11 May, 2016 Financial Planning

Budget Changes That May Affect Your Financial Plans

There were a couple of items tabled in the recent federal budget that deserve mention in this month’s column. These changes will impact the decisions people make with regard to their financial planning, however they do not take place immediately leaving individuals some time to take any necessary steps. Below I will outline the changes I’m referring to, and readers can contact their financial advisor to ask what steps, if any would be appropriate to take.

Firstly, there will be changes to the tax treatment of switches within Corporate Class Mutual Funds. Mutual funds that take the legal form of a corporation are commonly referred to as corporate class funds. In this structure, when an investor switches from one fund to another, they are exchanging shares of one class of the mutual fund corporation for shares of another class, which up until now was not deemed to be a disposition for income tax purposes. As such, it was an attractive place for individuals with taxable accounts and for corporate investment accounts, as it allowed investors to defer the capital gain, and taxes attributable to these capital gains, until the investor redeemed from the corporate class altogether. Starting in October of this year however, these switches will be treated as a disposition and taxed accordingly. The Corporate Class structure will still offer unique benefits going forward, however investors with corporate class funds may want to investigate whether it makes sense to do any rebalancing within their accounts before this tax deferral is lost.

Secondly, there will be changes affecting the tax treatment of life insurance policies issued after January 2017. Policies issued before this date are grandfathered typically, but not in all cases. In short, the rules for life insurance policies are being modernized to address current mortality rates and provide standardization across the industry and products. Currently, policyholders can deposit more money into their insurance contract than is needed to pay for the insurance. This additional money can be deposited into guaranteed investments or market oriented investments and the growth within the policy is not taxed when certain conditions are met. The new rules impacting policies issued in 2017 will limit the amount of money that can be deposited into the policy to receive this favourable tax treatment. In addition to the decreased amount of sheltering, we will also see an increase in the cost of insurance for Universal Life insurance policies. The policies that are in existence before these changes take place in January 2017 will provide significantly better financial benefits than those issued after this date. This year may be a good year to review existing coverage or implement any permanent personal or corporate coverage before the changes take effect. It is worth a call your advisor to learn how these changes may impact you. (Sources: PPI Advisory tax talk, Life17 Canada Life) 

Greg Dowdall CFP®, CIM®, FCSI®, is a Senior Financial Advisor with IPC Securities Corporation in Lindsay. To download a free retirement readiness kit visit www.gregdowdallpresents.com