Since March of 2020, Canadians have been dealing with the impact of the global COVID-19 pandemic. The Federal Budget, usually released in April, was postponed in 2020 as the Federal Government focused solely on their COVID-19 response. Yesterday’s budget update is the first that we have seen in two years. A lot has changed in that time. The impact of COVID-19 has not only been felt on our daily lives, but also collectively in our pockets. In order to fight the pandemic, the Federal deficit has hit new record levels. Each budget prompts an opportunity to look for additional means of revenues through taxes, and this budget is certainly no exception.
Although life insurance was not directly impacted or named in the 2021 Budget updates, we have a few topics of interest that are closely related to life insurance planning.
Changes to taxes on Capital Gains
After announcing the date of the official 2021 Federal Budget, there was much speculation about the possible avenues for the Federal Government to increase revenue through taxation. One of the common guesses was increasing the Capital Gain Tax rate. In Canada, only 50% of capital gains are taxable as opposed to dividends, interest, and employment income, which are subject to higher rates.
Capital gains occur when you sell an asset for more than adjusted cost base (usually the price you paid). Capital gains occur on items like stocks, mutual funds, ETF’s, real estate or even shares in your small business corporation. Even though capital gains only have a 50% inclusion on your taxes, when you are selling larger assets they can add up. When possible, you can plan for a capital gain, however, one of the most common drivers is upon an asset owner’s death.
When you pass away, your assets may be deemed to have been sold. Luckily, in Canada, there are exceptions granted if you have a surviving spouse that can delay the tax implications (called a Spousal Rollover) However, tax becomes payable at the time of the surviving spouse’s death. Life insurance is a key component of a tax-efficient estate plan. The assets that you have accumulated throughout your life are there to ensure that you and your family are taken care of. When you pass away, you can choose to place the burden of the tax implications on future generations, or you can utilize life insurance to affectively assist you for pennies on the dollar.
Life insurance provides more than just protection for outstanding debts and future obligations. It can be used to enhance the value of your estate and ensure that your tax obligations are met. Family cottages or secondary properties are a great example of a common situation where a large amount of taxes can be owed upon the death of the owner. For most families, the ownership of the cottage will pass on to the next generation with the hopes of keeping the property in the family. With the possibility of large tax consequences, life insurance can provide the required funds to ensure the cottage does not have to be sold to cover the tax bill.
Whether the capital gains inclusion rate is at 50% or increases to a higher amount in the future, the importance of including life insurance in your estate planning is paramount to securing your family’s future.
Housing Costs
The housing market across Canada continues to hit record highs, month after month. In their March 2021 update, The Canadian Real Estate Association (CREA) disclosed that the average home price in Canada was $716,828. This is 31.6% higher than March of 2020 when the global COVID-19 pandemic began. With housing prices climbing quickly and interest rates being at historic lows, Canadians are taking on increasing amounts of mortgage debt to enter or move up in the housing market.
With higher mortgage balances, more people are in danger of being put in an extremely difficult financial position if they lost a partner or spouse. Life insurance provides financial protection for the balance of your mortgage as well as other additional needs you may have. Unlike mortgage insurance offered through lenders and banks, life insurance offered by insurance companies provides you with flexible options, lower rates, and more dependable coverage. It also gives you the option to provide financial support above and beyond the balance of your mortgage, with rates that are guaranteed for the term you select, not subject to change every time you renew your mortgage.
We will continue to keep an eye on the housing market across Canada to ensure our understanding of the changing needs of our clients. If you decide to enter the housing market or currently have mortgage insurance – spending a few minutes connecting with a licensed advisor will provide you with valuable information that could have a huge impact on your family’s future.
Child Care Support
One of the key focuses for post-pandemic Canada is on additional financial support for childcare costs. Although childcare remains under provincial control, the federal government is allocating a significant portion of its new spending to counteract rising costs for parents. With this additional investment of funds, childcare costs are expected to be cut in half by the end of 2022 and down to $10 per day by 2026.
Quebec has already had a program in place to keep the cost of childcare much lower than the other provinces. In fact, the approximately $180 monthly cost in Quebec is less than half the cost of anywhere else in Canada and some estimates in Ontario show a cost of more than 10 times that of Quebec.
In the past, many people failed to realize the financial impact a caregiving parent had on the household. When thinking about your life insurance needs, it is easy to see that you would be left in a difficult situation if an income-earner were lost. But the same can be said for a parent providing care for children. Although the government has proposed future improvements to the cost, this will be a process that takes time. For individuals currently expecting or raising children, it is important to understand the financial impact an untimely death would have on your family.
Additionally, the costs shown for childcare only represents a part of the cost of raising a child. There are many other monthly expenses such as clothing, food, activities, entertainment – not to mention the future costs if you are going to assist them with tuition, purchasing a car or house, their wedding and more! Proper life insurance planning will consider these goals to ensure that your children’s futures are protected.
Conclusion:
The 2021 Federal Budget was one of the most expansive budgets in recent years as the COVID-19 pandemic has forced Canadian representatives to rethink many components of our current system. Balancing the need of a quick recovery from the pandemic with systematic changes, the federal government is ready to make a substantial investment over the coming years.
It is likely that some of the changes will directly impact you and your family in one way or another. If you are looking for a more in-depth breakdown of the entire budget, it can be found on the government website.
Although we did not see a change to the capital gains rate this time around, there are certainly some important items to consider now, and in the future. There are many reasons why you would want to review your own personal or family budget, and life insurance should be a part of that process. Our Hometown Life team works with you to identify and protect your loved ones from financial risks. Now that the federal government has completed their annual review, maybe it is time for you to think about yours.
Sources
https://creastats.crea.ca/en-CA/
https://arrivein.com/daily-life-in-canada/child-care-in-canada-types-cost-and-tips-for-newcomers/
