Earlier this week, the Federal Liberal Government tabled their election-year budget, albeit through historically unorthodox methods. As expected, several measures were included that were designed to appeal to voters, especially the segments that the current government had seemingly lost approval with. Despite being announced for this election year, many of the most significant proposals will not take effect until after the election, in 2020 and beyond. The proverbial carrot, you could call it. Furthermore, some of the big initiatives, namely housing affordability and National Pharmacare, were also less defined and work will be required prior to them being instituted - should the Liberals be afforded another mandate by Canadians.

The key items that have a direct impact on our clients, within the framework of our wealth management activities, are few. Here there are a couple of the most important measures introduced this week:

Home Buyers Plan (HBP)

From a financial planning standpoint, this measure should have the biggest impact on our clients, as far as we can tell. Starting after March 19, first-time homebuyers will be able to access $35,000 from their RRSP’s to buy a home, which is a $10,000 increase on the previous maximum. This can be combined with a spouse, allowing a total of $70,000 towards a down payment.

Annuities

Deferred annuities have not been allowed for purchase in registered plans, however this budget includes a proposal for them to be purchased within certain types registered plans. These annuities can be deferred until age 85 and will not be included in the regular minimum RRIF payment calculation after the year in which are purchased.

There will be a limitation in that only 25% of a qualifying plan can be allocated to them, up to a lifetime limit of $150,000. This lifetime limit will be indexed to inflation after 2020 and rounded to the nearest $10,000.

Registered Disability Savings Plan (RDSP)

More flexibility will be introduced to RDSP’s, in terms of the length of time that they can remain open after losing the Disability Tax Credit (DTC). Essentially, the RDSP can now remain open indefinitely and withdraws after eligibility will remain subject to the current proportional repayment rule and the holdback amount of the grant and bond will be based on the beneficiary’s age.

The plans will remain eligible for a rollover of a deceased individual’s RRSP or RRIF to a RDSP of a financially dependent, infirm child or grandchild, only if it occurs within four years of loss of the DTC. These new rules will take effect in 2020 and an RDSP issuer will not be required to close an RDSP on or after the budget and before 2021 because the beneficiary is no longer eligible for the DTC.

Individual Pension Plans (IPP’s)

In the past, some members of IPP would transfer the full commuted value of a plan to a new plan sponsored by another employer. This planning strategy was used to allow the full value of the plan to be deferred, as opposed to just the qualifying transfer that would normally be transferred to a registered plan and non-qualifying portion that would have to be taken as income. Post March 19, 2019 any transfers of this sort will also require the non-qualifying portion to be transferred out and taken as income and just the qualifying portion can be transferred to the new employer’s plan.

Character Conversion Full Closure

The budget is closing a loophole from a previous budget that disallowed character conversion transactions or, as the late Jim Flaherty called it, converting vinegar to wine. This loophole is largely used by ETFs to allow a character-conversion transaction that allows redeeming unit holders to inappropriately defer tax, that is ordinarily taxable income, into capital gains that are taxed a lower rate.

To be clear, this has no impact on the corporate class funds and private pools that are being used within our investment portfolios.

First-Time Home Buyers Incentive

Of all the budget measures that relate to wealth planning, this is by far the one that has the least definition around it and will need a greater clarification before being implemented. This proposal is set to begin after the election and, if I was a betting man, I would speculate that it would not be legislated if a different government was formed. In general, it allows a prospective home buyer to receive an interest-free loan of up to 10% of a new home and 5% of an existing build from CMHC. To be eligible for the incentive, the first-time home buyer’s household incomes must be less than $120,000 and the insured incentive amount must not exceed 4x annual income. Essentially, this caps the house price at $500,000 as the 5% down payment will still be required.

The details of this plan are very foggy at this point. Many questions remain as to when the incentive loan needs to be paid back, if there is any tax on the incentive during the period that it remains unpaid, whether the government will receive 5% or 10% of the sale value when the home is sold (thus making it an equity stake in the home), or if it is merely an interest-free loan and the government just has to be repaid in full.

Please let us know if you have any questions on the budget and how the proposal may impact your personal finances or future financial decisions. As always, we are here to help!