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Articles of Interest
Tax implications of the Liberal win
Here’s what your clients need to know
· By: Michelle Schriver
With the Liberal government re-elected, it’s time to consider how your clients’ taxes could be impacted by election promises.
However, keep in mind that, because the Liberals are now managing a minority government, the implementation of potential tax changes is less certain, says Debbie Pearl-Weinberg, executive director, tax and estate planning at CIBC Financial Planning and Advice.
Regarding corporations, she highlights the Liberals’ broad-based proposed changes. These include a promise to crack down on tax loopholes that allow companies to deduct debt from earnings to reduce tax.
“We’ll have to wait and see what those changes actually are,” she says.
She also notes the promise to cut corporate taxes by 50% for clean-tech companies, specifically those that develop and manufacture zero-emissions technology.
Changes to personal taxes
For personal taxes, several changes are in the works.
“What will impact the most Canadians is changes to the basic personal amount — the amount of income that any individual can earn that is not subject to tax,” Pearl-Weinberg says.
That amount is currently $12,069 in 2019 and rises annually with inflation. The Liberals have promised to increase it by 15% over four years. “By 2023, it will reach $15,000,” she says.
The increase isn’t universal. “It will not apply for those individuals who are described as being Canada’s wealthiest 1%,” she says.
The amount will be reduced for those earning more than $147,667 — those in the second-highest federal tax bracket — and completely eliminated for those in the top bracket, which is $210,371 in 2019.
Those in the top bracket will continue to receive the current basic personal amount, which will continue to be adjusted for inflation, Pearl-Weinberg says.
The Liberals also promised to boost Old Age Security (OAS) by 10% for seniors over age 75 who earn less than $77,580, and to raise the Canada Pension Plan (CPP) survivor’s benefits by 25%.
The change to OAS could mean an increase of $729 a year, according to the Liberals’ platform. “It will start in July 2020,” Pearl-Weinberg says.
With CPP, a spouse or common-law partner currently receives about 60% of what their deceased spouse or common-law partner received in benefits, she says. The promised increase could mean an additional $2,080 per year.
Parents have been promised that their maternity and parental benefits, received through employment insurance, will be tax-exempt at source, starting in 2020. The result would be about $1,800 more annually for someone receiving EI benefits who earns about $45,000 annually, Pearl-Weinberg says.
Adoptive parents could also see a change in their EI benefits, with the Liberals proposing a 15-week leave — the same length as for maternity leave.
The tax-free Canada Child Benefit is also slated for an increase for those with kids under one year old. The promise is to boost the benefit by 15%, resulting in an increase of up to $1,000. “Starting in July 2020, the base benefit should be $7,750 for these children,” Pearl-Weinberg said
The Liberals proposed to immediately double the tax-free Child Disability Benefit. The benefit applies to families caring for a child with a disability who is under age 18 and eligible for the disability tax credit. The Liberal platform said the increase could result in more than $2,800, to $5,664 annually.
Other tax highlights
A new vacancy tax would “limit the housing speculation that can drive up home prices,” the Liberal platform said. The residential tax would apply to vacant properties owned by non-resident non-Canadians.
Finally, the Liberals might move forward with two tax credits originally announced in the federal budget, Pearl-Weinberg says.
The Canada Training Credit was proposed to start in 2020, to help cover up to half of eligible tuition and fees associated with training. The credit could accumulate a balance up to a lifetime limit of $5,000.
The second is a non-refundable 15% credit for eligible digital news subscriptions. The credit is for a limited time, for amounts paid after 2019 and before 2025, and “is a maximum tax credit of $75 annually, to start in 2020,” she says.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.
Essential tax numbers: updated for 2020
Use this handy list of tax numbers as a quick reference
This article was updated on Nov. 27, 2019, to include 2020 numbers.
You have a lot to remember as an advisor, so we’ve assembled this reference list of tax numbers. We’ll update it as things change.
Working clients
- Maximum RRSP contribution: The maximum contribution for 2019 is $26,500; for 2020, $27,230.
- TFSA limit: In 2020, the annual limit is $6,000, for a total of $69,500 for someone who has never contributed and has been eligible for the TFSA since its introduction in 2009. The annual limit for 2019 is $6,000, for a total of $63,500 in room available in 2019 for someone who has been eligible since 2009.
- Maximum pensionable earnings: For 2020, the maximum pensionable earnings is $58,700 ($57,400 in 2019), and the basic exemption amount remains $3,500 for 2019 and 2020.
- Maximum EI insurable earnings: The maximum annual insurance earnings (federal) for 2020 is $54,200; for 2019, $53,100.
- Lifetime capital gains exemption: The lifetime capital gains exemption is $883,384 in 2020 and $866,912 in 2019.
- Low-interest loans: The current family loan rate is 2%.
- Home buyers’ amount: Did your client buy a home? He or she may be able to claim up to $5,000 of the purchase cost, and get a non-refundable tax credit of up to $750.
- Medical expenses threshold: For the 2020 tax year, the maximum is 3% of net income or $2,397, whichever is less. For 2019, the max is 3% or $2,352, whichever is less.
- Donation tax credits: After March 20, 2013, the first-time donor super credit is 25% for up to $1,000 in donations, for one tax year between 2013 and 2017. This program has now expired.
- Basic personal amount: For 2020, it’s $12,298, line 300. For 2019, it’s $12,069. (Note that the newly re-elected federal Liberal government promised to raise the basic personal amount over four years to reach $15,000, phasing out the benefits of the increase at incomes over $147,667.)
Older clients
- Age amount: Clients can claim this amount if they were 65 years of age or older on December 31 of the taxation year. The maximum amount they can claim in 2020 is $7,637; in 2019, it’s $7,494.
- Pension income amount: Clients may be able to claim up to $2,000 if they reported eligible pension, superannuation or annuity payments.
- OAS recovery threshold: If your client’s net world income exceeds $79,054 for 2020 and $77,580 for 2019, he or she may have to repay part of or the entire OAS pension.
Clients with children, dependants
- Canada caregiver credit: If you have a dependant who’s physically or mentally impaired, you may be able to claim up to an additional $2,182 in calculating certain non-refundable tax credits.
- Disability amount: The amount for 2020 is $8,576 (non-refundable credit; $8,416 in 2019), with a supplement up to $5,003 for those under 18 (the amount is reduced if child care expenses are claimed; $4,909 in 2019).
- Child disability benefit: The child disability benefit is a tax-free benefit of up to $2,886 (2020) for families who care for a child under age 18 with a severe and prolonged impairment in physical or mental functions. For 2019, the amount is $2,832.
- Canada child benefit: This non-taxable benefit was effective July 1, 2016, and replaced the universal child care benefit. In 2020, the maximum CCB benefit is $6,765 per child under age six and up to $5,708 per child aged six through 17. In 2019, those amounts are $6,639 per child under age six and up to $5,602 per child aged six through 17.
- Child care expense deduction limits: As of 2018, the maximum amounts that can be claimed are $8,000 for children under age seven, $5,000 for children aged seven through 16, and $11,000 for children who are eligible for the disability tax credit.
How past experience impacts investing decisions
Examining the connection between fear, memory and risk tolerance
· By: Mark Burgess
Most know-your-client forms don’t ask about the macroeconomic conditions during a client’s formative years. They don’t tend to inquire about the client’s taste for horror movies, either. Yet both may have something to say about risk tolerance.
The 2008 financial crisis is widely believed to have influenced millennials’ approach to risk. The same is said about those who lived through the Great Depression. A 2008 paper from researchers at Stanford University and the University of California, Berkeley1 found that while investors put more weight on recent stock-market returns than on distant performance, “experiences several decades ago still have some impact on current risk-taking of older households.”
A couple of more recent papers have examined how local economic hardship affects risk behaviour. In one, an economics professor from Simon Fraser University2 used data from Japan to show that men who experienced local economic shocks between the ages of 18 and 21 saw their risk aversion (as it applies to investments and self-employment) increase by roughly 0.2 standard deviations. The effect lasted into subjects’ thirties and forties. The author found the impact is most acute when the shock is experienced during the “impressionable years” of early adulthood.
The other paper, from a visiting business professor at Georgia Tech3 examining almost a century of U.S. data, found that state-level economic conditions during teenage years, especially, have a substantial impact on risk behaviour. “Individuals who begin their lives by observing an economic downturn remain pessimistic and risk averse with respect to investments over the course of their lifetimes,” the paper says, resulting in decreased stock investments and business ownership, and increased investment in low-interest savings accounts and home equity.
Professors of finance and psychology at the University of Pennsylvania4 provide the psychological background. The “retrieved-context theory” says that a present-day stock market loss can remind the investor of a previous loss. “The point is that memory itself produces a distorted database because the agent relives his worst fears when a stock market downturn occurs,” the paper says.
This can happen even when the new fear isn’t related to finance. Academics from the University of Chicago, Northwestern University and the Einaudi Institute for Economics and Finance in Rome5 examined 2009 data from an Italian bank and found that the financial crisis made clients more risk averse. While not revelatory on its own, they also found that those who didn’t actually experience financial loss felt the same increased risk aversion: those clients rebalanced their portfolios by selling risky assets, which the authors said is consistent with a fear-based model, showing they were emotionally affected by the crash even if it didn’t affect their bottom lines.
This led the researchers to examine the underlying emotion. They used an experiment with horror movies to show that fear alone, without any new information about the economy or stock market, affects risk behaviour.
A sample of students watched a five-minute torture scene from Eli Roth’s 2005 movie Hostel. Those students exhibited higher risk aversion, very similar to what the bank clients had experienced in 2009: their certainty equivalent — the guaranteed return they would accept now rather than taking a chance on a higher, uncertain future return — was 27% lower than students who hadn’t watched the clip.
“Since the outside environment of the treated and non-treated sample is the same, the experiment is able to show that emotional fear (i.e., fear that is not related to changes in the outside environment), experienced at the time of the decision, causes an increase in risk aversion,” the paper says.
The UPenn authors said the response of students in the horror movie experiment is a good test of their retrieved-context theory. “It is as if the movie reminds the agent that the world is a risky place, and one thus should not take risks with one’s financial wealth,” the paper says. The context should be irrelevant, but it isn’t.
What does this mean for your clients? First of all, it’s worth discussing how the economic climate during the client’s formative years may inform their investment approach.
It may also be useful to find out what a client has been doing the day of a meeting. Were there layoffs at their company? Was a child hospitalized for a concussion? Were they nearly run over by a cement truck crossing the street to your office? Are they arriving directly from a Hostel marathon at the local independent cinema? If watching five minutes of a scary movie impacts risk tolerance, consider all the real-world concerns that could be distracting the person sitting across from you.
Papers discussed
1. Ulrike Malmendier and Stefan Nagel, “Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?” National Bureau of Economic Research Working Paper No. 14813 (March 2009).
2. Hitoshi Shigeoka, “Long-Term Consequences of Growing up in a Recession on Risk Preferences,” National Bureau of Economic Research Working Paper No. 26352 (October 2019).
3. Erin McGuire, “The Long-Run Influence of Local Economic Conditions on Financial Decision-Making,” SSRN (May 2019).
4. Jessica A. Wachter and Michael Jacob Kahana, “A Retrieved-Context Theory of Finance Decisions,” National Bureau of Economic Research Working Paper No. 26200 (August 2019).
5. Luigi Guiso, Paola Sapienza and Luigi Zingales, “Time-Varying Risk Aversion,” National Bureau of Economic Research Working Paper No. 19284 (August 2013