What a Liberal Government Means for Canadian Personal Finances

What a Liberal Government Means for Canadian Investors ?

Last week the charismatic Justin Trudeau lead the Liberals to win the 2015 federal election. I’m sure his good looks has nothing to do his popularity and success. 😛

Justin pledged to make meaningful policy changes to the country that could benefit millions. But will his commitments help you? The jury is still out on the long-term effects, but here’s a TL;DR summary of what Trudeau’s government means for Canadian personal finance and investors in the short term.

These are only generalizations. The rest of this post will explain individual policies that could affect your pocket book. Keep in mind that just because politicians promised something during their campaign, it doesn’t mean they will always follow through. Any of these policy changes below could be altered or cut completely going forward.

Borrowing To Invest. Going back into Deficit. 

According to the federal finance department, Canada’s government had a $1.9 billion surplus in the 2014-2015 fiscal year. 🙂 But the new Liberal government under Trudeau plans to run a $10 billion deficit for each of the next 3 years, before balancing the budget again in 2019.

Going into more debt as a way to expand economic output isn’t necessarily a bad idea. $10 billion is peanuts relative to our $1,827 billion/year economy (0.6%.) Also, our national debt to GDP ratio is quite low by international standards, which means we can borrow money at ridiculously low costs. New 10 year Canadian government bonds are currently yielding 1.5% in annual interest.

After factoring in inflation, there might actually be no real cost to tax-payers, lol. 🙂 Craig Alexander, the Vice President at the C.D. Howe Institute, said that despite digging deeper into debt, the debt to GDP ratio of Canada is still going to decrease over the next three years because our GDP is expected to increase as well. 😀

About a third of the new spending will go towards much-needed public transportation and infrastructure development and repairs. This means building more roads, highways, bridges, etc. This should improve the country’s productivity because gridlock and urban densification are causing major problems right now in large cities such as Toronto, Montreal, and parts of Vancouver. The other two-third of public spending is planned for social housing, seniors centers, and clean energy projects like solar and wind farms.

Due to more deficits and fiscal stimulus the Bank of Canada will be less likely to further cut interest rates for the time being.

What this means for you: Invest your money. Historically the S&P/TSX Composite performed well during times of deficit spending. Below is a graph I put together using stock market returns and government budget information courtesy of the CBC. During the two decades from 1995 to 2014 there have been 9 years where the government ran a deficit budget. And the stock market had positive returns in 8 out of those 9 years.

Economic stimulus increases employment and grows the economy so people and businesses feel more optimistic about their investments which tend to be bullish for the financial markets. 🙂 In particular I would consider investing in stocks or sectors that have exposure to financials, cannabis, industrial goods, construction, utilities, preferred shares, and green technology (solar panels, wind, etc.)

Goodbye annual $10,000 TFSA contribution limit ?

The Tax-Free Savings Account annual contribution limit will revert back to $5,500 and increase in $500 increments based on inflation. This will make it harder for Canadians to save and won’t benefit the middle class. There’s a rumor that the TFSA only helps the rich get richer. But that’s baloney! The TFSA actually helps anyone who wants to save get richer. Here’s a table courtesy of the National Post which shows that many low and middle-income families still managed to max out their TFSA contribution rooms in 2013 when the limit was still $5,500.

But there is a sliver of good news here. Retroactively changing the TFSA contribution rules for 2015 would be an accounting nightmare and be very costly to the government so I expect this year’s contribution limit will remain at $10,000. Furthermore, tax changes to investment vehicles often involve federal budgets, and the next budget is expected to be tabled in February or March of 2016. So this gives Canadian savers a small window of time at the beginning of 2016 to contribute $10K towards our TFSAs.

What this means for you: If enough people contribute the maximum $10,000 in January 2016, the Liberal government will have no choice but to extend the $10K contribution limit for another year before cutting it back down to $5,500 in 2017. 😀

Income Tax Transfer

Middle-class income earners will get a tax break, at the expense of those making more than $200,000.

What this means for you: If you make less than $44,700 a year then nothing will change for you. If you make $60,000 your income tax will be reduced by $230 a year. If you make $80,000 a year, you will save $530 a year. The maximum you can save is $670. If you are making over $217,000 then your average income tax would go up.

If your income is too high then split it with a shareholding spouse if you run a business, and maximize your RRSP contribution limit before putting savings into a TFSA. Use other ways to defer your income so you stay below the $200,000 income bracket.

Enhancing the Canada Pension Plan 

The Liberals have said they want to increase contributions and benefits to the CPP. 😕 This policy hurts workers who save and rewards those who spend. It’s meant to provide a social safety net for Canadians who can’t (or won’t) save adequately for their own retirement. But I question the efficacy of this policy. It will create more incentive for some people to not save because they’ll think there’s a beefed up government pension waiting for them in retirement.

The other problem with expanding the CPP is that it’s a payroll tax that hampers economic growth and hiring. Employers are required to match employee CPP contributions. For example, if I contribute $1,000 more every year towards the CPP program, then the company I work for has to remit the same amount. But of course, my employer doesn’t eventually reap the benefits when I turn 65 years old and start collecting my CPP payments. So this will encourage businesses to look for alternative solutions, such as automation or hiring more contractors.

I think a more targeted initiative like increasing the Guaranteed Income Supplement (GIS) to low-income seniors would be a much better solution than to expand the CPP for everyone. But to his credit, Trudeau did mention he also wants to increase the GIS by 10% for low-income retirees.

What this means for you: A balance of growth oriented and fixed income investments will create a diversified nest egg at retirement. Since the Liberals want CPP benefits to make up a larger part of your retirement income, you can consider investing in more risky assets like equities and preferred shares in your own RRSP or retirement portfolio, instead of holding all bonds or GICs.

No More Income Splitting

The current Family Tax Cut allows the higher-income spouse in a household to transfer up to $50,000 of taxable income to a spouse in a lower income tax bracket for federal tax purposes, up to a maximum benefit of $2,000. Income splitting is said to benefit only 15% of Canadian households and provides no advantage to single parents, those who don’t have kids or who have kids who are over 18. Justin’s government has said it wants to eliminate this tax benefit for non-seniors, which will save the government $2 billion a year.

What this means for you: You can still use spousal RRSPs to split your incomes but it takes some more planning to do.

More Funding for Post-Secondary Education ?

The maximum Canada Student Grant for low-income students will be increased to $3,000 per year for full-time students, and to $1,800 per year for part-time students. The federal student loan system will be more flexible. No graduate with student loans will be required to make any repayment until they are earning an income of at least $25,000 per year.

What this means for you: If your parents earn $65,000 each year – you will be eligible for an annual grant of $2,000 under the new plan, instead of the $800 that you would currently get.

Rolling Back Old Age Security Eligibility to Age 65 ??

This is almost a non-issue at this point. The Harper government raised the required age to receive OAS benefits from 65 to 67. But this change doesn’t take effect until 2023. By then we could have a completely new government in charge. I wouldn’t put too much thought into this policy just yet.

What this means for you: Not much. For many people the earlier they can receive OAS the earlier they can retire. OAS benefit depends on how long you’ve lived in Canada. The maximum OAS income one can receive is about $8K a year, assuming they’ve lived in the country for at least 40 years since their 18th birthday.

New Children Benefit Program ?

Trudeau wants to replace Harper’s Universal Child Care Benefit with the new “Canada Child Benefit.” It is income tested so the more a family makes the less benefits they would receive. This is good for most parents.

What this means for you: For families with children aged 6 to 17, if your household pre-tax income is less than $163,000 then you will receive more money under the new Trudeau government than the current Harper plan. Here’s a table showing the difference between the two party’s policies.

Change is Coming

It’s still too early to know exactly what a Liberal government means for Canadian investors and personal finance. The fact that Trudeau isn’t afraid to put the government back into deficit means that he could theoretically keep all of his campaign promises if he wants to. He doesn’t officially take office until next week which gives Canadians some time to process any expected changes. All the stimulus and debt creation over the next 3 years will likely lead to a stronger Canadian dollar, more inflation, a lower unemployment rate, faster GDP growth, more foreign investment activity (especially in the cannabis industry,) slightly higher interest rates on bonds and mortgages, and further price appreciation in real estate and stocks. Position yourself accordingly, folks. 😉