Retirement savers, small-business owners, lower income families see tax benefits

(February 18, 2003) Retirement savers got a mixed tax break in federal Finance Minister John Manley’s first budget. RRSP contribution limits will go up but not as high as many expected. Still, the budget offered a glimpse of potential future tax assistance for retirement savings even as its focus was directed more toward small businesses and lower income families with children.

For advisors, the headline is that the maximum RRSP limit will jump to $14,500 this year — 12 months ahead of schedule. RRSP limits will be raised to $18,000 over three years and then, starting in 2007, indexed to average wage growth. An increase in RRSP limits was widely expected, but the budget figure is less than the $19,000 limit recommended by the House of Commons finance committee, and much less than retirement advocates like the Investment Dealers Association of Canada, Investment Funds Institute of Canada and Advocis have sought.

“It came in just below the two most popular recommendations,” said Jamie Golombek, AIM’s vice-president of tax and estate planning. “The House of Commons Standing Committee on Finance [were] recommending $19,000, based on 18% of $105,000” — roughly the starting point for the highest tax bracket. “C.D. Howe plumped for $18,500, so we got $18,000.”

“We didn’t get it right away; we get it in 2006,” he noted. “But it’s a step in the right direction.”

Existing and Proposed RPP/RRSP Limits	2003	2004	2005	2006	2007
Money purchase RPPs: annual contribution limit
Existing	14,500	15,500	Indexed
Proposed	15,500	16,500	18,000	Indexed
Defined benefit RPPs: maximum pension benefit (per year of service)
Existing	1,722	1,722	Indexed
Proposed	1,722	1,833	2,000	Indexed
RRSPs: annual contribution limit
Existing	13,500	14,500	15,500	Indexed
Proposed	14,500	15,500	16,500	18,000	Indexed
Source: Department of Finance Canada

“I think it’s great as long as you have the money to put in the RRSP,” said David Clarke, an accountant with Collins Barrow in Ottawa. However, not all Canadians will feel the impact of higher limits. “Really we’re looking at higher earning individuals who will benefit from the tax shelter of the RRSP,” he explained. “It would have been of more benefit to middle-income investors if the 18% contribution rate had been changed.”

Warned Tim Cestnick, managing director of national tax services at AIC Limited, “If you’re not making over $75,000 a year, you won’t notice the difference. I think, by and large, people with higher income having been saving enough for retirement,” he added. “I don’t think the average Canadian has done as well at that, so I don’t think this helps them at all.”

Tax-prepaid accounts

Since the RRSP system and the pension system are integrated — tax-sheltered retirement savings are currently slightly more generous than RRSP limits — the maximum pension benefit for defined benefit plans will rise from the current $1,722 per year of service to $2,000 in 2005, and will be indexed thereafter.

To ensure pension and RRSP benefits receive equivalent tax treatment, the government relies on a formula so that the maximum RRSP limit is nine times the maximum pension benefit. At present, the $1,722 maximum pension benefit would translate into an RRSP limit of $15,498. In 2003, the money-purchase RPP limit (essentially for group RSPs and similar vehicles) will rise to $15,500. Traditional RRSPs will achieve parity with RPPs in 2006, when the pension limit rises to $2,000 and the RRSP limit attains $18,000.

The federal government also said it would examine tax prepaid savings plans (TPSPs). Under such a plan, there would be no tax deduction for an initial contribution, but savings could compound and be withdrawn tax-free. The United States has already moved in this direction with Roth Investment Retirement Accounts. President George W. Bush’s budget included two TPSP proposals, a Lifetime Savings Account with a $15,000 (US) annual contribution limit for couples, and a Retirement Savings Account also with a $15,000 limit. The latter, however, could only be tapped after age 59 while the former could be used at any time.

More Budget Coverage

Big spender: Ottawa commits billions to healthcare, boosts RRSP limits Retirement savers, small-business owners, lower income families see tax benefits Clouds and silver linings — Advisors react to budget Industry insiders see “spending budget” having little impact on advisors, clients RRSP increase disappoints industry associations; anti-fraud initiative garners praise Return to Budget 2003 main page

“I can only see that as a good thing,” said Clarke. “If you’re looking at people who have available cash after they put money into their RRSPs, it’s definitely a benefit.

“It could help a lot of people who are in employment situations,” he explained. “People who own corporations have the option to defer tax within their own corporations. High earners who are employed don’t have that ability.”

Cestnick said he’s made representations on TPSPs to the finance department. “I’m certainly not holding my breath that that would happen in Canada.” Still, he said, “I really hope the government looks at this seriously. There are too few choices, basically RRSPs and non-registered accounts. I could see this fitting into someone’s personal plans.”

Family support

Most observers expected the Canada Child Tax Credit (CCTC) to be raised, but Manley went one better, creating a new Child Disability Benefit. The CCTC, currently $2,444 for the first child, will rise to $3,243 by 2007. Since it’s a means-tested benefit, the government is also promising to look at clawback thresholds, which are slated to rise from $33,487 in July 2003, to $37,176 in 2007.

The Child Disability Benefit, also means-tested, will provide up to $1,600 for families with incomes of less than $33,487 who have disabled children.

However, these child tax credits are targeted at lower income families, Cestnick noted. Indeed, the average Canadian family will see little tax savings: $46 a year in lower employment insurance premiums and a cut on the once-a-year plane trip they make, thanks to falling airport security taxes.

For families with disabled children who need constant care, the government is also proposing to raise the income measure used to calculate financial dependence from $7,634 to $13,814. That will allow parents and grandparents to roll over more of the proceeds of their RRSPs and RRIFs to infirm children when the parent dies.

“That’s always been a problem in the past, where a child had a certain amount of income and didn’t qualify for the rollover,” Golombek explained. “Now they’ve increased that quite substantially. Almost doubled it, so that’s a big benefit.”

Small business

The government plans to extend the low 12% rate on small-business income (13.12% with the federal surtax). Currently the first $200,000 of qualifying income is eligible for the lower tax rate. The budget proposes moving the limit up to $300,000 over four years, as well as some investment credits. In the past, small businesses have not been able to capture the full value of some credits.

“Refundable [research and development] credits are capped based on an expenditure limit of $2 million and the credits are ground down between $200,000 and $400,000,” explained Clarke. “They’re proposing to shift the grind up $100,000 so it will start at $300,000.”

In addition, the lower tax rate might “incent” small-business owners to invest more in their business rather than pull it out as a salary, said Cestnick.

The capital gains rollover for small-business investors introduced in the 2000 budget is also being improved. Investors who sold their businesses were entitled to reinvest $2 million of their original capital in a new enterprise and defer the capital gains, provided they did it within a short time period. The limit on the value of the old and the new investment is being removed, and the time limit for reinvestment is being extended.

“That’s a good thing for small-business investors,” Clarke added, noting that many business owners in the past haven’t been aware of those time limits and thus missed the deadline to reinvest and defer their capital gains.

The government is also easing tax definitions that inhibit pension funds from investing in venture capital partnerships. Venture capital partnerships count as foreign property unless they meet the definition of a qualified limited partnership. Until 2001, no limited partner could hold more than 30% of a limited partnership. Now the government has introduced more technical changes to the definition of a qualified limited partnership.

Overall, Golombek concluded, “We were looking for the RRSP limits and we were happy they were increased. We would have hoped that they would have been faster. We would have liked the full 19% but 18% is okay.”

As usual, there were a couple of disappointments, he said, including no change in the foreign content rule, and no exemption from capital gains for securities donated to charity, as is the practice in the U.S.

Detailed List of Indexed Personal Income Tax Parameters Including Budget 2003 Measures

	Pre-2000 budget	2002	2003
		(dollars)
Personal amounts andbracket thresholds
Basic personal amount	7,131	7,634	7,756
Spousal/equivalent-to-spouse amount	6,055	6,482	6,586
Net income threshold	606	649	659
Taxable income at which 22-per-cent bracket begins	29,590	31,677	32,183
Taxable income at which 26-per-cent bracket begins	59,180	63,354	64,368
Taxable income at which 29-per-cent bracket begins	n/a	103,000	104,648
Credit amounts to reflect needs
Infirm dependant amount	2,353	3,605	3,663
Net income threshold	4,778	5,115	5,197
Caregiver amount	2,353	3,605	3,663
Net income threshold	11,500	12,312	12,509
Disability amount	4,233	6,180	6,279
Disabled child amount	n/a	3,605	3,663
Allowable child care and care expenses	n/a	2,112	2,145
Medical expense tax credit—3per cent ofnet income ceiling	1,614	1,728	1,755
Refundable medical expense tax credit supplement	500	535	544
Minimum earnings threshold	2,500	2,676	2,719
Family net income threshold	17,419	20,296	20,621
Age amount	3,482	3,728	3,787
Net income threshold	25,921	27,749	28,193
Old Age Security repayment threshold	53,215	56,968	57,879
Goods and Services Tax credit1
Adult maximum	199	213	216
Child maximum	105	112	114
Single supplement	105	112	114
Phase-in threshold for the single supplement	6,456	6,911	7,022
Family net income at which credit begins to phase out	25,921	27,749	28,193
Canada Child Tax Benefit1
Base benefit	1,020	1,151	1,169
Additional benefit for third child	75	80	82
Additional benefit for children under 7 years	213	228	232
Family net income at which base benefit beginsto phase out	29,590	32,960	33,487
National Child Benefit (NCB) supplement2
First child	955	1,293	1,463
Second child	755	1,087	1,254
Third child	680	1,009	1,176
Family net income at which NCB supplementbegins to phase out	20,921	22,397	21,529
Family net income at which NCB supplementphase-out ends	29,590	32,960	33,487
Child Disability Benefit3
Maximum benefits	n/a	n/a	1,600
Family net income at which Child Disability Benefitbegins to phase out	n/a	n/a	33,487
1 The GST credit and CCTB are paid on a benefit-year cycle beginning in July. 2 Includes Budget 2003 increase of $150 per child for July2003. 3 Introduced in Budget 2003.
Source: Department of Finance Canada

Filed by Scot Blythe, Advisor.ca, sblythe@advisor.ca.

(02/18/03)

This special package brought to you by: