Post-Budget Hot Topics: Discuss the Home Buyers’ Plan Now

The March 19, 2019 federal budget was released last week, and along with it came a few hot topics advisors should consider discussing with clients now. After all, proposed changes to the Home Buyers’ Plan, stock options, and mutual funds will affect Canadians and their wealth management strategies in the coming years. In this edition of KBR, we’ll take a deeper dive on the RRSP’s Home Buyers’ Plan.

One of the most discussed items to come out of the 2019 federal budget was the proposed changes to the Home Buyers’ Plan. For the RRSP Home Buyers’ Incentive, individuals with savings in their RRSPs will be able to tap into more of their savings on a tax -free basis under the Home Buyers’ Plan. An increase in withdrawal from $25,000 to $35,000 will be allowed; couples can thus withdraw up to $70,000 under the HBP. The increased withdrawal limit will also apply to the acquisition of a new home to be more accessible to a disabled person. However, the money will need to be repaid in 15 years or added to income, as per existing rules. This change will take effect after March 19, 2019.

Along with an increase to the limit on RRSP withdrawals within the Home Buyers’ Plan, the federal budget introduced new rules to include couples who experience a relationship breakdown. Effective after 2019, couples who separate or divorce may participate in the Home Buyers’ Plan as individuals even if they don’t otherwise qualify as a first-time buyer.

To qualify, an individual must be living apart from their former spouse or common-law partner at the time of the withdrawal and the separation must have occurred in the current or four preceding years. In addition, the taxpayer may not make a withdrawal if they move into a home owned and occupied by a new spouse or common-law partner.  Where the purpose of the HBP withdrawal is not to buy out the share of the residence owned by the former spouse or common-law partner, the former principal residence must be disposed of no later than two years after the HBP withdrawal. Taxpayers who have an existing HBP balance may not make a new HBP plan withdrawal until the former plan withdrawal is repaid.

In an attempt to make buying a first home a little more attainable, the March 2019 federal budget also announced that CMHC will be offering a shared equity mortgage to qualifying home buyers. First-time home buyers whose household income is $120,000 or less may qualify for a CMHC shared equity mortgage of 5% of the cost of an existing home or 10% of the cost of a new home. To qualify, the CMHC insured mortgage plus the CMHC shared equity mortgage must be less than four times their annual income. 

There will be no payments or interest accruing on the shared equity mortgage, but it must be repaid when the home is sold. It remains unclear whether the amount to be repaid on sale is the original amount provided by CMHC or a percentage of the sales price equivalent to the percentage of the equity invested. The program details are to be released later, but it is expected to be operational by September 2019. 

Information compiled from our Special Budget Report by Christine Steendam, Assistant Publisher at Knowledge Bureau.

Charitable Sector Reform: CRA Lifts Suspension on Audits and Restriction on Political Activities

The nature of the charitable sector is changing in Canada. On March 7, 2019, the Minister of National Revenue issued four key recommendations for the administration of new rules relating to the political activities of charities. Some in the sector are rejoicing, but others are wondering about the long term impact of the changes.

The big news: policy development and discussions relevant to their charitable activities can now can be pursued without limitation, as long as the charitable organization operates exclusively for philanthropic purposes.

New legislation, passed on December 13, 2018, will apply retroactively to September 14, 2018 and now allows CRA to lift a suspension of audits in progress in the interim pending guidance on the implementation of these new rules. Those charities will hear from the government shortly on the status of their files. Here’s a synopsis of the recommendations for change in the charitable sector:

Charitable Purpose. CRA’s first recommendation allows charities to engage in the development of public policy and development without limitation, provided these activities are carried out exclusively for a stated charitable purpose. The CRA has developed and published a guidance document on the administration of this policy, which is open for feedback until April 23, 2019. 

Outreach Funding. Through its second recommendation, the government will provide up to $5.3 million in new funding in the period 2018-2019 to 2023-2024 to enhance charitable sector outreach, as well as education and internal education for employees. It will conduct in-person visits with registered charities to provide support that will help them meet obligations to maintain their charitable status.

Charitable Activities. Recommendation 3 discusses changes to the rules that govern the political activities of charities. With Royal Assent on December 13, 2018, the new rules explicitly allows charities to fully engage (without limitation) in political activities. However, they must further a stated charitable purpose and cannot support or oppose any political party or candidate for public office, directly or indirectly.

Jurisprudence. The government  has also decided to discontinue its appeal of the decision in Canada Without Poverty v. AG Canada case which which restricted registered charities from participating in political activities that exceed 10% of its resources. This Ontario case was overturned as the legislative provisions at issue in the litigation are no longer applicable following the above-mentioned changes. This decision is controversial to some; the reasons for which are well outlined in an article from Mark Blumberg, July 2018.

To assist with the new landscape, Recommendation 4 establishes a permanent Advisory Committee on the Charitable Sector (ACCS) to provide recommendations to the Minister of National Revenue “on important and emerging issues facing charities and qualified donees on an ongoing basis.”

The Government is also providing $3.2 million in new funding to the CRA over the 2018–2019 to 2023–2024 period to support the ACCS in strengthening the relationship between the government and the charitable sector.  

Knowledge Bureau Report is interested on your take on the matter. At its core, the issue encircles the question: which political views should be subsidized through the tax system and which should not?

You may wish to weigh in on the issue, as readers did when we asked our readers their views about changes to the charitable donations tax credit (see results of our previous poll.)   At that time, financial professionals largely indicated that they were in opposition to new donation tax credits for a new category of donees that are non-profit journalism organizations that produce a wide variety of news and information.  These organizations will be able to now issue receipts in the same manner as other registered charities.  

Meanwhile, here is a timeline issued by the government on how this charitable sector reform unfolded:

  • Fall 2016: The CRA held online and in-person consultations
  • September 2016: The Consultation Panel was established
  • May 2017: The Minister welcomed the Panel Report on the public consultations on charities and political activities and asked the CRA to suspend all action related to the remaining audits and objections under the Political Activities Audit Program
  • August 2018: Statement by the Minister of Finance and Minister of National Revenue on removing restrictions on political activities of charities
  • October 29, 2018: New legislation was tabled
  • November 21, 2018: The government announced the creation of a new permanent Advisory Committee on the Charitable Sector (ACCS) as part of Fall Economic Statement 2018
  • December 13, 2018: New legislation received Royal Assent

Knowledge Bureau Poll: High Tax Refunds Spur Controversy

Is the tax refund a good thing? It’s a question that spurred a great debate in February’s Knowledge Bureau poll when we asked tax and financial professionals whether or not the withholding taxes that lead to a tax refund should be reduced to help taxpayers save or pay down debt. Did the no side or the yes side win? You’ll be surprised by the results.

While the votes were split almost down the middle (58% no, 42% yes, from a total of 266 votes), the comments revealed that most agree about one fundamental concept: having taxpayers receive such large refunds means that the government is getting significant interest-free loans from taxpayers, and that’s not ideal.

The debate itself came down to a behavioral finance factor: taxpayers look forward to these returns and factor them into their financial planning each year, whether it’s the most strategic approach or not. So, reducing CRA tax withholdings means that many advisors have to re-align their clients’ way of thinking and their approach to money management – and they were divided on whether or not that could be effective.

Read on for more insight from February’s poll, starting with some comments from respondents who voted “no”:

Cindy outlined why having the extra cash flow monthly might be ineffective: “I wish I could say yes, but a lot of Canadians are not responsible enough to use the extra monthly cash in a beneficial way.”

Clare gave a succinct summary of why this is such a highly-debated issue: “Most prefer to have the refund, it has turned into a short-term savings account. Maybe we should encourage the CRA to pay interest on the refund. It would push the CRA to reduce the amount of taxes taken as they won’t want to pay interest, but recognize the amount as a true short-term savings account for the taxpayer.”

Joanne agreed, explaining that she’s tried to re-align her clients’ perceptions about the tax refund: “In spite of advice to the contrary, many clients still want the refund at the end of the year. Their idea of a reward at tax time or forced savings. I do, however, explain their options and the reasons.”

Mitzi-Lynne used an important example to highlight why she voted no:  “I thought about this and I don’t think it would help, except in very rare cases. My clients all want that refund at tax filing time. If the deductions were used to reduce taxes paycheque by paycheque, the bills would still pile up, the bit extra on the paycheque would be spent on trivialities, nothing would get saved and at the end of the year there would be zero refund. Typically, my clients claim the Northern Resident Deduction. They could get this benefit paycheque by paycheque by putting it on the TD1, but they kick up dust at tax time because don’t understand that they already had that benefit, (and wasted it!) and you only get it once.  I think that reducing the tax payments over the year would not benefit many people. It may be better that we try to do a bit towards saving them from themselves.”

Daniel stated that there could be repercussions if the government stops withholding too much tax: “I think the tax refund scenario is a win-win for everyone. The government gets the free use of our money for part of a year, and we get a forced savings with a lump-sum payout at the end of the year. If not withheld from paycheques, many taxpayers would spend it all as soon as they receive it anyway. And if the government didn’t get the free use of our money throughout the year, they would instead need to raise the tax rates. Would we like that any better?”

Frank said: “While a lesser refund would totally make sense, since it is the taxpayer’s money the government is working with, many people would not really benefit from it. Many taxpayers wait for that cash tax refund to make a purchase or go on vacation. All of these taxpayers who expect that refund would not save a dime during the year. Without this little bright light of the refund, they may not ever make their purchase, take their vacation, or worse, pay down debt.”

Tim explained how it may depend on the circumstances:  “I would like to know what deductions and/or credits are being claimed to generate the $1,700 refund. Is this a one-time RRSP purchase in February? If so, the CRA had use of the refund for only about two months. Even if it was monthly contributions out of your bank account and not through work, average it out over the year and, really, how much interest are you losing? Is it from a year-end charitable donation? Again, not really much interest lost. If it’s a disability credit claim for a dependent or spouse, then, yes, the TD1 should be filled out and given to your employer to reduce tax withholdings.”

Alice pointed out that reducing withholdings risks that taxpayers will owe: “I would hesitate to recommend lowering withholding taxes, as it may create owing tax at the end of the year and this is very hard for taxpayers to deal with. I always find there are employees who ask to have more tax taken off each paycheque.”

Jo agreed: “I would hesitate to recommend lowering withholding, as I have worked with too many clients who depend on the ‘Rev Can savings plan’ and for whom actually owing would be a disaster. Indeed, when doing payroll, I always find there are employees who ask to have more tax taken off each paycheque. It is easy to look at this $1,700-plus as a ‘wasted’ opportunity but — especially for those taxpayers who don’t have that much discretionary income — this is the best way for a lot of people to accumulate some savings.”

Gaetan stated: “In my 35+ years as a tax accountant, the vast majority of my clients (90%+) want to see a refund from their tax return filing. The reason for this is that they see the refund as a tax-free “bonus” part of their income. They do not see it as paying too much in income taxes. Many of my clients actually rely on a tax refund to finance their vacations, home renovations, etc. If their tax deductions are reduced at source (from their paycheques), their standard of spending will simply increase accordingly. They see their refund as a type of ‘forced’ savings tool. Even after I explain to my clients that this means the government had their hard-earned money for more than 12 months, interest-free. My clients simply want a refund every year!”

Here are some comments from those who voted “yes” – which weren’t that different from many of the “no’s,” demonstrating why this is such a complex issue to debate.

Leanor indicated how addressing this issue with business clients opens up a whole different conversation: “You are all looking at the individual taxpayer, but what about the business taxpayer, who pays monthly corporate tax on the basis of the profit of the previous year end—business becomes slow so very little profit, but you have paid monthly to the CRA. Try getting that back in a timely period after you have filed your year-end—you will no doubt expect an audit as they hate to give up money paid in two years ago. Expect an audit which is very time consuming and a great expense to the business owner. CRA would give you penalties back to each month’s corporate tax bill if it wasn’t correct by their auditors.”

Ron explained that from a professional standpoint it makes sense, but he is concerned about the impact it would have on taxpayers: “Yes I think withholdings should be reduced, but there are just so many folks out there that use their tax refund as their savings account! And they will be happy with a big refund rather than the smaller amounts they would get each month, which would then just get spent! Many treat that refund much more wisely than they would with an extra few dollars on their paycheques!”

Prith said “yes,” but added that the CRA needs to introduce a more comprehensive assessment: “We need comprehensive assessment, it would make more sense. Then, the people who know they have high medical could use those to bring down their withholding.”

Doris agreed: “There are things that bring down your tax over and above the items listed on the TD1. If that was more comprehensive, it would make more sense. Then the people who consistently tithe, or know they have high medical, could use those to bring down their withholding.”

Pat said it would help seniors, in particular: “I suggest to seniors who get a refund that they should reduce it. Better to have the money monthly. I usually tell them it is better they get to spend their money than their heirs. Also, in BC, after the age of 55 we can defer our property taxes. It really helps!”

Heather pointed out how reducing withholdings demands professional advice: “Advisors, both tax and planners, should be working with their clients to update the TD1 each year. Another value-add that gets missed too often.”

Martin outlined the challenges, and offered a solution: “Yes, withholding should be reduced a little. It’s a free loan to the government. Having said that, however, many taxpayers would not reduce debt or save it, but consider it just more cash in their pocket to be spent. They just wouldn’t have to wait until the following April to receive it. A person can already ‘reduce tax deductions at source,’ if they make arrangements to make contributions to an RRSP and have their employer fill out the form. That way, it is a forced savings.”

Thank you to everyone who weighed in on February’s highly-debated poll question! This month, we’re changing gears and asking: In your opinion, is it as difficult to envision life after retirement as it is to save for it?” Vote now!