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Advisor Insights

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4 budget changes you need to know now

The Liberal budget didn’t have a lot of surprises, but there are still a few things that could impact your clients’ fortunes.

By: SARAH BARMAK

Date: March 24, 2016

Not surprisingly, infrastructure spending and deficits were the main attraction in the Liberal’s first budget – the government’s promised to spend $11.9 billion on infrastructure projects over the next two to five years and run $29 billion deficit this year – but there were also a few announcements that could impact your clients.

Some announcements were expected, such as changes to income tax and the creation of a $200,000 plus tax bracket, but others were unexpected. Here are four important budget points that you need to keep in mind.

No more corporate class

This came as a big surprise to many in the investment business. Corporate class funds have allowed investors to switch between securities on a tax-deferred basis.

For instance, if someone wanted to move from, say, a growth equity fund to a more large-cap defensive portfolio they could do so without triggering gains as long as both funds were under a corporate class umbrella.

That benefit will disappear on October 1.

“It will affect accounts over the long-term,” says Peter Bowen, vice president of Tax and Retirement Research at Fidelity Investments Canada.

Fortunately, advisors have six months to sit down with their clients, review their portfolios and reposition them as appropriate before this new rule takes affect. Any chances made before October can still be done on a tax-deferred basis, says Mr. Bowen.

Corporate class funds will retain some benefits after the October deadline, he says. These funds will still come with reduced taxable distributions compared to funds that are structured conventionally.

Investors can also continue getting cash flow out of a fund on a tax-deferred basis through the use of a tax efficient systematic withdrawal plan (T-SWP), often referred to as a T-Series fund.

However, advisors should remember that they shouldn’t be investing simply for tax purposes anyway.

“The investment merits of the particular investment funds that people are in should not be lost sight of,” says Mr. Bowen. “Tax efficiency is important, but so is investment performance.”

Removal of capital gains on linked notes

While it’s not the most common investment, many advisors do make use of linked notes. This is an income-producing vehicle that’s tied to a security or a basket of securities, like stocks or commodities. It’s similar to a bond in that it has a maturity date, but you can also sell it before that date and receive capital gains.

Up until now, any money made at the maturity date would be taxed as income. Sell it before that date and those dollars would be treated as capital gains, which receives a more favourable tax treatment.

Now, though, “if you sell prior to maturity, you will still have to treat the return as interest income,” says Mr. Bowen.

Again, there is a window of opportunity: The new rule only applies to sales of linked notes after September of this year. Consideration should be given to selling notes prior to the end of September to receive capital gains treatment.

When buying linked notes, advisors should ask themselves “what are the costs, what are the situations in which you get various returns?” says Mr. Bowen. “Both the advisor and the investors need to understand them because they have complicated features that aren’t often well understood.”

Goodbye Family Tax Cut

It only saved people about $2000 a year, but the ability for families with children under 18 to income split is no more.

There was plenty of controversy around the Family Tax Cut when the Conservative’s introduced it in October 2014. Many saw it as a tax break for wealthier individuals, which is in part why the Liberals eliminated it.

As tax time approaches, though, it’s important to remember that your clients can still take advantage of this tax break this year.

“We have one last kick at that can when filing our 2015 returns,” says Mr. Bowen.

Introducing the Canada Child Benefit

This won’t impact every client, but it could help some of the young families on your roster buy diapers or fund their RESP.

As expected, Liberals announced that they would be replacing the Universal Child Care Benefit and Canada Child Tax Benefit with one Canada Child Benefit.

Those earning less than $30,000 will get the most benefits – $6,400 per child under six and $5,400 per child between six and 17. That’s about $1500 more people in this income bracket would have received under the previous regime.

However, those making more than $30,000 will see those benefits gradually clawed back. Make $180,000 or more and you won’t receive a benefit at all. One plus, though, at least for those who receive the payments, is that they’re now tax free.

There are some other things to pay attention to as well, such as the the promise to review the Canada Pension Plan, the elimination of the fitness and arts tax credits and life insurance transfers to corporations.

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