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2016 Federal Budget: The Middle Class Budget

Posted under: FMV, IPP, News, RCA

On the election trail in 2015, the Liberal Party proposed a series of changes to eliminate certain benefits for higher income earners, to focus on cuts to the middle class and to increase spending on infrastructure and other special interest groups. On March 22, 2016 the first steps of this game plan were put into motion in a 2016 Federal Budget that also included $40 billion in additional measures spending over the next two years.

Initial announcements related to yesterday’s 2016 Federal Budget were made back in December. At that time, the Liberals raised the top federal marginal tax rate by 4% for taxable income above $200,000, and reduced the federal tax rate by 1.5% for income between $45,283 and $90,563. The Tax Free Savings Account limits were rolled back from $10,000 to $5,500. There were also measures to eliminate the Universal Child Care Benefit and Canada Child Tax Benefit and replace them with a tax-free income tested benefit.

How will the 2016 Federal Budget impact GBL solutions for you and your client?

More reasons to consider Individual Pension Plans (IPP) and Retirement Compensation Arrangements (RCA)

Firstly, the changes as to tax and dividend tax rates within the 2016 Federal Budget will make it even more imperative for advisors to find viable tax saving opportunities for their clients. This makes the use of Individual Pension Plans and Retirement Compensation Arrangements more desirable.

IPP contributions are made from pre-tax corporate income into a tax deferred and creditor proofed registered pension plan, where all expenses are deductible to the corporation. The pension income may be split with a lower income spouse in retirement. For taxpayers in Ontario it also offers a welcome alternative to the Ontario Registered Pension Plan (ORPP).

The RCA may be used by higher income earners who have an exit strategy outside of Canada in retirement, or who would be able to bracket manage their retirement income in a manner that is more tax efficient than a typical bonus out strategy.

Fair Market Values (FMV) of Life Insurance Policies

One major policy change was with regards to section 148(7)(9) with respect to the non-arm’s length transfer of a life insurance policy to a corporation by a shareholder at the Fair Market Value of the policy. Section 148 prior to the 2016 Federal Budget date permitted a policy to be transferred at its FMV with the only taxable amount being the excess of the cash surrender value (CSV) over the adjusted cost base (ACB). This resulted in the policy becoming corporately owned and funded rather than personally owned and funded, and also resulted in the withdrawal of tax-free money from the corporation.

The 2016 Federal Budget has now made the difference between the FMV, or any other consideration given for the policy and the ACB, a taxable disposition for transfers that occur on or after the budget date. An additional measure for policies transferred before the budget date is to subtract any consideration received above the CSV from the capital dividend account at death.

The measures outlined above have no impact on the use of the FMV for purposes of valuing a corporation’s shares, transfers from corporately owned to personal, for US Citizens owning Canadian policies residing in Canada and vice versa, and especially charitable giving.

For high-income earners, Professional Corporations, and entrepreneurs, the 2016 Federal Budget may have not created too many landmines but with rising taxes and fewer savings strategies, the need for prudent tax and planning strategies becomes even more necessary.