What a difference a year makes.

Last year’s razor-thin budget surplus is a distant memory, with the Liberal government’s fiscal blueprint showing a projected deficit for 2016/17 of $29.4 billion. Finance Minister Bill Morneau acknowledges that falling commodity prices have hurt the economy, but he also says “circumstances for investment are ideal.” He calls Budget 2016 “an essential step in a sustained, strategic effort to restore prosperity and optimism.”

Factors leading to the shortfall include reduced revenue, income tax breaks and new spending on infrastructure, among many other spending initiatives. And it doesn’t look like balance will be restored any time soon, with a $14 billion shortfall predicted for fiscal 2020/21.

“A year ago we were warning of the potential economic ‘ripple effects’ from the threat of persistently low oil prices,” says Sadiq S. Adatia, Chief Investment Officer for Sun Life Global Investments. “Those ripple effects have turned into waves, particularly for some of the western provinces. We do agree that fiscal stimulus is in order, deficit or no deficit.”

As expected, the budget is largely focused on initiatives intended to support the middle class and bolster the economy. Some of the initiatives, including a cut to the income tax rate for middle income earners and a higher rate for the highest earners, have already been put into motion.

One of the main culprits behind the government’s weaker fiscal position is low oil prices.

“Despite a modest recovery in the past few weeks, oil prices have fallen further and stayed lower for longer than we had anticipated,” says Adatia. “The effect on the domestic stock market is one thing, but what’s more worrying are the longer term economic implications. Job losses, reduced business investment, segments of the population more reluctant to spend — these effects can take a long time to sort themselves out and the economy will need to adjust.”

This year’s budget contains plenty of proposals for individuals, families and financial advisors to be aware of. Here are just a few…

Budget highlights:

  • Mutual fund corporations (corporate class).Certain switch fund share corporations, also known as corporate class or mutual fund corporations, allow investors to maintain the original cost base when switching from one share class to another share class. The budget proposes that such switches would be considered a disposition at fair market value in order to ensure the appropriate recognition of capital gains. Currently, this type of exchange of convertible corporate securities is deemed not to be a disposition for income tax purposes. The change is proposed to take effect in October this year. Sun Life Global Investments is conducting a deeper analysis of this proposal. We’ll share more information as soon as it’s available.
  • Canada Child Benefit.The budget proposes a new Canada Child Benefit (CCB). Families with combined incomes under $30,000 will receive $6,400 per child under the age of 6, and $5,400 per child from ages 6 to 17. CCB benefits will be phased out as family income rises. The CCB will replace the current Canada Child Tax Benefit and Universal Child Care Benefit.
  • OAS & GIS. The budget proposes to restore the eligibility ages for Old Age Security and Guaranteed Income Supplement benefits to 65 (from 67), and Allowance benefits to 60 (from 62). The planned increases were supposed to have taken effect from 2023 to 2029. In addition, the budget proposes to increase the GIS top-up benefit by up to $947 annually, starting in July.
  • Life insurance planning: credit of death benefit. Certain structures that may have allowed a corporation to receive a full credit of the death benefit to its capital dividend account (CDA) without reducing that amount by the adjusted cost basis (ACB) of the policy have been addressed. The budget proposes that going forward the CDA credit will properly reflect the ACB of the policy, regardless of the ownership structure that may have been in place.
  • Life insurance planning: transfer to corporations. This change would effectively prevent personally held life insurance policies from being transferred to corporations in return for a tax-free payment based on the fair market value of the policy. The proposed rules mean that the taxable disposition to the original policy owner, and the acquiring cost to the corporation, will reflect the fair market value of any consideration given for an interest in the policy. Similar measures will apply to partnerships.
  • Changes for small businesses. The small business tax rate will remain at 10.5% on the first $500,000 of active business income. Previously scheduled rate reductions for 2017 and future years will be eliminated. The budget proposes strengthening the rules that require businesses to allocate income pro rata among associated companies. The rules try to ensure that the small business tax rate applies only to a business, even if the business is carried on through multiple associated companies and partnerships. The budget also eliminates a provision in Budget 2015 to exempt from tax capital gains realized on sales of private corporation shares and real estate when the cash proceeds are donated to a charity within 30 days. The provision was to go into effect in 2017.

Adatia is confident that given time, the combination of fiscal stimulus from Ottawa and monetary stimulus from the Bank of Canada will help keep the economy on track. Though he warns it’s going to be a bumpy road – especially with all the recent stock market volatility.

“Market turmoil is bound to keep investors on their toes this year,” he says. But it’s our belief the best approach is to stick to a long-term plan. That’s what we do. We have a strategic view that’s unaffected by day-to-day market fluctuations, and within that view we have the flexibility to adjust our short-term risk profile, and to take advantage of opportunities as they arise. Right now for example, we’re more cautious overall toward stocks given the recent gains, and so we’re more inclined to favour Canadian bonds. Within stocks, we’re more positive about investing in Europe than we are in the U.S. or Canada.

It’s times like these that investors may want to regroup with their financial advisor, says Adatia. “Keeping clients focused on their long-term goals no matter what’s happening in the market — that’s the kind of value a good financial advisor brings to the table. Take advantage of it.”

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This summary contains information in summary format for your convenience, published by Sun Life Global Investments (Canada) Inc. Although this summary has been prepared from sources believed to be reliable, Sun Life Global Investments (Canada) Inc. cannot guarantee its accuracy or completeness and shall not be liable for any errors and omissions. This summary is intended to provide you with general information and should be not be construed as providing specific individual financial, investment, tax, legal or accounting advice. Please note, any future or forward looking statements contained in this report are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated. Please speak with your professional advisors, such as your financial advisor or tax specialist, and refer to the Budget as published by the Government of Canada for details before acting on any of the information.

Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies.