Tuesday, June 19, 2018

Investment Wisdom

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Liberal victory or should you worry about the TFSA?

The Conservative decade is over.

The Liberals won all 33 seats in Atlantic Canada, and 184 overall, with 170 needed for a majority. Stephen Harper conceded to Justin Trudeau just after midnight, and Conservative Finance Minister Joe Oliver failed to win re-election in his riding of Eglinton-Lawrence.

What does the red wave mean for investors?

From a macro perspective, elections rarely impact the economy, and from a big-picture point of view, there’s really nothing to stress about.

As for taxes, the Liberals have promised to raise the tax rate for income above $200,000 to 33% from 29%. On a $250,000 income, this would mean paying up to $1,329.50 more. They would also lower the rate for income between $44,700 and $89,401 to 20.5% from 22%, for tax savings worth up to $670 a year per person.

Keith MacIntyre, national tax practice leader at Grant Thornton LLP, says advisors should tell business owners to review their compensation plans for 2015 in light of the four percentage-point tax rate increase.

It’ll probably take effect in 2016 since it’s unlikely the government will pass a budget before the end of the year, he says. So if clients have corporate structures, they should consider withdrawing higher salaries and/or bonuses this year.

TFSA rollback

Trudeau said his party would roll back the current $10,000 in annual TFSA room to $5,500. Assuming a 5% return and 30% tax, you’re looking at a difference of less than $70 in actual savings.

While it’s unlikely that the Liberals will make the $5,500 contribution limit retroactive to 2015, there is no tax on withdrawal if they do so. People aren’t going to face any tax burden for it. In that event withdrawing investments with gains, since losses within a TFSA cannot be applied against regular capital gains.

Other tax measures

Corporate executives should pay attention to what the government does with employee stock options, which it’s promised to tax fully. (There’s currently a 50% deduction on stock option income.) Businesses will probably wait for the budget.

Businesses are also interested to see if the small business deduction changes under a Trudeau regime. The Canadian Chamber of Commerce is looking for an increase to $1 million from $500,000, which could net CCPCs $70,000 per year. Liberals have said they support tax incentives for small businesses.

Political risk

Potential policy changes highlight the political risk associated with any investment or tax planning. Investors should be wary of what any particular government chooses to give, [knowing that] the next government can take it away.  Voters might get weary of the giving and taking of successive governments. We’d like to see “consistency and coherence” from elected officials going forward.

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