This overview provides answers to some of the more popular questions arising from the proposed 2012 federal budget. While it does not cover all aspects of the federal budget, it addresses several points that may affect individuals and their financial plan.
When will persons born after April 1, 1958, be eligible for Old Age Security (OAS)?
Persons born between April 1, 1958, and January 31, 1962, will be eligible for OAS at various ages depending on their year of birth. Those born on or after February 1, 1962, will be eligible for OAS at age 67 instead of the current age of 65. Persons eligible for OAS starting July 1, 2013, will have the option to voluntarily defer receiving OAS, which would result in an increased benefit when they do start claiming it.
What is a Registered Disability Savings Plan (RDSP)?
A Registered Disability Savings Plan is a long-term savings plan that benefits people with disabilities and their families in saving for their long-term financial needs in a tax-deferred vehicle. Contributions to the RDSP are eligible for the Canada Disability Savings Grant up to a lifetime limit of $70,000. By investing wisely, the RDSP can grow into a significant asset.
Many people use insurance to protect their family against loss of income during working years and to leave to their beneficiaries/charities for estate planning. How will the proposed budget affect insurance policies?
Permanent insurance policies provide both insurance protection and savings components. The income earned on the savings component of a permanent life insurance policy that is an ‘exempt policy’ under the Income Tax Act grows on a tax-sheltered basis. This tax-free savings component makes insurance policies an attractive segment of overall financial portfolios as there are only two other tax-free investments – principal residence and TFSAs. However, the budget proposes changes that may result in a reduction of the savings component that is permitted to grow on a tax-sheltered basis with an exempt policy. This would not eliminate the value that the savings component provides, but does limit the attractiveness of the feature. This change is proposed to apply to policies issued after 2013, thereby making now an opportune time for people to review insurance planning initiatives. It is expected that any policies issued on or before December 31, 2013, will not be affected by these proposed changes.
For those with term policies in place, now would be a crucial time to review the policy to check if it is convertible to permanent coverage. This feature would allow conversion of part or all of one’s coverage without undergoing new medical questioning which would help in obtaining preferred rates on premiums.
Will gift funds to foreign charitable organizations still be allowed?
Foreign charities are generally not qualified donees under the Income Tax Act so donations to such charities are not eligible for the charitable tax credit. A foreign charitable organization that receives a gift from the Government of Canada within a prescribed time period will be a qualified donee if it is registered with the Minister of National Revenue. The budget is proposing to modify the registration rules for foreign charities that wish to issue tax receipts to Canadians. A foreign charitable organization that receives a gift from the Government of Canada may be designated as a qualified donee if it pursues activities related to disaster relief, urgent humanitarian aid, or activities in the national interest of Canada. Once the foreign charitable organization has been designated as a qualified donee, it will be able to issue tax receipts to Canadians for a 24-month period.
Will small businesses with an Employees Profit Sharing Plan established still be able to direct profits to the EPSP for members of the family?
They may not be able to make the same amount of contributions as they used to. The budget proposes a targeted measure to discourage excessive employer contributions to EPSPs where the employee recipient has a significant equity interest in their employer or does not deal at arm’s length with their employer. This measure aims to ensure that EPSPs are used for their intended purpose and to limit the ability of business owners directing profits to members of their families in order to reduce or defer the payment of income tax on these profits. The measure is proposed to apply to EPSP contributions made by an employer on or after March 29, 2012, other than contributions made before 2013 pursuant to a legally binding obligation arising under a written agreement entered into before March 29, 2012.
What provisions are there for small businesses that would like to hire more employees?
The proposed budget extends the Hiring Credit for Small Business for one year. That will give the employer a credit of up to $1,000 to offset increases in EI premiums.
How will the new rules impact established Retirement Compensation Arrangements (RCA)?
The budget proposes new prohibited investment and advantage rules to directly prevent RCAs from engaging in non-arm’s length transactions. These rules will be based very closely on existing rules for Tax-Free Savings Accounts and Registered Retirement Savings Plans. As well, the budget would place a new restriction on RCA tax refunds currently allowed in circumstances where RCA property has lost value.
Will changes occur where employers contribute to group sickness or accident insurance plans on behalf of employees who do not pay tax on the benefit?
The budget has proposed a taxable employee benefit when an employer makes contributions to a group sickness or accident plan where the contribution is not in respect of a wage-loss replacement benefit payable on a periodic basis. This measure will not affect the tax treatment of private health services plans.
Source: The Harbour Group, RBC Wealth Management Dominion Securities