Happy 2019! Welcome back to Knowledge Bureau Report and to what’s sure to be a fascinating year for interpreting tax and financial news, based on recent stock market volatility and significant tax change. It’s an election year, too, so broadly misunderstood tax reforms recently introduced will likely re-emerge for debate. What lies ahead for 2019? Here are just some of the facts Canadians should know.
First some economic news: many have forecasted that Canada’s economic growth will slow into 2019, including Deloitte, in a recent economic report, and Bank of Canada Governor Stephen Poloz, who has cautioned Canadians to brace for volatility. This is reflected by the Bank of Canada's announcement today that the prescribed interest rate will remain at 1.75%. This will be the year to seek out qualified financial professionals who can help with debt management, the number one financial priority for Canadians in 2019, according to a CIBC poll announced December 27, 2018.
Changes to the Canada Pension Plan (CPP) remain the greatest source of confusion for pre-retirees, current retirees and employers/workers alike. Starting in January, CPP contributions increase from 4.95% to 5.1% on earnings between $3,500 and $57,400. This year marks the first of five years of graduated increases running until 2023, when the rate will reach 5.95%. After this, higher earners will feel an even greater pinch. These enhancements support the CPP program so it remains viable for future generations. But those who pay now will see little (if any) benefit.
How much more will these enhancements cost Canadians in 2019? According to a report from the Canadian Taxpayers Federation, they will take $98 annually, on average, from the take-home pay of every employee, and that amount will continue to rise over time, until 2023. After five consecutive years of rate increases, those making $60,000 per year will contribute $550 more annually. But those who earn more will see rates rise an additional 4% on top of this; and remember, self-employed people pay both employer and employee portions. Lower Employment Insurance premiums and other tax deductions will bring this down to an average increase of $380 annually by 2023.
TFSA contribution room rises to $6000. Here’s a great new year’s resolution that will pay tax free returns in the future: invest as much as you can in a TFSA. As pay cheques continue to shrink due to CPP premium hikes, save sooner rather than later.
Make the RRSP contribution. In response to the financial challenges ahead, Knowledge Bureau President Evelyn Jacks says this is particularly important. “Financial worries are top of mind with market volatility, debt management worries and the reduction in take-home pay Canadians face due to increased CPP rates. For these reasons, it’s the right time to look ahead and take control over your retirement income plan. Top up your RRSP contributions by February 28 (18% of earned income to a maximum of $26,230) to increase your tax refund.”
Having and sticking to a tax-efficient financial plan is most important, so be sure to consult with a qualified advisor, such as a Real Wealth Manager, who can review your opportunities this month and find opportunities to preserve and grow your wealth throughout 2019.
Business tax changes continue. Evelyn’s advice applies equally to business owners as well, who were subject to the new Tax on Split Income rules in 2018 – this will affect many this tax season. Others need to come up to speed on the potential clawback of their Small Business Deduction due to the new passive investment income rules effective January 1, 2019. Business owners can generate up to $50,000 in passive income before they start to lose access to the low small-business tax rate of 9% (new for 2019) for the first $500,000 in business earnings.
All of this on top of the immediate impact with the implementation of the CPP premium enhancements. According to Dan Kelly from the Canadian Federation of Independent Business (CFIB), “Once the rates reach their threshold limit in 2023, employers will be paying up to $1,100 more per employee per year. Business owners will pay up to $2,200 more on the income they draw from their own business.”
Now for some good news. There are some positive tax and benefit changes, as many credit and benefit amounts are also being indexed to inflation: the basic personal amount rises to $12,069, for example. Employment Insurance and the new Canada Workers Benefit will also change.
The Canada Workers Benefit also increases the assistance offered to low-income workers. The maximum benefit will increase by $300-400 (depending on single vs family status), bringing the maximum benefit to $1,355 for a single person or $2,335 for a single parent or couple, depending on personal income.
In 4 provinces, new Carbon Tax Incentive payments also apply this year, but new carbon taxes will impact the cost of fuel.
Auto expense claims increase. Some minor increases to allowable auto expense claims may also provide some assistance to certain taxpayers, while those who use their vehicles for business will enjoy higher CCA (Capital Cost Allowance) deductions if the vehicle was purchased after November 20, 2018.
More information on these changes is available at the CE Summits Advanced Tax Update starting January 17 in Winnipeg and then moving on to Toronto, Ottawa, Calgary, Edmonton and Vancouver. Register by January 10 to save up to $200 – increases that will be in effect on January 11.
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