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What the federal budget means for you

Federal Finance Minister Bill Morneau presented the 2019 Budget Plan on March 19th. Compared to past years, there are few significant measures in this budget and no tax rate reductions for individuals or corporations. This post summarizes some of the federal budget changes that are relevant to our clients.

Limiting Employee Stock Options Benefits
Under the current tax rules, employee stock options receive preferential tax treatment. Generally, a stock option benefit realized by an employee on the exercise of stock options would be half-taxable, akin to capital gains.

The federal budget aims to limit the use of the current preferential tax treatment of stock options for the employees of “large, long-established, mature firms.” This preferential treatment would only be available on the stock option grants not exceeding $200,000 (based on the fair market value of the underlying shares). Any stock option benefit not eligible for preferential treatment, would be taxed as regular income.

The budget does not elaborate on the meaning of “large, long-established, mature firms” and indicates that further details will be released before the summer of 2019. Any changes would apply on a go-forward basis only and would not apply to employee stock options granted prior to the budget date.

These new rules would also not impact the unexercised stock options, which were granted to employees of large and mature firms. Also, employees of start-up and rapidly growing firms would be exempt from these rules.

Additional Annuity Choices for Registered Plans
Under the current tax rules, funds from certain registered plans, such as RRIFs, can be used to purchase an annuity to provide guaranteed income in retirement. The budget proposes to permit an advanced life deferred annuity (ALDA) to be a qualifying purchase. This annuity effectively allows a deferral of RRIF withdrawals, subject to certain limits, to the year in which the annuitant turns 85 years of age (as compared to 71 years of age, under the current rules).

While the tax treatment is favourable, an annuity may not be the best investment solution, given their cost and complexity and especially in the current environment of low interest rates. Alternative investment strategies may result in better after-tax outcomes.

Incentives for First-Time Homebuyers
The budget contains two separate incentives for individuals looking to purchase or build a home – good news for the young adults in our client families. First, the Home Buyers’ Plan (HBP) withdrawal limit would increase to $35,000 from $25,000. As a result, a couple could potentially withdraw $70,000 from their RRSPs to purchase their first home. However, the 15-year repayment period remains unchanged. The downside of this proposal is that young adults will be sacrificing more of their retirement savings for the purpose of purchasing a home.

Second, a new shared equity mortgage program administered by the Canada Mortgage and Housing Corporation (“CMHC”) is intended to help individuals lower their borrowing costs when purchasing their first home. Under the new program, qualified new buyers can receive a 10% shared equity mortgage for newly constructed homes or 5% for existing homes. This shared equity mortgage will be repayable when the property is sold in the future. The budget documents are silent on the specifics of repayment and whether CMHC will benefit from the appreciation of the house value. This incentive would be available to first time home buyers with household incomes under $120,000 per year.

If you have any questions on the federal budget and what these measures might mean for you, please feel free to get in touch any time.