Potential Tax Implications in the Federal Budget 2019

Here is a summary of some of the changes announced in the Federal Budget which was presented on March 19, 2019.

1. Interest Rates and Repayments for Canadian Student Loans

In 2019-2020, the interest rate on Canada Student Loans will be lowered to Prime while the fixed interest rate will be lowered to Prime plus 2%. Right now the interest rate is Prime plus 2.5% and the fixed rate is Prime plus 5%.

This will let medical students decide if it is beneficial for them to convert any Ontario/Federal Student Loans to a bank line of credit because these loans will not accumulate any interest for 6 months after they leave school.

2. First Time Home Buyer Incentive

After March 19, 2019 the Home Buyers Plan (HBP) withdrawal limit for first-time buyers will increase to $35,000 (currently this limit is at $25,000).

The HBP rules have also been extended to allow people who have experienced a breakdown of marriage or common-law partnership to take part in the HBP even if they do not meet the requirements of first-time buyers.

Expected to start in September 2019, the Canada Mortgage and Housing Corporation will finance an equity loan of 10% for newly constructed houses and a 5% equity loan for existing construction. This incentive is for first-time buyers who have an annual family income of less than $120,000 and an insured mortgage of less than $480,000.

3. Character Conversion Transactions

The new changes in the Federal Budget will not allow taxpayers to use mutual funds and derivatives as a method of deferring tax. Also, these instruments will no longer be used to convert fully taxable ordinary income to capital gains which are taxed at a lower rate.

Mutual funds will also not be used to allocate capital gains or income to unitholders that can result in tax deferral opportunities. Before the new changes, these mutual funds had the potential to avoid the new passive investment income rules by deferring reporting of investment income.    

4. New Types of Annuities for Retired Individuals

According to the Federal Budget, an Advanced Life Deferred Annuity (ALDA) will let retired individuals enjoy additional deferral of tax within a registered retirement account until the end of the year in which they turn 85.

A lifetime ALDA limit will be equal to the lesser of 25% of the amounts which are held in the qualifying RRSP/RRIF plans and $150,000.

5. Canada Training Benefit

The Canada Training Benefit is a new skills training incentive which has been set up to help Canadian Workers cover the cost of trainings and take Employment Insurance-funded leaves from work to attend training.

A new training credit will be introduced for individuals between the ages of 25-64 who have annual earnings between $10,000 and $150,000. Individuals will be able to accumulate $250 per year up to a lifetime maximum of $5000 which can be claimed on their annual tax filing.

Medical residents can apply for this credit against a portion of the annual registration fees paid to their post-graduation training university. Accumulation of this tax credit will start in 2019 and credits can be applied in 2020.

Keep in mind that individuals will also be eligible for the Employment Insurance (EI) Training Support Benefit and will be able to take up to 4 weeks off within a four-year period at a 55% average weekly earnings. We can expect to see this benefit in 2020.

Employers can also expect an EI Small Business Premium Rebate in 2020. It will be available to any business that pays employee EI premiums equal to or less than $20,000 per year and will offset the expected increase in EI premiums.  

Feel free to contact us if you have any questions about how these changes might affect you.

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