The Conservative government introduced its 2015 federal budget on Tuesday evening. While the 518-page document is chock-full of text and charts on topics ranging from foreign direct investment to energy exports, it doesn’t exactly spell out in how it affects real people.
We’ve applied the budget measures that touch individual households to four fictional scenarios. Find the scenario that best mirrors your personal living situation to learn how the federal budget hits your bottom line.
Julie | $55,000 annual income; no kids; renter
Meet Julie. She’s a single divorcee. She earns approximately $55,000 at her administrative job and is diligent about putting money into her Registered Retirement Savings Plan (RRSP). She hopes to retire in five to 10 years.
She’ll benefit from just announced increases to the annual Tax Free Savings Account (TFSA).
At an annual salary of $55,000, Julie pays approximately 30% in tax each year, while her contribution to her retirement savings provides her with a 20% tax refund. “However, if her marginal tax rate is comparable in retirement she’d actually benefit by using a TFSA rather than contributing to her RRSP,” says certified financial planner Jason Heath.
Any withdrawals above $18,000 in retirement would be subject to her marginal tax rate as well as a “50% effective tax rate,” says Heath. “That’s because for every $2 of income earned over and above $18,000 in retirement the federal and provincial clawbacks take about $1 away.”
By using the TFSA she could save tax-free and any withdrawals in retirement would not be subject to income-tested clawbacks.
Pat & Dylan | $100,000 combined annual income; one pension plan; no kids; condo owners
This couple in their late 20s lives in downtown Calgary and, despite the recent dip in oil and housing prices, they’re happy they bought their two-bedroom condo almost five years ago. Dylan earns $60,000 as an accountant with a large firm that offers a pension. Pat is self-employed as an acupuncturist and earns, on average, $40,000.
“There’s not much in the budget for Dylan and Pat,” says Heath. “They could take advantage of the increased TFSA limits to help them save for maternity leave—if they decide to have a baby—or to save up for a larger down payment if they decide to move up the property ladder,” says Heath.
Family with kids
Debbie and Jonas Schmidt make a respectable combined annual income of $125,000, but they still complain about living paycheque to paycheque. Debbie has a relatively new job and enjoys the social aspect of going into the office as well as her benefits (which include a pension plan and healthcare). Jonas is a self-employed contractor that specializes in home additions and decks. As parents to a 2-year-old and a 7-year-old, they want to know how the budget will help them manage their day-to-day expenses and their long-term savings.
“Their biggest savings actually came last fall with the Family Tax Cut,” says Heath. Still, this spring 2015 budget could offer some savings for families.
For instance, slight reductions to Employment Insurance premiums ($0.31 per $100 insurable by 2017) mean there will be a bit more in Debbie’s cheques every month, but not enough to make a big difference in monthly expenditures, says Heath.
And if Jonas’ business is already incorporated, the cut to the small business tax rate may help. For example, Jonas could save $100 in tax for every $10,000 he keeps in the business. “But the average business owner usually needs all the income generated from the business to pay household expenses,” explains Heath, “and to benefit from this tax cut money must to be left in the business.”
There is one other way the Schmidts can take advantage of this budget’s tax cuts. If he hasn’t already, Jonas could incorporate his business and leave most of the earnings in the new corporation. That would make him an employee of the company and the lower income earner in the family, paving the way for income splitting. Announced this past fall, the Family Tax Cut, allows higher income earners to transfer up to $50,000 in income to the lower income earner for a maximum tax credit of $2,000.
Betty & Howard | $50,000 combined annual income; $700,000 nest egg
Betty, 70, and Howard, 73, have been married almost 40 years and despite a few health setbacks continue to travel and enjoy retirement. However, Betty is worried that their $700,000 nest egg won’t be enough.
“The very targeted changes in this budget really benefit seniors,” explains Don Carson, spokesperson for Canada’s Chartered Professional Accountants. The current Registered Retirement Income Fund (RRIF) withdrawal rules require anyone 71 or older to withdraw 7.38% of their savings. The new minimum withdrawal is 5.21% which should allay Betty’s fears.
Heath agrees: “This is significant because most retirees aren’t earning 7% returns so these minimum withdrawal requirements really draw down on their capital.”
Betty and Howard live on approximately $50,000 per year and are subject to roughly 20% tax on withdrawals from their RRIFs (depending on their source of income). “By dropping the RRIF withdrawals requirements the couple could save up to $3,000 in tax annually,” says Heath.
And because the pair are older than 65, they’ll benefit from the new Home Accessibility Tax Credit (HATC), explains Carson. Under this new tax credit, seniors qualify for a 15% tax rebate on home renovation projects up to $10,000 designed make their home more accessible. “If a walk-in tub costs $5,000, this 15% tax credit will mean the net cost for that modification is $4,250,” says Carson. The rebate is also open to caregivers of anyone over 65 and those who already qualify for the Disability Tax Credit. Better still, this tax credit can be claimed in addition to the medical expense credits for the same renovation costs.