Ontario and Saskatchewan budgets: what advisors should know

The governments of Ontario and Saskatchewan have announced their provincial budgets for the upcoming year. With elections expected in both provinces over the next year, both governments generally played it safe, offering balanced budgets that distributed modest benefits across the board and avoided drastic changes.

The Ontario budget, delivered by the Liberal government’s finance minister, Greg Sorbara, offered virtually nothing in the way of personal or corporate tax relief, but advisors will want to take note of regulatory changes that impact retirement income.

Ontario is following the federal government’s lead on allowing pension income splitting. Sorbara did not specifically outline what forms of pension income are eligible, but provincial income taxation of pension income will mirror the federal legislation, assuming it is passed.

Pensioners are also going to have more flexibility in how they access their pensions and savings and what they can do with them. The Ontario government is creating a new Life Income Fund program that will integrate with the Life Registered Income Fund. The new LIF is designed to increase income for seniors in retirement and permit up to 25% of their savings from a transferred locked-in employment pension plan to be accessed for a one-time withdrawal.

“Right now, this is really two products, once you get past 69, the LIF and the LRIF,” said Paul Timmins, a senior consultant at Watson Wyatt. “The LIF is really just a RIF with a tax restriction on it, and its setup now is that by the time you reach 80, you have to go out and buy an annuity. The LRIF is like a tax registered fund, but it doesn’t require you to buy an annuity, and instead, you can just keep on withdrawing amounts.”

Timmins adds that the details on this measure are not entirely clear but that the concept seems similar to policy that was implemented by Alberta last year, where it collapsed its LIFs and LRIFs to make a single LIF with fewer restrictions.

What the budget does make clear is that those in or nearing retirement will now have the right to an optional one-time unlocking of up to 25% of locked-in funds, which can be used at their discretion, no earlier than the early-retirement date of the pension plan from which the money was transferred.

The LIF will have an amended payment schedule that will increase retirement income and allow the entire remaining account balance to be withdrawn when the holder turns 90. As well, there will be an opportunity to withdraw additional income from the previous year’s investments returns within the LIF.

Property and sales tax credits will be extended to those who receive old-age security and guaranteed income supplements. This will be done by increasing the income threshold at which these benefits are reduced. The budget didn’t specifically state what that threshold is, but it will be more than the current $23,090.

Other notables in the Ontario budget include an incremental increase of minimum wage from the current $8.00 to $10.25 by 2010. The Ontario Child Benefit, which is given to each child in a low-income family, is having its eligibility standards relaxed so that low-income working parents on social assistance are not deterred from seeking employment for fear of having government subsidies reduced. Low-income families will receive a yearly maximum of $600 per child under 18 in 2008, which will increase to $1,100 by 2010.

The Saskatchewan budget delivered by the NDP government’s finance minister, Andrew Thomson, provided its own set of mild offerings.

Students about to graduate are getting a big boost. In an effort to keep young people in the province, recent graduates from accredited postsecondary institutions are getting a tax break of $10,000 a year or $50,000 over five years for the first five years following graduation. This effectively means that the first $20,000 of a recent grad’s annual income is exempt from provincial income tax.

As in Ontario, seniors are getting a bit of a break; Saskatchewan has implemented a cap on the price they will have to pay for their medications. Under this plan, no drug prescription for any citizen over the age of 65 will cost more than $15.

On top of implementing the 2 percentage point reduction in the provincial sales tax that was announced in October, Saskatchewan is offering a continuation of an 8% cut to the education portion of property tax, which it has pledged to hike to 10% if the province receives the federal government’s proposed equalization payments.

In its analysis of the budgets, CIBC Capital Markets wrote that it is pleasantly surprised with the revenue production of both provinces, and particularly with Ontario’s ability to turn in a balanced budget when some predicted that the province would run a deficit.

The decreased reliance on debt does mean there will fewer bond issues for the coming year.

“Ontario plans modest short-term borrowing in 2007/08, with $0.4 billion of maturing CPP-held debt also likely to be rolled over. That leaves term debt funding at $18.8 billion for 2007/08, likely to be split between $1.5 billion of Ontario Savings Bonds and $17.3 billion of marketable bonds/medium-term notes,” CIBC writes.

In Saskatchewan, CIBC notes that provincial borrowing requirements are expected to fall by $300 million. It will still issue $700 million in domestic and $200 million in international bonds/MTNs.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(03/23/07)

Mark Noble