The government targeted these gains in the last budget, with less than the expected 1.5% tax on profits of more than $ 100 million, which effectively expanded the measure beyond the larger banks and insurance companies. Ottawa also described a one-time tax of 15 percent on the taxable income of financial institutions over $ 1 billion in fiscal year 2021. While the two measures are expected to raise more than $ 6 billion to help pandemic recovery, the average Canadian may not realize how big a share the nation’s largest financial institutions have in their retirement portfolios. either directly in their subscribed retirement savings plans (RRSPs), tax-free savings accounts (TFSA), or indirectly through Canadian equity mutual funds, negotiable funds and retirement plans. In this age of low interest rates, banks and insurance companies have become de facto fixed income streams. creating annual returns between three and five percent. Major Canadian banks have never lost or reduced dividend payments from the Confederation. Corporate dividends come from profits and higher taxes mean lower profits. There has been little market reaction in the Canadian financial sector immediately after the budget, but it is unclear how investors will absorb the new fiscal measures in the long run. In recent decades, shares of Canadian banks have (mostly) risen in value steadily and steadily. Taking as an example the largest in the package: the share price of Royal Bank of Canada has risen by about 429 percent since 2002. Based on overall performance, it has risen by 1,021 percent. Another de facto income stream, real estate investment trusts (REITs), were not explicitly mentioned in this week’s budget, but the Liberals said they would review – and possibly reform – their tax treatment as part of a broader strategy to cooling of the housing market. On the positive side, the forecast for smaller deficits in the coming years could (for the time being) allay concerns that future revenue-thirsty governments will leverage some resources close to and beloved by retired investors. Even so, here are two things to look out for:
“TAX” COMPROMISE IN TFSA
Canadians have been flocking to tax-free savings accounts since they were introduced in 2008 for the simple reason that investment profits are never taxed (other than dividends on foreign equities). The allowable contribution room is growing every year since then to the point where the TFSA has become a serious investment tool for retirement. serious enough that a government might eventually reduce its allowable contribution room in the coming years or jeopardize its tax-free status.
RESOLUTION OF TAX BENEFITS OF RRSP
Canadians also love their registered retirement savings plans because contributions can be deducted in years when their income is taxed at a high margin, increased tax-free on investments for decades and withdrawn at a low margin tax rate (ideal tax rate) . . The RRSP has become a sacred cow and it would be political suicide for any government to mix it up, but its effectiveness could be reduced if marginal tax rates are raised.
