2019 Federal Budget overview
This document was prepared by the Sun Life Wealth and Insurance Solutions Tax team at Sun Life Financial and is being reproduced with permission.
On March 19, 2019 Finance Minister Bill Morneau tabled the Liberal government’s last budget before Canadians go to the polls, probably this fall.
The Budget leaves corporate and personal tax rates and brackets unchanged. It also forecasts a $14.9 billion deficit for 2018-19, rising to $19.8 billion the following year, then declining to $9.8 billion by 2023-24. These compare to estimates of $18.1 billion and $17.5 billion respectively in last year’s Budget. There is no word on when federal finances will return to balance, but the Department of Finance projected a return to balance no earlier than 2040 in its “Update of Long-Term Economic and Fiscal Projections 2018”, issued in 2018.
The Budget provides many programs supporting the government’s commitment to helping middle class Canadians. We’ve summarized some of the major initiatives that we think you and Clients may be interested in.
Advanced Life Deferred annuity (ALDAs)
An ALDA helps cover the risk of outliving your retirement income. Put simply, the longer you live, the greater your risk of running out of income. Further, the likelihood of you needing extra care increases as you get older, putting even more pressure on your retirement income. Under current rules, a registered annuity has to start no later than the end of the year you turn age 71. But under the Budget proposal, an ALDA will start paying an income no later than the end of the year the annuitant reaches age 85. For most people, that’s when they likely won’t be able to return to work if they are running out of retirement income.
ALDAs will be allowed under the following plans: registered retirement savings plans (RRSP), registered retirement income funds (RRIF), deferred profit sharing plans (DPSP), pooled registered pension plans (PRPP) and defined contribution registered pension plans (RPP). Further, an ALDA won’t have to be included as an asset in those plans when determining the annuitant’s minimum formula amount.
The value of an ALDA will be limited to 25% of the registered account value at the end of the previous year plus any amounts used to buy ALDAs in previous years. This limit applies at the time of purchase; if a registered plan declines in value the annuitant won’t have to surrender any ALDAs. Additionally, a lifetime $150,000 limit applies, though the limit is indexed to inflation starting in 2021, rounded to the nearest $10,000.
To qualify as an ALDA, an annuity must meet the following requirements:
- Provide annual or more frequent payments for the life of the annuitant, or joint lives of the annuitant and spouse or common-law partner, starting no later than the end of the year the annuitant turns age 85.
- If the annuitant dies before the income commencement date, payments must commence to the joint annuitant by the date they would have commenced had the annuitant not died, though payments can be adjusted to reflect the fact that they will be based on a single life.
- An ALDA must make equal periodic payments, though payments can be indexed to changes in the consumer price index, or a fixed rate not to exceed 2% per year, and payments can reduce at the annuitant’s or spouse/common-law partner’s death.
- At the annuitant’s death, any lump sum death benefit can’t exceed the premium paid for the ALDA minus the sum of all payments received by the annuitant and joint annuitant, if applicable.
- If the premiums paid for an ALDA exceed the 25% or $150,000 limits noted above, the excess must be refundable. A 1% per month penalty tax will apply to the excess until it is removed. This penalty can be waived if the annuitant shows that the excess amount resulted from a reasonable error, and if the excess amount is removed by the end of the year following the year the excess payment was made.
- An ALDA can’t provide other benefits, such as a commutation or cash surrender payments, or payments under a guarantee period.
At the annuitant’s death, a surviving spouse can transfer the death benefit tax-free to their RRSP or RRIF (if they were the joint annuitant they could also take a continuation of income). A death benefit can also be transferred to a financially dependent child or grandchild where that child or grandchild is dependent on the annuitant because of mental or physical infirmity. If any other beneficiary receives the death benefit, the death benefit will be treated as income to the deceased annuitant in the year of death.
The Budget documents also say that additional rules may be included as necessary.
Variable Payment Life Annuity (VPLAs)
The tax rules will be changed to allow defined contribution registered pension plans and pooled registered pension plans to offer variable payment life annuities (VPLAs) directly to plan members. Previously, in-plan annuities, paid directly from the plan, have not been allowed. The only options for a member were to transfer their balances out of the plan to an RRSP or RRIF, take variable benefits from their plan, or use their balance to buy an annuity. A VPLA pays an income that varies depending on the investment performance of its underlying assets and the mortality experience of the VPLA annuitants.
A plan member will be able to acquire a VPLA only by transferring money from their existing PRPP or DC registered pension plan; they cannot purchase one directly. The requirements for them follow the registered plan rules and agree with some of the rules for ALDAs:
- Payments must start either by the end of the year the member attains age 71, or the end of the calendar year in which the VPLA is acquired.
- Payments must reflect the value of the amount transferred from the member’s account, according to generally accepted actuarial principles.
- A VPLA must provide annual or more frequent payments for the plan member’s life, or joint lives of the plan member and their spouse or common-law partner.
- Equal payments are required, although indexing to the CPI, or 2% fixed, are allowed, as is a reduction in payments at an annuitant’s death. Payments may also be adjusted annually to reflect the fund’s investment performance and the participants’ mortality experience.
Home Buyers’ Plan changes
The amount you can borrow from your RRSP under the home buyers’ plan limit will increase from $25,000 to $35,000, starting from Budget Day 2019. The $35,000 limit will also apply to those buying a home more suited to their needs, provided they qualify for the disability tax credit (DTC). The 15-year repayment period remains the same.
For Home Buyers’ Plan (HBP) withdrawals after 2019, the Budget also proposes extending access in situations where there is breakdown of marriage or common-law partnership, provided that (among other conditions) an individual is living separate and apart from the spouse or common-law partner at the time of the HBP withdrawal.
First Time Home Buyer Incentive
Under this initiative, a first time home buyer would need at least a 5% down payment towards the purchase of a home. The Canada Mortgage and Housing Corporation (CMHC) would then provide a home buyer incentive of 10% of the total purchase price in the case of a new build or 5% of the total purchase price in the case of an existing home. For example, to buy a $400,000 existing home, a purchaser would need a minimum $20,000 down. CMHC would put up another $20,000, so that the purchaser would have to finance only $360,000, not $380,000.CMHC’s contribution would not require interest payments, and could be repaid when the home is sold, or at any time before then.
Of course, not everyone will qualify. A first time home buyer’s household income cannot be over $120,000 per year, and their insured mortgage and incentive amount cannot exceed four times their household incomes. In the example above, the participants’ household income could not exceed $95,000 per year ($380,000 / 4).
Contributions to a Specified Multi-Employer Plan for Older Members
Currently, pension tax rules do not preclude those contributions in respect of specified multi-employer plan (SMEP) members who can no longer accrue further pension benefits (i.e. those contributions in respect of those receiving a pension from the plan or of workers over age 71). Budget 2019 proposes to prohibit such SMEP contributions made after the date a collective bargaining agreement is entered into, where the contributions are made pursuant to agreements entered into after 2019.
Pensionable Service under an Individual Pension Plan
An individual who terminates membership in a defined benefit registered pension plan (DBRPP) can make a tax-deferred transfer of:
- the full commuted value of the accrued benefits, to another defined benefit plan sponsored by another employer; or
- a portion (subject to a prescribed transfer limit, normally 50%) of the commuted value, to the member’s registered retirement savings plan or similar registered plan.
Presently, that terminating individual could potentially incorporate and control a private corporation, use it to establish and sponsor an Individual Pension Plan (IPP), and then transfer the pension entitlement from the former employer’s defined benefit plan into the IPP. Essentially, these individuals would be using an IPP to avoid the prescribed transfer limit (and thereby make transfers of full commuted value). The Budget would deem this type of transfer into an IPP (i.e. from a member of a defined benefit plan of a former employer, other than the IPP’s participating employer or its predecessor employer), to be a non-qualifying transfer that would be required to be included in the member’s income for tax purposes.
Regarding supporting the health and caregiver needs of Canadians, Budget 2019 announced the following targeted investments, tax relief clarification or strategic spending initiatives.
Kinship Care Providers
A number of provinces and territories offer kinship and close relationship care programs as alternatives to foster or other formal state care for children in need of protection. Budget 2019 proposes to amend the Income Tax Act (ITA) to clarify that a kinship care provider will be considered a parent for purposes of qualifying for the Canada Workers Benefit, and to clarify that financial assistance payments received by kinship care providers are neither taxable, nor treated as income for the purposes of determining entitlement to income tested benefits and credits under the ITA. These measures impact 2009 and later years.
Addressing Major Health Care Challenges
- In support of the National Strategy for Alzheimer’s Disease and Other Dementias Act, Budget 2019 will provide $50M over five years to support and implement a national strategy. Over 400,000 seniors live with dementia, a figure that has risen by 21% over the last 10 years (according to information taken from the Canadian Chronic Disease Surveillance System, April 2017, not including data from Saskatchewan, and reproduced in the Budget document).
- To help Canada move to a more co-ordinated and effective approach to organ donation and transplantation, Budget 2019 will provide Health Canada, in collaboration with provincial and territorial partners, with $36.5M over five years with the goal to ensure Canadians have timely and effective access to organ transplant care.
- To continue funding a comprehensive public health emergency response to Canada’s Opioid crisis, Budget 2019 will provide additional funding, beyond that earmarked in Budget 2017 and 2018, of $30.5M over the next five years. Such funding will support efforts to expand access to safe supply, and access to opioid overdose response training and Naloxone.
- To expand health related tax relief, Budget 2019 will relieve certain reproductive expenditures and certain foot care devices from being subject to GST/HST and expand GST/HST exempt health care services to include co-ordinated health care services provided by multidisciplinary health care teams includes a medical professional.
- Budget 2019 will provide $25M over 5 years to work with experienced and dedicated partners to support a pan-Canadian suicide prevention services and to leverage their existing services and experiences.
- To improve the outcomes for persons with intellectual disabilities and on the Autism Spectrum Disorder, Budget 2019 will provide $12M over 3 years to the Canadian Association for Community Living, in partnership with the Canadian Autism Spectrum Disorders Alliance to improve the employment outcomes for persons with intellectual disabilities and ASD.
Improvements to the Registered Disability Savings Plan (RDSP)
The RDSP was designed to help Canadians with severe disabilities and their families save for their long term financial security. Budget 2019 outlines two changes that the government expects will better protect and safeguard the long term savings of persons with disabilities. The two changes are eliminating the requirement to close an RDSP when a beneficiary no longer qualifies for the disability tax credit (DTC), and to protect RDSPs from seizure in bankruptcy, except for contributions made in the last 12 months, similar to the treatment that RRSPs currently enjoy. These measures are slated to be implemented in 2020, however an RDSP will not be forced to wind up on or after March 19, 2019 if the RDSP beneficiary is no longer eligible for the DTC.
Medical Expense Tax Credit (METC)
The METC is a non-refundable tax credit that provides relief to taxpayers who have significant medical, dental or health care related expenditures. Budget 2019 will expand the eligibility of Cannabis related purchases for the METC to align with Cannabis regulations.
Work continues on this initiative. In the 2018 Budget the government created an Advisory Council on the Implementation of National Pharmacare to begin a dialogue on moving forward with a national pharmacare program. The Council has not yet delivered its final report, but it has had consultations and has delivered an interim report. The government has announced that it is moving ahead with three initiatives:
- Canadian Drug Agency. This agency will assess the effectiveness of drugs and negotiate prescription drug prices on behalf of all Canadians, with a view to lowering the cost of those drugs.
- National Formulary. The effort here will be to create a consistent, evidence-based list of prescription drugs.
- National strategy for high-cost drugs for rare diseases. The government will work to develop a plan, in cooperation with the provinces, territories and other partners, to help ensure that patients with rare diseases have better and more consistent coverage.
For more information
For more information on the 2019 federal budget, please visit http://budget.gc.ca/2019/home-accueil-en.html.
This document was written by the Sun Life Wealth and Insurance Solutions Tax team at Sun Life Financial and is being repurposed by Sun Life Global Investments with permission. This document contains information in summary form. This document is provided for information purposes only and is not intended to provide specific individual financial, investment, tax or legal advice. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed by Sun Life Global Investments (Canada) Inc. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell.
Information contained in this document has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy. This document may contain forward-looking statements about the economy, and markets; their future performance, strategies or prospects. Forward-looking statements are not guarantees of future performance and are speculative in nature and cannot be relied upon.
Please speak with your professional advisors, such as your financial advisor or tax specialist, and refer to the Budget as published by the Government of Canada for details before acting on any of the information.
© Sun Life Global Investments (Canada) Inc., 2019.
Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies.