The federal budget tabled by Jim Flaherty, Minister of Finance, on Jan. 27 proposes a broad range of new spending programs and personal income tax reductions.
This summary highlights the HR-related measures proposed in the budget that will be of interest to businesses and individuals.
Personal tax reductions
The budget proposes personal income tax reductions effective January 1, 2009:
•the basic personal amount will increase to $10,320; and
•the lowest two marginal tax thresholds will increase by 7.5% -- significantly more than inflation indexing -- to $40,726 and $81,452, respectively.
Employers will need to update their payroll systems to reflect new source-deduction rates as a result of these changes.
Employment insurance (EI)
•For two years, the regular period for collecting EI unemployment benefits will increase by five weeks. This extension does not apply to other EI benefits, such as maternity or parental benefits.
•EI premiums will remain frozen at $1.73 per $100 of insurable earnings in 2010. The government expects that EI benefits will exceed EI premiums in 2009.
•Extended EI benefits will be provided for long-term training programs.
•EI-sponsored work-sharing agreements (used by some employers to avoid lay-offs during a temporary slowdown in business) will be extended by 14 weeks to a maximum of 52 weeks.
Labour force initiatives
The budget proposes several initiatives which will help address shortages of skilled workers in certain regions and employment sectors, and will help in situations where employers are faced with the prospect of closures or bankruptcy.
•Funding for the Targeted Initiative for Older Workers, which provides assistance to older workers to find work in small communities, will increase by $60 million over three years. The scope of the program will be expanded to include cities with populations of up to 250,000.
•Apprentices who complete certification in a "Red Seal" skilled trade will be eligible for a new "Apprenticeship Completion Grant" of $2,000. The grant will be taxable.
•The government proposes to spend $50 million over two years to support a common approach to recognition of foreign educational and professional credentials to improve integration of immigrants into the work force.
•The Wage Earner Protection Program currently guarantees up to $3,254 of unpaid wages to workers employed by a bankrupt employer. This guarantee will be extended to cover severance and termination pay -- but still subject to the existing $3,254 limit.
Federally regulated pension plans
Budget proposals relating to pension benefit standards legislation will only affect pension plans that fall within the federal jurisdiction -- such as plans covering employees in designated sectors such as banking and interprovincial transportation. For such pension plans, two budget announcements are potentially noteworthy.
Increases to smoothed asset values for solvency funding. Under current federal rules for solvency valuations, plans are permitted to smooth asset fluctuations over five years when determining cash contribution requirements, provided the smoothed asset value does not exceed 110 per cent of market value.
The budget proposes to increase the 110 per cent limit. In the current economic environment, this could reduce the minimum required cash contributions for many federally-regulated pension plan sponsors.
To the extent the cash contributions are reduced, the assets of the plan sponsor would be subject to a statutory lien in the event of bankruptcy. The Office of the Superintendent of Financial Institutions will soon provide detailed guidance on this measure.
Accelerated schedule for pension consultations. On Jan. 9, 2009, the federal government released a consultation paper on federally-regulated pension plans. The budget announces that the timeline for this consultation will be accelerated so that it will be completed within 90 days.
Perhaps most significantly, the budget indicates that the government intends to make "permanent improvements" to the legislative and regulatory framework governing federally-registered pension plans by the end of 2009.
Other measures affecting tax-assisted savings
Deposit insurance for TFSAs. The budget proposes to designate tax-free savings accounts (TFSAs) as a separate category of deposits guaranteed by the Canada Deposit Insurance Corporation (CDIC) in the event of default of a member financial institution.
The CDIC has a cap of $100,000 per depositor, per institution, but the cap applies separately to deposits held in each category recognized by the CDIC (such as savings accounts, registered retirement savings plans, registered retirement income funds and now TFSAs).
Home buyers' plan. The amount individuals may withdraw from their RRSPs under the Home Buyers' Plan to buy or build a first home will increase from $20,000 to $25,000.
RRSP/RRIF losses after death. Currently, the market value of investments held in an RRSP at the time of death is generally included in the income of the deceased for the year of death. Upon distribution to the RRSP beneficiaries, any subsequent increase in the value of the RRSP investments is generally included in the beneficiaries' income -- but losses are not deductible. (Similar rules apply in the case of RRIFs.)
The budget proposes to allow the amount of such losses in value after death to be carried back and deducted against the RRSP/RRIF income inclusion. This measure will apply where the final post-death distribution from the RRSP or RRIF occurs after 2008.
Minimum RRIF withdrawals. The government reiterated its recent commitment to reduce the required minimum RRIF withdrawal for 2008 by 25 per cent (on a one-time basis), to recognize the impact of the deterioration in market conditions on retirement savings.
Non-resident trusts and foreign investment entities. The proposals for non-resident trusts and foreign investment entities, first introduced in the 1999 budget, and most recently included in Bill C-10, had the unintended effect of taxing certain pension investments outside Canada.
The budget states that these proposals will be reviewed in light of the submissions received and the recommendations of the Advisory Panel on Canada's System of International Taxation, before proceeding with these measures.
Filing requirements for information returns
The budget proposes to increase the use of electronic filing rather than paper filing for information returns. In particular, after 2009, the threshold at which electronic filing is required for multiple information returns (of the same type) will be reduced from 500 to 50. New penalties will apply for failure to file electronically where required to do so.
The penalty structure for late-filed information returns will be amended so that the penalty is based on a combination of both the delay in filing and the number of late returns. This may increase or decrease the amount of the penalty compared to current Canada Revenue Agency assessing practices, depending on the circumstances.
Both of these measures will apply to information returns such as annual information returns (AIRs), past service pension adjustments (PSPAs), pension adjustment reversals (PARs) and T4 slips.
Government bond yields -- Implications for pension liabilities
The Department of Finance surveys private sector economic forecasters quarterly for their outlook on the Canadian economy. The budget documents include a summary the most recent survey results (updated in mid-January).
Of interest to sponsors of defined benefit pension plans, 10-year government bond yields -- which were 3.9 per cent at the start of 2008, averaged 3.6 per cent over the course of the year, but had dropped to 2.7 per cent by the end of the year -- are forecast to average 2.8 per cent in 2009, then rise to 3.4 per cent in 2010 and five per cent on average over the period from 2011 to 2014.
For plan sponsors that are required to file actuarial valuation reports in 2009 or 2010, this suggests potentially higher cash contribution requirements than in prior years, due to lower solvency valuation interest rates. This will exacerbate the effect of severe drops in pension fund asset values in the latter part of 2008. If borne out, the forecast increase in government bond yields in 2011 and beyond will offer some eventual relief.
It remains to be seen what impact government borrowing to finance the deficits forecast in the budget -- and further developments in the economy -- will have on corporate bond yields, which will influence the accounting cost reported for sponsors of defined benefit pension plans and post-retirement benefit plans.
C. Ian Genno and James Pierlot are consultants in the Toronto office of Towers Perrin. This article was prepared with the assistance of several colleagues in their office.