Finance Minister Jim Flaherty's third budget has a number of items that are of interest to HR practitioners
Jim Flaherty, the Minister of Finance, tabled his third federal budget on yesterday. Among other proposals, the budget announces two initiatives that will be welcome news for individuals and employers:
•Beginning in 2009, individuals will be able to contribute up to $5,000 per year to a tax-free savings account (TFSA). TFSA investment earnings and withdrawals will not be subject to tax and will provide increased ability for many individuals to save for retirement or other goals on a tax-effective basis.
•A new Crown corporation, the Canada Employment Insurance Financing Board (CEIFB), will be established to administer the employment insurance (EI) program and set EI premiums on a cost-recovery basis. This may reduce future EI premium rates for employers and employees.
Tax-free savings accounts
The budget introduces a new tax-assisted savings vehicle —TFSA. Beginning in 2009, individuals will be able to contribute up to $5,000 per year to a TFSA, with no impact on registered retirement savings plan (RRSP) contribution room. Investment earnings on funds contributed to a TFSA will not be subject to tax. Other key features of the TFSA include:
•TFSA contributions will not be deductible from taxable income and withdrawals will not be taxed;
•TFSA contributors must be age 18 or older and resident in Canada in the year contributions are made;
•the $5,000 TFSA contribution limit will be indexed to inflation with annual increases rounded to the nearer $500;
•unused TFSA contribution room will be carried forward to future years, and amounts withdrawn from a TFSA will be applied to increase future TFSA contribution room;
•TFSAs will be permitted to hold the same investments as an RRSP, subject to a prohibition against investments in entities with which a TFSA owner does not deal at arm's length;
•an individual who provides funds to a spouse to invest in a TFSA will be exempt from attribution rules that would normally require the spouse's TFSA investment earnings to be taxed in the individual's hands;
•on death, the TFSA assets can be transferred to a surviving spouse's or common law partner's TFSA;
•on the breakdown of a spousal relationship, amounts can be transferred between the TFSAs of separating spouses on a tax-free basis;
•TFSAs will not be protected from creditors in the event of bankruptcy and TFSA assets can be pledged as security for loans;
•interest will not be deductible on funds borrowed to invest in a TFSA;
•TFSA investment earnings and withdrawals will not affect eligibility for income-tested benefits and credits, including the Canada Child Tax Benefit, the Goods and Services Tax Credit, the Age Credit, the Old Age Security Benefit, the Guaranteed Income Supplement and employment insurance benefits; and
•unlike RRSPs, there is no age limit by which the TFSA assets must be withdrawn.
Implications of TFSAs for employers
The introduction of TFSAs may present opportunities for employers to refine the design, funding or delivery of certain benefit programs. For example:
•Sponsors of capital accumulation plans (such as registered retirement savings plans, defined contribution registered pension plans, deferred profit sharing plans and employee profit sharing plans) may wish to review the structure of their savings arrangements to assess whether the mix of vehicles is optimal.
•Although annual contributions are limited, in certain circumstances a TFSA might provide a useful vehicle for pre-funding supplemental employee retirement plan (SERP) or post-retirement health care benefits.
Employers who contemplate using TFSAs to fund employment benefit programs should also consider whether employees may perceive this as an encroachment on their own ability to contribute to TFSAs.
Employment insurance reform
The budget announces the creation of the Canada Employment Insurance Financing Board (CEIFB). A new Crown corporation reporting to the Minister of Human Resources and Social Development, the CEIFB will operate independently of the government and will have responsibility to set EI premium rates and administer EI premiums collected from employers and employees.
Starting in 2009, the CEIFB will administer a new EI premium-setting mechanism designed to ensure the EI system operates on a "break-even" basis over time. To ensure rate stability, CEIFB will maintain and manage an EI cash reserve to which the federal government will contribute an initial amount of $2 billion. Differences between EI benefit payments and EI premiums will be paid from or into the cash reserve account, with the maximum year-over-year increase or decrease in the EI premium rate to be set at 15 cents per $100 of insured earnings.
To date, the cumulative surplus of EI premiums (contributions less benefit payments) has reached more than $50 billion. The new CEIFB will therefore be welcome news to the many employers and economists who have long advocated for reform of the EI system to align premiums with benefit payments. The budget does not announce any changes to EI benefit payments. This suggests that if unemployment rates remain stable, both employers and employees may be able to look forward to reductions in EI premium rates.
Medical expense tax credit (METC)
METC rules will be clarified to confirm that eligible drugs include only those that:
•can lawfully be acquired only if prescribed by a medical practitioner; or
•are on the restricted list of METC eligible drugs that can be acquired without a prescription (such as insulin).
Because the METC rules are used to define drugs and other medical expenses that can be covered under tax-preferred private health services plans (PHSPs), this clarification may be significant for plans that currently cover over-the-counter drugs (OTCs), homeopathic substances and other health products that, while prescribed by a physician or other provider, can be obtained without a prescription. Employer-sponsored benefit programs may need to be reviewed and restructured either to exclude ineligible expenses or to provide coverage for them under a separate, taxable arrangement.
The budget also proposes to extend the list of items eligible for the METC (and consequently PHSPs).
Unlocking of life income funds (LIFs) subject to the federal Pension Benefits Standards Act
The budget announces that individuals who hold LIFs arising from funds transferred from a federally-registered pension plan will have increased flexibility to unlock their funds:
•individuals age 55 or older with LIF holdings of up to $22,450 will be able to collapse their LIF and receive the proceeds in cash or transfer the proceeds to a non-locked-in registered retirement savings plan (RRSP) or registered retirement income fund (RRIF);
•individuals 55 or older will also have a one-time opportunity to transfer up to 50 per cent of LIF holdings to a non-locked-in vehicle, such as an RRSP or RRIF;
•a LIF holder in financial hardship will also be entitled to withdraw up to $22,450 as a taxable lump sum; and
•the maximum withdrawal amount of $22,450 will increase annually in step with increases in the average wage.
No effective date is specified. This measure is similar to changes announced in other jurisdictions in recent months.
Other Measures
Remittance of source deductions: The budget proposes a graduated penalty regime for late remittances of income tax, Canada Pension Plan contributions and employment insurance contributions withheld from employees' pay. Currently, late remittances are generally subject to a flat penalty of 10 per cent of the amount required to be remitted. With effect from Feb. 26, 2008, the government proposes to replace the current penalty regime with graduated late-remittance penalties that cap at 10 per cent after seven days.
Registered education savings plans (RESPs): The budget proposes to increase the contribution and plan-termination limits for RESPs. The period during which RESP contributions can be made will be increased from 21 to 31 years, the termination deadline will be increased from 25 years to 35 years after inception of the plan and the contribution age limit for the beneficiary will be increased from 21 years of age to 31 years of age. If the RESP beneficiary qualifies for the Disability Tax Credit, the contribution period will be increased from 25 to 35 years and the termination deadline is extended from 30 years after plan inception to 40 years. This measure takes effect in 2008.
Guaranteed Income Supplement (GIS): Available to low-income seniors, the GIS is clawed back at a rate of 50 cents for every dollar of non-GIS income received. Currently, seniors may receive up to $500 per year of earned income before GIS benefits are clawed back. The budget proposes to increase this amount to $3,500 per year in order to encourage more seniors to participate in the labour market.
Northern residents deduction: The budget proposes to increase the northern residents deduction. For each member of a household, the limit will increase from $7.50 per day to $8.25. Where only one member of a household claims the deduction, the limit will increase from $15.00 per day to $16.50.
Targeted initiative for older workers (TIOW): Introduced in 2006, the TIOW is a federal-provincial program to assist unemployed older workers in vulnerable communities to stay in the workforce. The budget announces that an additional $90 million in funding over three years will be provided to the TIOW.
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. Towers Perrin attended the federal budget lockup on behalf of Canadian HR Reporter. For a more detailed look at the federal budget, and its implication for employers, see the March 24 print issue of Canadian HR Reporter.
•Beginning in 2009, individuals will be able to contribute up to $5,000 per year to a tax-free savings account (TFSA). TFSA investment earnings and withdrawals will not be subject to tax and will provide increased ability for many individuals to save for retirement or other goals on a tax-effective basis.
•A new Crown corporation, the Canada Employment Insurance Financing Board (CEIFB), will be established to administer the employment insurance (EI) program and set EI premiums on a cost-recovery basis. This may reduce future EI premium rates for employers and employees.
Tax-free savings accounts
The budget introduces a new tax-assisted savings vehicle —TFSA. Beginning in 2009, individuals will be able to contribute up to $5,000 per year to a TFSA, with no impact on registered retirement savings plan (RRSP) contribution room. Investment earnings on funds contributed to a TFSA will not be subject to tax. Other key features of the TFSA include:
•TFSA contributions will not be deductible from taxable income and withdrawals will not be taxed;
•TFSA contributors must be age 18 or older and resident in Canada in the year contributions are made;
•the $5,000 TFSA contribution limit will be indexed to inflation with annual increases rounded to the nearer $500;
•unused TFSA contribution room will be carried forward to future years, and amounts withdrawn from a TFSA will be applied to increase future TFSA contribution room;
•TFSAs will be permitted to hold the same investments as an RRSP, subject to a prohibition against investments in entities with which a TFSA owner does not deal at arm's length;
•an individual who provides funds to a spouse to invest in a TFSA will be exempt from attribution rules that would normally require the spouse's TFSA investment earnings to be taxed in the individual's hands;
•on death, the TFSA assets can be transferred to a surviving spouse's or common law partner's TFSA;
•on the breakdown of a spousal relationship, amounts can be transferred between the TFSAs of separating spouses on a tax-free basis;
•TFSAs will not be protected from creditors in the event of bankruptcy and TFSA assets can be pledged as security for loans;
•interest will not be deductible on funds borrowed to invest in a TFSA;
•TFSA investment earnings and withdrawals will not affect eligibility for income-tested benefits and credits, including the Canada Child Tax Benefit, the Goods and Services Tax Credit, the Age Credit, the Old Age Security Benefit, the Guaranteed Income Supplement and employment insurance benefits; and
•unlike RRSPs, there is no age limit by which the TFSA assets must be withdrawn.
Implications of TFSAs for employers
The introduction of TFSAs may present opportunities for employers to refine the design, funding or delivery of certain benefit programs. For example:
•Sponsors of capital accumulation plans (such as registered retirement savings plans, defined contribution registered pension plans, deferred profit sharing plans and employee profit sharing plans) may wish to review the structure of their savings arrangements to assess whether the mix of vehicles is optimal.
•Although annual contributions are limited, in certain circumstances a TFSA might provide a useful vehicle for pre-funding supplemental employee retirement plan (SERP) or post-retirement health care benefits.
Employers who contemplate using TFSAs to fund employment benefit programs should also consider whether employees may perceive this as an encroachment on their own ability to contribute to TFSAs.
Employment insurance reform
The budget announces the creation of the Canada Employment Insurance Financing Board (CEIFB). A new Crown corporation reporting to the Minister of Human Resources and Social Development, the CEIFB will operate independently of the government and will have responsibility to set EI premium rates and administer EI premiums collected from employers and employees.
Starting in 2009, the CEIFB will administer a new EI premium-setting mechanism designed to ensure the EI system operates on a "break-even" basis over time. To ensure rate stability, CEIFB will maintain and manage an EI cash reserve to which the federal government will contribute an initial amount of $2 billion. Differences between EI benefit payments and EI premiums will be paid from or into the cash reserve account, with the maximum year-over-year increase or decrease in the EI premium rate to be set at 15 cents per $100 of insured earnings.
To date, the cumulative surplus of EI premiums (contributions less benefit payments) has reached more than $50 billion. The new CEIFB will therefore be welcome news to the many employers and economists who have long advocated for reform of the EI system to align premiums with benefit payments. The budget does not announce any changes to EI benefit payments. This suggests that if unemployment rates remain stable, both employers and employees may be able to look forward to reductions in EI premium rates.
Medical expense tax credit (METC)
METC rules will be clarified to confirm that eligible drugs include only those that:
•can lawfully be acquired only if prescribed by a medical practitioner; or
•are on the restricted list of METC eligible drugs that can be acquired without a prescription (such as insulin).
Because the METC rules are used to define drugs and other medical expenses that can be covered under tax-preferred private health services plans (PHSPs), this clarification may be significant for plans that currently cover over-the-counter drugs (OTCs), homeopathic substances and other health products that, while prescribed by a physician or other provider, can be obtained without a prescription. Employer-sponsored benefit programs may need to be reviewed and restructured either to exclude ineligible expenses or to provide coverage for them under a separate, taxable arrangement.
The budget also proposes to extend the list of items eligible for the METC (and consequently PHSPs).
Unlocking of life income funds (LIFs) subject to the federal Pension Benefits Standards Act
The budget announces that individuals who hold LIFs arising from funds transferred from a federally-registered pension plan will have increased flexibility to unlock their funds:
•individuals age 55 or older with LIF holdings of up to $22,450 will be able to collapse their LIF and receive the proceeds in cash or transfer the proceeds to a non-locked-in registered retirement savings plan (RRSP) or registered retirement income fund (RRIF);
•individuals 55 or older will also have a one-time opportunity to transfer up to 50 per cent of LIF holdings to a non-locked-in vehicle, such as an RRSP or RRIF;
•a LIF holder in financial hardship will also be entitled to withdraw up to $22,450 as a taxable lump sum; and
•the maximum withdrawal amount of $22,450 will increase annually in step with increases in the average wage.
No effective date is specified. This measure is similar to changes announced in other jurisdictions in recent months.
Other Measures
Remittance of source deductions: The budget proposes a graduated penalty regime for late remittances of income tax, Canada Pension Plan contributions and employment insurance contributions withheld from employees' pay. Currently, late remittances are generally subject to a flat penalty of 10 per cent of the amount required to be remitted. With effect from Feb. 26, 2008, the government proposes to replace the current penalty regime with graduated late-remittance penalties that cap at 10 per cent after seven days.
Registered education savings plans (RESPs): The budget proposes to increase the contribution and plan-termination limits for RESPs. The period during which RESP contributions can be made will be increased from 21 to 31 years, the termination deadline will be increased from 25 years to 35 years after inception of the plan and the contribution age limit for the beneficiary will be increased from 21 years of age to 31 years of age. If the RESP beneficiary qualifies for the Disability Tax Credit, the contribution period will be increased from 25 to 35 years and the termination deadline is extended from 30 years after plan inception to 40 years. This measure takes effect in 2008.
Guaranteed Income Supplement (GIS): Available to low-income seniors, the GIS is clawed back at a rate of 50 cents for every dollar of non-GIS income received. Currently, seniors may receive up to $500 per year of earned income before GIS benefits are clawed back. The budget proposes to increase this amount to $3,500 per year in order to encourage more seniors to participate in the labour market.
Northern residents deduction: The budget proposes to increase the northern residents deduction. For each member of a household, the limit will increase from $7.50 per day to $8.25. Where only one member of a household claims the deduction, the limit will increase from $15.00 per day to $16.50.
Targeted initiative for older workers (TIOW): Introduced in 2006, the TIOW is a federal-provincial program to assist unemployed older workers in vulnerable communities to stay in the workforce. The budget announces that an additional $90 million in funding over three years will be provided to the TIOW.
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. Towers Perrin attended the federal budget lockup on behalf of Canadian HR Reporter. For a more detailed look at the federal budget, and its implication for employers, see the March 24 print issue of Canadian HR Reporter.
