg, Loeppky said it could help ease things for families where childcare tends to fall on the laps of elder generations.

As lengthy as the budget is, it still leaves plenty of room for future improvements. That includes a possible increase in contribution room for TFSAs, which have been making a bigger difference for retirees ever since their introduction in 2008. According to statistics released by the CRA in January, Canadians held more than 20 million TFSAs as of December 31, 2018, with a total fair market value of $298 billion.

“The annual contribution limit for TFSAs has been sitting at $6,000 a year for quite some time,” Loeppky said. “I think it’s been an overlooked vehicle that most people should use in their retirement planning, and allowing a little bit more money to go in those accounts could have a huge impact.”

While she conceded that the latest budget doesn’t have a negative impact on most retirees today, there’s still the question of whether it will affect future budgets. For the fiscal year 2020-2021 alone, the budget provides for a deficit of $354 billion dollars; consider the possibility of rising interest rates in the coming years, and you have the makings of a serious fiscal reckoning for future Canadians and retirees.

Of course, only time will tell. As important as it is to take a long-term view in financial planning, it can only go so far. Just as the COVID-19 pandemic derailed countless retirees’ travel plans this year, federal budgets can have a potentially transformative impact, which is why Loeppky encourages people to revisit their financial plans regularly.

“I think when something like the pandemic happens or when a new budget is announced, it's time to go back to the drawing board and ask what the impact is,” she said. “Whether or not they’ve been hit by big changes, we see a lot of people who are not necessarily confident that they’ve done enough to prepare themselves financially … I think being proactive and working with a professional goes a long way in addressing that fear.”

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