Why Tuesday’s budget may not hold much good news for your personal finances

Financialpost.com
March 21, 2016
By Jonathan Chevreau

It’s with some trepidation that I contemplate Tuesday’s federal budget, the inaugural one from Prime Minister Justin Trudeau and his team.

Although I can draw some comfort from Finance Minister Bill Morneau, who knows the retirement scene well enough to have co-authored a book titled The Real Retirement with Morneau Shepell’s chief actuary Fred Vettese, from what has already been revealed in the weeks leading up to the budget, there appear to be real contradictions in the measures related to personal finance and retirement.

The introduction of a new top tax bracket for Canada’s highest earners, and a cut to the middle-class tax rate, was telegraphed during the election campaign, as was the move to lower the recently-raised contribution limit to the tax-free savings account. Then, last week, Trudeau confirmed that the government would roll the age of eligibility for Old Age Security benefits back to the existing 65, rather than continuing the gradual rise to 67, as the previous administration had planned.

Never mind the trend to extended longevity and the fact many other nations are raising their retirement ages; this pledge to hold the line at 65 was positioned as a good thing and evidence of the government’s concern over senior citizens, which increasingly includes baby boomers in various stages of departing the full-time workforce.

Most boomers would have received their OAS at 65 regardless, but if this minor measure reveals compassion to this cohort, how does that jibe with the retrenchment (almost halving) of the annual contribution limit for TFSAs? Or, to return to the subject of expected budget measures, the rumors that the capital gains tax inclusion rate may rise beyond the current 50 per cent, or other equally unwelcome tweaks to these rules, which could affect business owners, families with cottages and many other groups. Since Jamie Golombek’s column on the subject appeared in the Post two weeks ago, it’s been the no. 1 question the tax expert receives every day, he told me in a recent chat.

As to action you can take before 4 p.m. on Tuesday, I wouldn’t bend over backwards to escape a problem that may not materialize. Personally, last week I did take profits on a couple of non-registered Canadian stocks I viewed as being overweight in my overall portfolio but that was mostly because I needed a bit of cash for other purposes, not because I feared a capital gains tax apocalypse. We don’t know what is planned and whether the effective date of any measure would be Tuesday before or after 4 p.m., backdated to Jan. 1, or what.

Generally, I don’t think it’s something worth panicking over. Two aspects of capital gains tax are unlikely to change: first, remember that you only pay capital gains tax if you crystallize profits. As long as you just leave a (non-registered) position intact, there’s no tax event, except in so far as your position also generates dividends, which taxable event must be reported in your annual tax filings. Second, I very much doubt that there would be any changes to the current system whereby any profits can be offset by losses in other positions. Even if the inclusion rate were hiked back to 75%, it could be largely avoided by the “stand-pat” stance and offsetting gains with losses. I suppose the carry-back and carry-forward rules could be changed to our disadvantage, but again, who knows?

What would I like to see in the budget that I probably won’t? Clearly, raising the TFSA limit back to $10,000 is a futile hope, no matter how many petitions demand otherwise. I do find the combination of lowered TFSA limits and possible capital gains tax hikes to be worrisome, though. Legions of retirees and near-retirees do not enjoy the lucrative defined-benefit pensions that politicians and civil servants enjoy. That’s one of the points made by Working Canadians in its petition to bring back the $10,000 TFSA limit.

The rest of us are stuck with our RRSPs, TFSAs and non-registered savings to try to reproduce the worry-free income flow of DB pensions, but we’re caught between the rock of minuscule interest rates and the hard place of volatile stock markets. I’ve seen no trial balloon about higher RRSP limits or any other way to give some measure of pension parity to those lacking DB plans, so have scant hopes on that score.

True, a year ago in Budget 2015 we did get a bit of relief on withdrawal rules from Registered Retirement Income Funds (which is what many RRSPs become after age 71). As things stand, few fixed-income vehicles can generate the current 5.28 per cent annual (and taxable) initial withdrawal rate from RRIFs, but at least that’s better than the previous 7.38 per cent, which really did threaten the eventual erosion of nest eggs. But those lower withdrawal rates still rise precipitously to 18.8 per cent by age 94, so most RRIFs are still headed to zero if their owners live long enough.

I’m still hoping the government will scrap the minimum withdrawal altogether and let investors make their own decisions about when to take their money and have it taxed. But, I have little hope this will happen Tuesday.