ALTHOUGH TH E 2012 FEDERAL budget contains various modest spending initiatives and breaks for certain groups, it’s clear that the main focus is deficit reduction.
The most important change for your clients is the federal initiative to restructure public pension plans. Ottawa has taken direct aim at the swelling cost of public pensions by raising the age of eligibility for old-age security (OAS) to 67 from 65. This will be a serious matter for those affected, particularly seniors with little other income, as the new age threshold extends to the guaranteed income supplement (GIS) as well.
However, Ottawa is providing lots of warning. Implementation of the new regime begins in April 2023 and will be phased in over the next six years. As a result, the measures do not affect anyone 54 or older on March 31, 2012, and gives everyone else at least 11 years to adjust their financial plans for retirement. The budget measures are contained in Bill 38, which received royal assent on June 29.
The budget also introduces a new option for people who wish to work longer, an increasingly popular option with baby boomers. Beginning on July 1, 2013, people can voluntarily defer their OAS pension for up to five years and subsequently receive a higher, actuarially adjusted pension. This delay will make sense for anyone whose income at age 65 will be above the level at which the full OAS benefits are clawed back, which is $69,562.
These changes aim to ensure the sustainability of the OAS and GIS programs, given the aging of the Canadian population overall.
Another significant change for advisors is the proposed revision to the exemption test for some life insurance policies. The exemption test limits investment returns that can accumulate in life policies without attracting taxes. (See story on page B6.)
Details of those changes are not yet available. The Canadian Life & Health Insurance Association Inc. (CLHIA) agrees that the test needs to be revised, given longer life expectancies and lower interest rates, but CLHIA has warned that the changes may include “frequent mandated variations in the assumptions underlying the exemption test [that] would cause significant disruption in life insurance marketplaces, leading to expensive redesigning and repricing of insurance policies, the cost of which would ultimately be borne by consumers.”
The revised test will apply to life insurance policies issued after Dec. 31, 2013.
@page_break@ Here’s a look at other budget measures: CANADA PENSION PLAN (CPP). The budget has announced that the 2010-12 triennial review of the CPP confirms the plan’s financial sustainability for at least 75 years at the current contribution rate of 9.9% of pensionable earnings.
REGISTERED DISABILITY SAVINGS PLANS (RDSPS). Qualifying family members are temporarily allowed to set up RDSPs for a disabled person whose ability to enter into a contract is in doubt and who does not have a legal representative. This is effective as of June 29 and until the end of 2016. In addition, as of 2013, the rules governing withdrawals from RDSPs will be changed to provide more flexibility. Transfers to RDSPs of investment income obtained from registered education savings plans will be allowed.
RETIREMENT COMPENSATION ARRANGEMENTS (RCAS). The Canada Revenue Agency is targeting abuses of RCAs, which fund the portion of a higher-income employee’s pension benefit that exceeds the maximum pension benefit permitted under the registered pension plan contribution limits. These apply as of March 29.
An example of abuse involves the deduction of large contributions that are indirectly returned to contributors, with the result that RCAs with little or no assets are being used to claim large refunds. The new “prohibited investment advantage” rules are designed to prevent these and similar abuses.
MINERAL EXPLORATION TAX CREDIT. Eligibility for the credit, applied to investors who use flow-through shares, has been extended a year. The credit applies to shares purchased on or before March 31, 2013.
EMPLOYEE PROfiT-SHARING PLANS. A special tax will be payable on contributions that exceed 20% of the employee’s income in any given year, effective March 29.
GROUP SICKNESS OR ACCIDENT INSURANCE PLANS. Employer contributions to these plans will be included in the employee’s income in the year the contribution is made rather than when benefits are received. There is an exception for contributions made for benefits paid on a periodic basis, effective March 29.
© 2012 Investment Executive. All rights reserved.