What HR practitioners and employers need to know about the federal budget
The Honourable Jim Flaherty, Minister of Finance, tabled his second federal budget on March 19, 2007. The budget includes proposals that begin to address potential workforce shortages and aging population issues faced by employers.
Phased retirement
The budget announces that sponsors of defined benefit (DB) registered pension plans (RPPs) will be permitted to give members the option to receive partial pension payments while continuing to work and accrue further pension benefits. Such flexibility is not permitted under current tax rules —except for defined contribution RPPs.
Members of a DB pension plan who are at least age 55 and entitled to an unreduced pension will be allowed to receive up to 60 per cent of an accrued pension while accruing current service benefits. No reduction in work time or salary would be required. Bridging benefits could be paid even if lifetime retirement benefits have not yet commenced.
These measures are intended to be in place for the 2008 tax year following a consultation process in 2007. The proposed rules offer more flexibility to employers than rules introduced or proposed in Quebec and Alberta. Other provincial pension legislation may have to be amended before phased retirement can be implemented.
The budget proposal favours those public sector plans and other DB plans that offer generous unreduced early retirement benefits. It will be of no benefit to the many employers that sponsor DB plans that do not offer such early retirement subsidies.
Retirement savings age limit
Effective 2007, the budget proposes to raise, from 69 to 71, the age at which taxpayers must begin to receive payments from retirement savings held in RPPs, registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs) and deferred profit sharing plans (DPSPs).
This will require plan sponsors and financial institutions to update their plan texts and contracts. Existing registered plan annuities can be amended to reflect the new age limit. Special provisions are made for members who turn 70 or 71 in 2007. This is a positive announcement, which restores the maturation age to pre-1997 limits and provides older Canadians with additional flexibility in managing their retirement income.
Pension income splitting
The budget restates an announcement made by the Minister of Finance in October 2006 that, beginning in 2007, couples will be permitted to split certain kinds of pension income for tax purposes. This measure will reduce the total tax payable by couples where one individual receives significantly higher income than the other.
It is not yet known exactly how income splitting will be administered and reported on personal tax returns, or how withholding tax requirements for payers of pension benefits will be affected.
Qualified investments
The tax rules for qualified investments for RRSPs and other registered plans are being updated. Investment-grade debt that is part of a minimum $25 million issuance will qualify. This would include, for example, "Maple Bonds" (Canadian-dollar denominated bonds issued by foreign entities) which provide additional diversity in the fixed-income market.
The list of qualified investments for RRSPs and other registered plans will also be streamlined and updated through a new system of recognizing stock exchanges, which will allow the tax rules to respond to evolving market needs.
Canada-U.S. tax treaty
Canada and the U.S. have agreed in principle on the major elements of an updated Canada-U.S. tax treaty, with formal negotiations expected to conclude in the near future. The changes are intended to support cross-border labour mobility, with further harmonization of the tax treatment of pension contributions in the two countries and new rules to clarify the treatment of stock options. No further details are provided in the budget documents.
Personal tax measures
The budget introduces a variety of other personal tax measures, including:
•An increase to the age credit amount (applicable to taxpayers age 65 or older) by $1,000 to $5,066.
•A new $2,000 tax credit in respect of each child under age 18.
•Amendments to the rules governing Registered Education Savings Plans (RESPs) to provide additional flexibility and opportunity for increased savings.
The budget proposes to introduce a new Registered Disability Savings Plan (RDSP) in 2008. The RDSP proposals will help severely disabled individuals under age 50 and their families save for their long-term financial security. RDSP contributions can be made for an individual who qualifies for the disability tax credit, up to a lifetime maximum of $200,000. Payments must commence by the end of the year the individual attains age 60 and will be subject to a maximum annual limit based on life expectancy and the fair market value of the plan.
Health care initiatives
The federal government proposes to rebalance the Canada Health Transfer to an equal per capita basis when the current arrangement expires in 2014. The budget speech affirms the government's commitment to a universal health care system and notes the need for electronic health records to improve the efficiency and quality of care.
In addition to $400 million for eHealth initiatives and up to $600 million to reduce wait times, the government is spending $300 million for cervical cancer immunization programs. The latter initiative in particular would be welcome news for employers who may have been considering whether to cover this expensive preventative therapy.
Ian Genno and Karen Tarbox are with Towers Perrin, a global professional services firm that helps organizations optimize performance through effective people, risk and financial management. Ian can be reached at (416) 960-7420 or [email protected]. Karen can be reached at (416) 960-2609 or [email protected].
Phased retirement
The budget announces that sponsors of defined benefit (DB) registered pension plans (RPPs) will be permitted to give members the option to receive partial pension payments while continuing to work and accrue further pension benefits. Such flexibility is not permitted under current tax rules —except for defined contribution RPPs.
Members of a DB pension plan who are at least age 55 and entitled to an unreduced pension will be allowed to receive up to 60 per cent of an accrued pension while accruing current service benefits. No reduction in work time or salary would be required. Bridging benefits could be paid even if lifetime retirement benefits have not yet commenced.
These measures are intended to be in place for the 2008 tax year following a consultation process in 2007. The proposed rules offer more flexibility to employers than rules introduced or proposed in Quebec and Alberta. Other provincial pension legislation may have to be amended before phased retirement can be implemented.
The budget proposal favours those public sector plans and other DB plans that offer generous unreduced early retirement benefits. It will be of no benefit to the many employers that sponsor DB plans that do not offer such early retirement subsidies.
Retirement savings age limit
Effective 2007, the budget proposes to raise, from 69 to 71, the age at which taxpayers must begin to receive payments from retirement savings held in RPPs, registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs) and deferred profit sharing plans (DPSPs).
This will require plan sponsors and financial institutions to update their plan texts and contracts. Existing registered plan annuities can be amended to reflect the new age limit. Special provisions are made for members who turn 70 or 71 in 2007. This is a positive announcement, which restores the maturation age to pre-1997 limits and provides older Canadians with additional flexibility in managing their retirement income.
Pension income splitting
The budget restates an announcement made by the Minister of Finance in October 2006 that, beginning in 2007, couples will be permitted to split certain kinds of pension income for tax purposes. This measure will reduce the total tax payable by couples where one individual receives significantly higher income than the other.
It is not yet known exactly how income splitting will be administered and reported on personal tax returns, or how withholding tax requirements for payers of pension benefits will be affected.
Qualified investments
The tax rules for qualified investments for RRSPs and other registered plans are being updated. Investment-grade debt that is part of a minimum $25 million issuance will qualify. This would include, for example, "Maple Bonds" (Canadian-dollar denominated bonds issued by foreign entities) which provide additional diversity in the fixed-income market.
The list of qualified investments for RRSPs and other registered plans will also be streamlined and updated through a new system of recognizing stock exchanges, which will allow the tax rules to respond to evolving market needs.
Canada-U.S. tax treaty
Canada and the U.S. have agreed in principle on the major elements of an updated Canada-U.S. tax treaty, with formal negotiations expected to conclude in the near future. The changes are intended to support cross-border labour mobility, with further harmonization of the tax treatment of pension contributions in the two countries and new rules to clarify the treatment of stock options. No further details are provided in the budget documents.
Personal tax measures
The budget introduces a variety of other personal tax measures, including:
•An increase to the age credit amount (applicable to taxpayers age 65 or older) by $1,000 to $5,066.
•A new $2,000 tax credit in respect of each child under age 18.
•Amendments to the rules governing Registered Education Savings Plans (RESPs) to provide additional flexibility and opportunity for increased savings.
The budget proposes to introduce a new Registered Disability Savings Plan (RDSP) in 2008. The RDSP proposals will help severely disabled individuals under age 50 and their families save for their long-term financial security. RDSP contributions can be made for an individual who qualifies for the disability tax credit, up to a lifetime maximum of $200,000. Payments must commence by the end of the year the individual attains age 60 and will be subject to a maximum annual limit based on life expectancy and the fair market value of the plan.
Health care initiatives
The federal government proposes to rebalance the Canada Health Transfer to an equal per capita basis when the current arrangement expires in 2014. The budget speech affirms the government's commitment to a universal health care system and notes the need for electronic health records to improve the efficiency and quality of care.
In addition to $400 million for eHealth initiatives and up to $600 million to reduce wait times, the government is spending $300 million for cervical cancer immunization programs. The latter initiative in particular would be welcome news for employers who may have been considering whether to cover this expensive preventative therapy.
Ian Genno and Karen Tarbox are with Towers Perrin, a global professional services firm that helps organizations optimize performance through effective people, risk and financial management. Ian can be reached at (416) 960-7420 or [email protected]. Karen can be reached at (416) 960-2609 or [email protected].
