People have a lot to say when it comes to politics. In part because government policies affect people's lives but how can the federal government affect your finances? The truth is, it’s complex but here are some of the more talked-about ways the federal government can affect your cashflow or investments:
Taxes, Taxes, Taxes
Let’s start with a big one, taxes. Taxes are created by the government. They can increase, decrease, remove, or add them. That said, they rarely increase taxes as it can discourage future votes. Alternatively, decreasing taxes can encourage votes. Either way, a tax change affects people at the till or during tax season.
Government Spending
The annual federal budget is usually published in February or March and is created by the party in power. It details what the current government sees as a priority for funding - funding can be either direct funds or tax incentives.
When Canadian citizens receive government stimulus, they tend to spend it on products and services instead of saving it. This in turn adds money to and stimulates the Canadian economy overall. (This was the strategy used during covid).
When companies/industries receive funding, they tend to use it to improve business and/or hire more employees, this in turn can make their stocks more attractive.
The Bank of Canada
The Bank of Canada (BOC) oversees Canada’s currency and financial systems. The BOC is a crown corporation, meaning it’s a “wholly owned federal … organization that is structured like a private or independent company,” Canadian Encyclopedia. In fact, the BOC is one of the few crown corporations that doesn’t need to have its plans approved by the government, giving it independence.
The BOC has various tools at its disposal to stabilize our economy, the most prevalent one being setting the overnight rate. The overnight rate is the rate financial institutions are charged when borrowing money, this then affects loan/mortgage rates.
So yes, the BOC’s actions can affect people’s mortgage rates but it’s not the party in power that is pulling the strings but rather the BOC’s board of directors.
Registered Account Changes
Registered accounts are accounts registered with the federal government to receive tax benefits and/or grant money. These accounts include RRSPs, TFSAs, RESPs, RDSPs, pensions, etc.
Since these accounts receive perks from the federal government, any change made to the rules affects account holders - The most common changes being adjustments to grant or contribution limits.
A recent change was the creation of a new registered account, the First Home Savings Account (FHSA) - giving future 1st time homebuyers an environment to grow their downpayment tax-free.
The truth is that the federal government’s choices can affect peoples’ finances but keep in mind, no matter who’s at the helm, government changes are made, at least in part, for votes.
To learn about how government policies affect your investments or to open a First Home Savings Account (FHSA) contact us at KLT Wealth Management.
- Courtney Beach, QAFP
