Now that the Canadian election is over, advisors and their clients are likely wondering how the Liberals’ campaign promises will affect their financial plans – and there will be some sort of impact, says Craig Alexander, vice president of economic analysis at the C.D. Howe Institute.
Three promises, specifically, may impact retirees, he says: a decrease in the TFSA limit from $10,000 to $5,500, tax changes for wealthy Canadians and an increase to the Canada Pension Plan.
For financial planning purposes, it’s the TFSA reduction that could impact people the most.
“If an individual has built a plan assuming a certain amount of saving each year, then the Liberal platform will change some of the assumptions that go into calculating that plan,” he says.
A lower limit won’t just reduce the amount of room one can save tax-free — it will also remove an important financial planning tool for advisors, says Evelyn Jacks, president of the Knowledge Bureau, a Winnipeg-based financial education organization.
The advent of the TFSA gave retirees who had diligently saved money in RRSPs a tax-free place to invest any withdrawals (as in when RRSPs convert to RRIFs) that they didn’t need. Jacks points out that of the 11 million people who put money in TFSAs, two million max them out and most of those people are seniors.
If the limit is reduced, then they won’t be able to shelter money that they don’t yet want to use. If someone has to remove savings from a RRIF, make sure to put it in a TFSA before any rule changes take place, says Jacks. “Advisors need to encourage people to top up while they can,” she says.
Creating a 33% tax bracket on those who earn $200,000 or more per year will also impact retirees. Those who have saved a lot during their lifetime, and now have to withdraw, could be taxed at a higher rate.
Even if your client is not taking out more than $200,000, the combination of part-time employment – many people are working later in life – and those withdrawals could push your client into the top tax bracket.
Avoiding the top tax bracket will take some careful planning, says Jacks. Advisors will want to “smooth out” the tax hit by removing money earlier than they have to. Essentially, a client will take out enough money to remain in a lower tax bracket every year, rather than remove a huge chunk at once.
“It’s about smoothing out withdrawals and generating tax at the lowest possible rates,” she says. “You want to be at the top of those brackets, but not over them.”
A CPP increase will have the least impact on your clients, but it will boost what they receive. Most people who have sound financial plans and a company pension don’t actually need more CPP savings, says Alexander. It’s the middle-class worker who doesn’t have a pension that will benefit the most. Still, any changes to one’s income will need to be factored into a plan.
As significant as some of these changes may seem – and the election was partly won on the promise of a more progressive tax system – they’re not as drastic as the Liberals have made them out to be, says Alexander.
“The changes are on the margins,” he says, and they won’t significantly impact the amount of money Canadians have when they retire. The math will change, though, but as with most planning decisions, how much will depend on the individual client.