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Federal budget impacts investors, employees, retirees
4/20/2019 6:29:37 AM
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By Knowledge Bureau  | Thursday, March 28, 2019



By Evelyn Jacks

Last Tuesday, Finance Minister Bill Morneau tabled the 2019 federal budget. It is unfortunate that Finance Canada continues its rhetoric about Canadians who don’t pay their “fair share,” specifically those who have been following perfectly legal rules in arranging their affairs to pay the least amount of taxes legally possible within the intent of the law. In past controversial moves, this was directed at private business owners who split income with family members or earned passive income on their retained earnings. In this budget it could be average Canadians investing in mutual funds and business owners who save within an IPP who are targeted. There are also proposals affecting TFSAs, certain types of annuities, and employee stock options.

Mutual funds

Mutual funds will be prevented from allocating capital gains or income to their redeeming unitholders if fully taxable ordinary income has been recharacterized as a capital gain or tax has been inappropriately deferred.

The “allocation to redeemers methodology” is being replaced with a new rule that denies the trust, in certain circumstance, a deduction for the portion of the allocation made to a unitholder on redemption of a unit that is greater than the capital gain that would otherwise have been realized by the unitholder on redemption of the units.

* Effective date: Allocation to redeemers methodology is effective for taxation years of mutual fund trust beginning after March 19, 2019.


To curb the conversion of ordinary income to capital gains by mutual fund trusts using the “allocation to redeemers methodology,” a mutual fund will no longer be allowed a deduction in respect of an allocation if the allocation is ordinary income and the unitholders redemption proceeds are reduced by the allocation.

* Effective date: Effective for business years of mutual fund trusts beginning after March 19, 2019.

Character conversion

Taxpayers who use derivative transactions to convert fully taxable ordinary income into capital gains will be curtailed by new rules.

A new qualification is added to the commercial exception to character conversion transactions that makes the exception unavailable if it can reasonably be considered that one of the main purposes of the series of transactions is for a taxpayer to convert the amount paid for a security into a capital gain.

* Effective date: Effective for transactions entered into on or after March 19, 2019, as well as after December 31, 2019, for transactions entered into before March 19, 2019.

Individual Pension Plans

Business people who use Individual Pension Plans (IPPs) will be limited in their use of certain types of pension plans that transfer into the IPP. Taxpayers may no longer transfer funds from a defined benefit plan from a former employer to a new IPP. This is to stop the circumventing of prescribed transfer limits.

* Effective date: March 19, 2019.

Carrying on business in a Tax-Free Savings Account (TFSA)

The TFSA exempts income from property earned within the plan from taxation. It does not exempt income from business, so when a business is operated within a TFSA, the income is subject to tax.

When a business is carried on within a TFSA, the holder of the TFSA and the TFSA issuer (trust) are jointly and severally liable for the taxes payable on that business income, but the issuer’s liability is limited to the property that the issuer is in possession and control of at the time the business was operating plus the distributions made to the taxpayer after the Notice of Assessment was sent in respect of the taxation year.

Note: TFSAs will now have to protect themselves when allowing withdrawals to ensure there is no outstanding assessment with respect of any business operated within the TFSA.

* Effective date: 2019 and subsequent taxation years

ALDAs and Variable Payment Life Annuities

Advanced life deferred annuities (ALDAs) will be permitted under a registered retirement savings plan (RRSP), Registered Retirement Income Fund (RRIF), Deferred Profit-Sharing Plan (DPSP), Pooled Registered Pension Plan (PRPP), and defined contribution Registered Pension Plan (RPP).

Variable payment life annuities (VPLA) will be permitted under a PRPP and defined contribution RPP.

An ALDA pays a pre-determined monthly income starting at a pre-determined age and continues until the annuitant dies. To qualify, the income must start no later than the end of the year in which the annuitant attains 85 years of age. No more than 25% of the plan assets may be used to invest in an ALDA. There will also be a lifetime limit of $150,000 for an individual’s contributions to ALDAs (indexed in increments of $10,000 beginning in 2020). Additional rules will apply as detailed in the budget documents.

A variable payment life annuity (VPLA) pays a variable amount depending on the performance of the investment in the annuity fund and the mortality of the other VPLA annuitants. A minimum of 10 retired members of the PRPP or RPP is required to participate in the VPLA before the arrangement can be established. The VPLA must begin payments to the members by the later of the end of the year in which the member attains the age of 71 years and the end of the year in which the VPLA is established. Additional rules apply, so talk to your advisor or see the budget document for more details.

* Effective date: 2020 and future years.

Employee stock options

When a corporation grants stock options with a fair market value (FMV) exercise price to employees, paragraph 110(1)(d) of the Income Tax Act provides a deduction equal to 50% of the benefit realized on the exercise or disposition of options where certain other conditions are satisfied (the stock option deduction).

Budget 2019 proposes to limit the availability of the stock option deduction where options are granted to employees of “large, long-established, mature firms by limiting the availability of the stock option deduction to an annual maximum of $200,000 of stock option grants.” Budget 2019 provides that the stock option deduction will remain unchanged for “startups and rapidly growing Canadian business”.

* Effective date: 2019

© 2019 The Knowledge Bureau, Inc. All rights reserved. Reprinted with permission.

Evelyn Jacks is the founder and President of Knowledge Bureau, which brings continuing financial education in the multiple areas of specialization to advisors and their clients. She is the author of 52 books on tax and wealth planning. This article originally appeared in the Knowledge Bureau Report. Follow Evelyn Jacks on Twitter @EvelynJacks. Visit her blog at

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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