5994395 - front view of the canadian parliament building , with nobody showing

While we don’t know what the upcoming spring 2020 federal budget will contain, there’s no shortage of ideas out there for the government to consider. Here are some suggestions that would be helpful for many of our clients, courtesy of the C.D. Howe Institute’s annual “shadow budget,” authored by the Alexandre Laurin and William B.P. Robson.

Double the top personal income tax threshold

The Institute suggested reducing the number of Canadians subject to the highest personal income tax rate (33%) by doubling the threshold at which it applies, to $428,736 from the current level of $214,368. This would bring it closer to the top U.S. threshold, which kicks in for income greater than US$518,400. The top U.S. federal income tax rate in 2020 is 37%.

To justify the higher threshold, the authors argue that the “positive response to this lower rate would expand the tax base for both the federal and provincial governments.” After accounting for changes in taxpayers’ decisions about when and how they report taxable income and higher levels of activity, the Institute estimated that the net cost to the federal budget would be around $378 million.

Increase age limits for tax-deferred saving

Turning to retirement savings, the report recommended increasing the age at which Canadians must stop contributing to their RRSPs and start drawing down on their RRIFs. The current age is set at 71. The authors argue that this age “is too soon: it discourages Canadians who would like to work and/or save longer, and increases the likelihood that retirees will exhaust their savings in these accounts.”

Instead, the authors are advocating for an increase in the mandatory age to collapse the RRSP to age 72, beginning in 2021, and rising one further month at six-month intervals thereafter. They argued that the cost implications would be small on an annual basis, and negligible on a present-value basis.

Shrink mandatory minimum withdrawals from RRIFs

The 2015 federal budget announced a reduction of the annual mandatory minimum withdrawal amounts from RRIFs. This was done to help reduce the risk that Canadians would outlive their savings.

With longevity increasing and low interest rates on safe investments, the mandatory minimums still put many Canadians at risk of running out of money in retirement. As a result, the report recommends lessening the requirements for older Canadians to draw down their tax-deferred savings by instituting an immediate one-percentage-point reduction of minimum withdrawals mandated for each age, beginning with the 2021 taxation year. Similar to the recommendation to increase the age to 72 above, the cost implications would be small on an annual basis, and negligible on a present-value basis.

Facilitate donations of private company shares and real estate

Currently, taxpayers who donate appreciated publicly traded securities or mutual or segregated funds to a registered charity get a donation receipt for the fair market value of their gift and pay no capital gains tax on those securities. But taxpayers who donate private company shares or real estate are liable for capital gains tax if the shares or real estate have increased in value.

In former Finance Minister Joe Oliver’s final Tory budget of 2015, a proposal was introduced that would have put donations of the proceeds from the sale of appreciated private corporation shares or appreciated real estate on a similar footing as donations of publicly traded securities. At the time, it was widely praised by the charitable sector as a tremendous incentive that would spur the philanthropically inclined to consider major gifts of private company shares and real estate to charity. The rule was to come into effect for donations made as of Jan. 1, 2017.

But the proposed rule was quashed before it ever came into effect in the newly elected Liberals’ first budget in April 2016, without any warning or public explanation. The C.D. Howe shadow budget recommends that the government exempt donations of privately held securities from capital gains tax altogether and grant only a partial exemption to donations of other real estate to maintain the incentive (i.e., 100% tax-free capital gains treatment) to donate environmentally sensitive land to land-conservation charities.