Election 2021: The More Things Change, the More They Stay the SameTuesday, September 21, 2021
I was going to title this article, “See my previous update from October 2019” and call it a day.
One must think that Prime Minister Justin Trudeau did not call an election during the fourth wave of the COVID-19 pandemic (“Election 2021”) just to win almost exactly the same number of seats that the Liberal Government won in 2019. And although not every vote has been counted as of September 21, 2021, it is clear that the Canadian political landscape is virtually unchanged from the day before.
What has changed? Spoiler alert; the tax on luxury cars, boats and planes is here to stay. Here are three things that everyone needs to know about the Liberal minority victory in Election 2021:
1. If You Are (or Want to Be) a Homeowner
If you are under 40 and want to buy your first home, there is help on the way. The Liberals will introduce a new tax-free First Home Savings Account (up to $40,000) to help younger Canadians afford a down payment faster. It is like a registered retirement savings plan combined with a tax-free savings account – money goes in tax free and comes out tax free. The Liberals will also double the existing Home Buyers’ credit, which allows first-time homebuyers to claim a non-refundable tax credit when they buy a home that is meant to help reduce the extra costs of buying a home.
For those wanting to sell their family home, it is advisable not to do so within 12 months of purchasing it (unless you want to pay tax or fit into one of the listed exceptions). The Liberals are set to introduce an anti-flipping measure on residential properties which would require homeowners to hold a property for at least 12 months before being able to utilize the principal residence exemption when they sell it.
2. If You Work for a Bank or are a Shareholder of a Bank
To help pay for the pandemic spending over the past two years (see No. 3 below), the Liberals will impose higher taxes on financial institutions’ earnings by introducing a corporate surtax of 3% on all bank and insurance company earnings in excess of $1 billion. The same companies would also be required to pay a special fee called a “Canada recovery dividend” over a four-year period. These two new measures would begin in 2022-23 and generate at least $2.5 billion over four years. Some commentators have noted that this surtax could lead to job cuts and higher borrowing costs as these institutions take steps to protect their profits.
3. If You are Wondering How All the Pandemic Spending Will Be Paid For
In April 2021, following the release of Budget 2021, Canada’s net debt was estimated to be over $1 trillion for the first time ever, with an expectation that it will rise with deficits of nearly $155 billion this year and $60 billion in 2022-23. The Liberals have promised $78 billion in new spending over the next five years but only $25.5 billion in new revenue. How will the Liberals pay for the spending and reduce the debt?
Besides the bank surtax as noted above, the Liberals will introduce a minimum effective tax rate of 15% for individuals with taxable income above the threshold for the top bracket ($222,661 for 2022). The Liberals are concerned that high earners are artificially lowering their taxable income through excessive use of deductions and credits. Canada already has an alternative minimum tax, which limits the tax deductions available from certain incentives. The minimum effective tax rate would raise $1.7 billion over five years, according to the Liberal’s projections. In addition, the Liberals will significantly increase the resources of the Canada Revenue Agency to combat aggressive tax planning and tax avoidance by the wealthiest Canadians, which is promised to produce at least $1.1 billion in new revenue in 2022-23 alone.
With $25.5 billion in new revenue, $78 billion in spending and over $1 trillion in national debt, no Liberal is really talking about the elephant in the room. Budget 2022 will need to contain significant measures to raise revenue. Many have speculated that the Liberals will raise the capital gains inclusion rate from 50% to 75% (which the New Democrats promised in their election platform). Others have commented that with the rise in property values in Canada, the principal residence exemption (which provides for a tax-free sale of a family home) should be altered. The anti-flipping measure introduced by the Liberals will change the taxation of a principal residence. Some tough decisions will need to be made and will need to be made soon. More to come on that as things progress.
This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.
If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.