Affordable Childcare, Taxes, & More!
This week myself and our fellow money nerds received an early gift from our federal government – A Fall Economic Statement with some proposed policy bombshells. In it we see the proposal of new national program, a bunch of new taxes, and a mishmash of policies.
At the heart of this document is a stimulus to support the Canadian economy throughout the ongoing COVID-19 health crisis. We’ve already seen various types of programs launched to support Canadian households, businesses and other types of institutions. Not all of these programs have been successful but some, like CERB, and the enhanced EI programs have really helped to support individuals across Canada.
The Cost of COVID-19 Programs
The stimulus is undoubtedly an expensive one – expected to cost approximately 3 to 4% of Canada’s GDP over the next three years. Spending so far this year on COVID-financial federal programs is sitting at $490.7 billion as of Nov. 13th. This spending accounts for over 80% of all spending done by the Federal and provincial governments.
The budget also identifies those most economically affected by the health crisis and includes measures to assist those demographics. These includes women, young Canadians, indigenous peoples, black and other racialized groups.
The duration of this stimulus spending was also clarified to being tied to specific economic outcomes and not static dates. Some of these perimeters include employment rates, hours worked and more. The risk here is that if a stimulus is pulled back too soon it could lead to the revival of economic issues.
COVID-19 Spending Debt
One of the reasons why the federal government has felt comfortable spending so much money on these programs is that while the debt load is high, the cost to service the debt is ridiculously low due to market conditions and past government monetary policies.
Right now, the 10-year interest rate on a federal bond is around .75% per annum and shorter term bonds are even cheaper. These rates are being applied to the current debt issued and are also being used to refinance older debt to lock-in lower borrowing costs.
Surprisingly, when we look at the interest costs compared to annual GDP, it’s sitting at a 100 year low.
Also, since the interest rates to service this debt is below expected future growth of GDP, what will happen is that this existing debt will organically shrink as a percentage of GDP. Many economists believe that this will be the major way that the Canadian government and many countries will deal with their rapidly growing debt. This approach is much easier and painless than just relying on increased taxes or spending cuts.
Of course, a shock that bumps up interest rates would put this strategy at risk.
So moving into the details of specific programs – one of the biggest surprises was the announcement of Canada-wide affordable childcare. Not many details were included, but this was more of a formal announcement that begins the foundations of this program
Obviously, this is a massive endeavour and one that will reduce childcare expenses for households and allow more woman to remain in the workplace.
Further details of this program should be announced around spring of next year.
Taxes on Digital Services
Another big change – and one that is welcomed by some is the implementation of sales taxes on digital sales and short-term rentals.
Taxation on these organizations has been sketchy to say the least and many believe that this creates a raft of problems.
Under current rules, providers of digital services do not pay corporate income taxes or need to charge HST/GST if they do not have a physical presence in Canada. Of the two components, the budget proposes that digital providers will be required to collect and remit HST/GST. The other more contentious issue – regarding corporate income taxes is an open debate and one that is going through ongoing discussions.
With HST/GST collection changes, the end user – and not the company – will be charged taxes on digital service purchases that traditionally weren’t taxed in the past – such as Netflix subscriptions or the Google Play store.
As for provincial taxes side of the equation – only a couple of provinces charge provincial taxes on digital services but it’s likely that more provinces will jump on the bandwagon with the federal government’s move.
This increased tax probably won’t be noticed by many as it will cost a couple dollars or even less per service per month but the cumulative impact is massive. The federal government believes that this new tax will generate approximately 1.2 billion over five years – no small sum.
This program is expected to be implemented on July 1st, 2021.
Taxes on Short-Term Rentals & Foreign Owned Property
A similar roll out will be applied to short-term rentals. Currently not GST/HST is charged at source and the providers of rental units only have to collect HST/GST if they have revenues over $30k over a continuous 12-month period. On top of this, they would also be charged income taxes on all profit.
Unfortunately, many rental unit providers didn’t properly collect HST/GST for many reasons.
It’s now proposed that these taxes will be collected at time of booking by the platform or property owner. So for example, it’s likely that AirBnB will collect the amount directly from the individual when they book the unit.
Another big new tax is one on foreign owned property that is not being used productively. These are typically properties that are used to just store wealth and not rented or lived in by the owner. This type of unproductive ownership causes units to be removed from the housing supply and ultimately causes higher housing costs. Not much information was given on this but it sounds like it will be rolled out over the next year.
Claiming Work From Home Expenses! Yay!
Finally, it’s proposed that many Canadians that have been working from home will receive a small tax break! Rules to claim eligible household expenses as an income-tax deduction has been simplified by removing many of the barriers. It’s expected that this will provide a tax deduction of up to $400 with most individuals not having to provide proof to support the claim. The final amount that you receive really depends on how much you’ve actually worked from home.
This deduction will have the same tax savings as a RRSP contribution. So for example, you would have a tax savings of $80 bucks if you live in Ontario and are taxed at the lowest rate of 20.05%. It’s not much, but can help.
Other propose changes include continuing the wage subsidy until June 2021, eliminating the federal portion of interest on student loans in 2021 to some time in 2022, offering energy audits in homes and increasing tax enforcement for overseas tax evasion.