Skip to customer sign in Skip to content Skip to footer

Financial planning tips

March 08, 2016

Middle-class tax cuts and other 2016 financial changes

Big political changes in Canada in 2015 mean big financial changes in 2016. A middle-class tax cut, new mortgage rules and a TFSA rollback are three to note.

2015 was a big year for political change. The long-standing Conservative majority government in Ottawa was replaced with a Liberal majority government, which has already begun to deliver on its campaign promises. As a result, there are some important financial changes you need to know about.

Changes to TFSA limit

Tax-free savings accounts (TFSAs) were first introduced back in 2009. Canadians were allowed to contribute up to $5,000 each year from 2009-2012, and up to $5,500 each year from 2013-2014. TFSAs became even more powerful in 2015 when the annual contribution limit was increased from $5,500 to $10,000.

Unfortunately for those who love the TFSA, this increase was short-lived, as the new government rolled the annual limit back to $5,500 for 2016. This means that any Canadian who was over 18 in 2009 and resident in Canada since then, and who has never contributed to a TFSA, currently has a total of $46,500 in contribution room for 2016.

Year

Annual contribution limit

Cumulative contribution limit

2009

$5,000

$5,000

2010

$5,000

$10,000

2011

$5,000

$15,000

2012

$5,000

$20,000

2013

$5,500

$25,500

2014

$5,500

$31,000

2015

$10,000

$41,000

2016

$5,500

$46,500


As with RRSPs, you can carry unused TFSA contribution room forward into future years. You can check your TFSA limit with the Canada Revenue Agency, either online at home, with the MyCRA mobile app or by phone (1-800-267-6999).

New marginal tax rates

Also new are changes to the federal marginal tax brackets and rates. Here are the rates and brackets for 2015 and 2016:

2015 tax year

2016 tax year

Tax bracket

Federal income tax rate

Tax bracket

Federal income tax rate

   Up to $11,327

0.0%

Up to $11,474

0.0%

   $11,327 - $44,701

15.0%

$11,475 - $45,282

15.0%

   $44,702 - $89,401

22.0%

$45,283 - $90,563

20.5%

   $89,402 - $138,586

26.0%

$90,564 - $140,388

26.0%

   Over $138,586

29.0%

$140,389 - $200,000

29.0%

   

Over $200,000

33.0%


As you can see, the government lowered the income tax rate for the middle-income bracket from 22.0% to 20.5%. To help offset the lower revenue this will generate, the government also introduced a new tax bracket that will see income above $200,000 taxed at 33.0%. Two things to note: This table only shows federal rates – you must also pay provincial/territorial income tax on top of the federal figure – and these changes don't affect the 2015 tax return you may be working on now. (Not sure how marginal rates work? Read my article: Marginal tax vs. average tax.)

What might this look like in dollars and cents? Here's an example:

If you earn $60,000 and you live in Ontario, you will pay $11,369.07 in income tax in 2016, versus the $11,685.19 you paid in 2015 – a saving of $316.12.

New mortgage rules

When the federal government changed mortgage rules back in 2012, it:

  • Lowered the maximum amortization period from 30 years to 25 years
  • Reduced the maximum mortgage amount for refinancing from 85% to 80% of the appraised value of your home

Most recently, the new government has changed the down payment required to purchase a home, in an attempt to limit the financial risk to homebuyers in overheated markets. Under the old rules, your down payment needed to be at least 5% for a home costing less than $1 million, and 20% for a home in the million-plus range. As of February 15, 2016, you need 10%, but only on the amount over $500,000 and under $1 million. The minimum down payment for homes at $1 million and up remains 20%.

For homes under $500,000, the minimum down payment is still 5%. If you're buying a home with a price tag of $400,000, you'll need to put down at least $20,000 (5% of $400,000).

If your new home costs $650,000, your minimum down payment will be $40,000. The calculation looks like this:

$500,000 X 5%    $25,000
$150,000 X 10%    $15,000
  $40,000

Here's how the new rules have changed the down payment you'll need for homes at various prices:

 

Old rules

New rules

Home price

Minimum down payment

Minimum down payment

$300,000

$15,000

$15,000

$400,000

$20,000

$20,000

$500,000

$25,000

$25,000

$600,000

$30,000

$35,000

$700,000

$35,000

$45,000

$800,000

$40,000

$55,000

$900,000

$45,000

$65,000

$1,000,000

$200,000

$200,000


Note there that these are only the minimum requirements. If you can put more money down, your mortgage payments will be lower and you'll pay less interest over time.

In addition to these three big changes, watch for more news about the Canada Pension Plan, Old Age Security and the Universal Child care benefit (UCCB).

Jim Yih is a group retirement consultant at Clearpoint Benefit Solutions and founder of the award-winning RetireHappy.ca blog. For more information, visit JimYih.com.

Related articles