With the Liberals winning a clear majority one of the biggest questions many want to know is how the change in federal government will affect your finances.
The Liberals had some key differences in their platform compared to the other parties, and some of them weren’t that popular.
TFSA Limit Rollback
The biggest change (and least popular with voters) is the rollback of the TFSA limit from $10,000 to $5,500 per year. A recent survey by Angus Reid showed that almost 70% of us weren’t in favor of the rollback, but it’s still likely to happen.
The 2015 annual limit is still likely safe, but the 2016 limit will likely be rolled back from $10,000 to $5,500. After that it will be indexed to inflation in increments of $500 like it was before the raise to $10,000.
Assuming an average return of about 6%, the rollback of the TFSA will cost an individual about $25,000 over the next 25 years (on the lost $4,500 in contribution room alone).
Luckily the TFSA won’t completely disappear, which means it will go back to $5,500 and increase from there each year based on inflation.
Tax Rate Changes
Anyone earning $200,000 per year (or more) will start to pay more taxes under the new federal government. The Liberals have promised to create a tax bracket of 33% (currently 29%). This means someone earning $250,000 will pay an extra $2,000 in taxes (federal only).
It’s not all bad news though. The middle class will receive a tax break – from 22% to 20.5% for those of us earning between $44,700 and $89,401 per year. This means someone who earns $70,000 per year will save about $400 in taxes.
These two changes have a clear goal in mind – tax the higher income earners and lower taxes for middle income earners.
Changes for Families
There are some big changes on how families will be getting taxed as well.
The Universal Child Care Benefit will be replaced by the Canada Child Benefit. The biggest difference? The new benefit is tied to income and is tax-free.
Let’s use a family with 2 children under 6 and a household income of $75,000 as an example.
Previously they’d get $160 per month (UCCB) x 2 children = $320 monthly ($3,840 annually). This amount would be taxable so assuming a tax rate of 30%, they would net $2,688 after taxes.
Under the new government the same family would get a total benefit of $7,700 – completely tax-free. The Liberals have claimed that 90% of families will see more money in their pockets because of the new tax changes.
What they didn’t mention is that they will be cancelling the family income splitting tax credit, which means the disparity won’t be as high for some families.
Using the example from above, assuming one spouse earned all of the $75,000 in household income, they would have received about $1,200 due to income splitting.
So after taking into account the cancelling of income splitting, the family used in the example is still ahead by about $3,800.
Changes for Students
The Liberals have quietly announced they would eliminate the textbook tax credits for students. For anyone who didn’t know already, the textbook tax credits are tax credits given to students based on whether they are full-time or part-time students (and how many months they attended school). Students attending post-secondary school full-time for 8 months in a year would have received $520 in tax credits, which will now disappear under the new federal government.
On the other hand it’s not all bad news for students. Students won’t have to start paying back their loans until they begin earning $25,000 per year (or more). This will be a great help for students struggling with finding a job after graduating, but I’m not sure when the interest begins to kick in for the student loans – as the longer the loan is outstanding, the more interest will start to add up.
Changes for Home Owners
One of the bigger changes announced is that it will be easier to access the home buyers plan. For anyone who isn’t familiar with it, the home buyers plan allows a first time home buyer to borrow up to $25,000 (tax free) from their RRSP. They have 15 years to pay it back and can be used more than once in a lifetime.
Under the new rules, those going through life changes (such as divorce) can access the home buyers plan to buy a second home. This is important for anyone who doesn’t qualify as a first time home buyer but needs access to the funds for a down payment on a home, which is even more important in markets with sky-high real estate prices like Vancouver and Toronto.