Budget presents financial planning opportunities

Nothing incredibly earth shattering from a financial planning point of view made it into the 2006 Federal Budget handed down by the Conservatives on Tuesday afternoon, but the finance minister’s first foray will likely leave clients feeling somewhat appreciative.

Clients will likely be happy about the government’s moves to reduce small business and personal taxes, make medical and disability credits more attractive and moves to double the amount of eligible pension income that can be claimed under the pension income credit, even though these benefits are all relatively small in the grand scheme. Pensioners, for example, will likely only gain an extra $150 a year from the move.

"For a lot of people, particularly the lower income seniors, it’s a benefit that they didn’t have before," says Ryan Beebe, partner at Edmonton-based Caplan Beebe & Associates. "From a dollar point of view, it only saves them $150, but from a political point of view that’s a smart one because the older folks really tend to like these little things. It’s the philosophy behind it, not the dollars."

Sandra McLeod, director of succession and estate planning at Grant Thornton LLP, says the fact that more small business income is eligible for the 12% federal tax rate (from $300,000 to $400,000) is welcome news for small business corporations, particularly if the provinces follow the federal government’s lead and match the new threshold. As well, she points out that the reductions, from the current rate of 13.12% to 11% in 2009 will be significant. "A two percentage point spread can make a big difference, especially to the small businesses. They promised this and they have come through on it and it’s significant to small businesses."

Beatrice Grant, a CFP with Dundee Private Investors Inc. in South Surrey, B.C., agrees that her business-owner clients will feel and notice the difference. "I deal with quite a few people who have their own small business. And that deduction of $300 or $400 will make a big difference; and the 19% [corporate tax rate reduction] for 2010 — I know it’s a long ways off — but it does help; it’s going the right way," she says. "I think that some of the businesses will be able to hopefully pass that cost down. Say they’ve got a small [trucking company] or something. They should be able to put that as a cost savings to the client. They should feel that reduction."

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York University taxation professor Amin Mawani also believes the tax cuts are significant for business owners. "It’s about a 9% difference — a good sized difference," notes Mawani, who is also a CFP. "If you’re planning to expand or invest in machinery and so on, everything is now slightly cheaper."

Similarly, budget measures to increase the maximum annual Child Disability Benefit and increase the refundable medical expense supplements were welcomed by advisors even though they say the primary beneficiaries of the new measures will be clients who are lower and middle-income earners.

"Certainly it helps high-income earners as well. They don’t need as much help but any help is good, certainly when you have a disabled child because the expenses tend to be extremely high or higher than when you don’t have a disabled child," says McLeod.

The much-touted income tax reduction, on the other hand, is actually a tax increase in disguise. Last fall, the Liberals reduced the personal income tax for those in the lowest bracket to 15%, from 16%. Although the Tories said they would reverse that decision, the budget announcement ultimately rolled back only half a percentage point, putting the income tax rate at 15.5%.

"That’s kind of sneaky," says Beebe. "How did they manage that sleight of hand?" Overall though, advisors say half a percentage point on the first $36,378 of income will generally have very little impact on clients’ bottom line.

Charitable organizations meanwhile could soon be on the receiving end of significant donations of appreciated stock. The move to eliminate capital gains on donations of publicly listed securities, gives those involved in charitable and estate planning one more way of allocating resources.

Finally, Douglas Macdonald, managing partner at Macdonald, Shymko & Company in Vancouver says the government’s promise to route future surpluses that exceed the first $3 billion a year earmarked for debt reduction, towards the Canada Pension Plan and Quebec Pension Plan, is important from a financial planning perspective.

Although members of the CPP Investment Board would insist these pension plans are fully funded for at least another 75 years, Macdonald says a lot of clients still have concerns about collectablity of CPP. "I think this should give them some greater degree of assurances that CPP will in fact be there for them, and it will be indexed for inflation," he says. "We have yet to see if there will be any surplus, but if there is and it does go [to that], that will be a positive thing."

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com, and Heidi Staseson, Advisor’s Edge, heidi.staseson@advisor.rogers.com.

(05/02/06)

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