2012 Federal Budget
The 2012 Federal Budget, brought down on March 29, 2012, includes some significant measures that will affect the retirement plans of most Canadians. The Budget also proposes to change the funding of public sector pension plans. Other proposals will have implications for federally regulated pension plans and for health benefits.
ELIGIBILITY AGE RAISED FOR OAS AND GIS
The Budget proposes to increase the age of eligibility for Old Age Security (OAS) and Guaranteed Income Supplement (GIS) benefits gradually from 65 to 67 starting in April 2023. The change will be fully implemented by January 2029. This proposed change to OAS/GIS eligibility will not affect anyone 54 years of age or older as of March 31, 2012. Individuals who were born on March 31, 1958, or earlier will not be affected. Those who were born on or after February 1, 1962, will have an age of eligibility of 67. Those who were born between April 1, 1958, and January 31, 1962, will have an age of eligibility between 65 and 67, in accordance with the following table:
In line with the increase in age of OAS/GIS eligibility, the ages at which the Allowance and the Allowance for the Survivor are provided will also gradually increase from 60-64 today to 62-66 starting in April 2023. This change will not affect anyone 49 years of age or older as of March 31, 2012. Certain federal programs, including those for veterans and aboriginals that provide income support benefits until age 65, will be aligned with changes to the OAS program, so these individuals do not face a gap in income at ages 65 and 66.
OPTION TO DEFER OAS
Starting on July 1, 2013, the Budget will allow for the voluntary deferral of the OAS pension for up to five years. Those who choose to defer will receive a higher, actuarially adjusted, annual pension. It appears the adjustment would be a 0.6% increase in OAS pension for each month that commencement is deferred. This is less generous than the 0.7% increase that applies under the Canada/Quebec Pension Plans between ages 65 and 70. On average, individuals will receive the same lifetime OAS pension whether they choose to commence pension at the earliest age of eligibility or defer it to a later year. GIS benefits will not be eligible for actuarial adjustment.
ENROLMENT FOR OAS AND GIS BENEFITS
The budget proposes to put in place an enrolment regime that will eliminate the need for many seniors to apply for OAS and GIS. Automatic enrolment will be implemented in a phased-in approach from 2013 to 2015.
CANADA PENSION PLAN
The Budget announces that the 2010–2012 triennial review of the CPP confirms the financial sustainability of the Plan for at least the next 75 years at the current contribution rate of 9.9% of pensionable earnings. There will be no change to the CPP contribution rate.
POOLED REGISTERED PENSION PLANS
The Budget includes mention that the Government has introduced legislation to implement Pooled Registered Pension Plans (PRPPs), intended to offer a low-cost retirement savings vehicle. The PRPP legislation will apply to employees in industries that are federally regulated and to all individuals employed in Canadian Territories. Provinces would need to introduce legislation in their own jurisdictions to make PRPPs available. The federal tax rules for PRPPs will apply to all PRPPs and will be implemented in 2012.
RETIREMENT COMPENSATION ARRANGEMENTS
RCAs are employer-sponsored, funded retirement savings arrangements that can be used to fund a higher-income employee’s pension benefit that exceeds the maximum pension benefit permitted under the Registered Pension Plan (RPP) contribution limits. The Budget proposes tightening the rules applicable to Retirement Compensation Arrangements (RCAs) to prevent certain tax schemes. The rules relate to prohibited investments and advantages to reflect rules similar to those recently made applicable to RRSPs, RRIFs and TFSAs. Transitional rules will apply. With possible exceptions, if RCA property has declined in value, RCA tax will be refunded only where the decline in value, of the property is not reasonably attributable to prohibited investments or advantages.
EMPLOYEES PROFIT SHARING PLANS
EPSPs are trust arrangements that can enable employers to share profits with employees. The Budget proposes tightening the rules applicable to Employees Profit Sharing Plans (EPSPs) to discourage excessive contributions for employees with a close tie to their employer. The changes follow the Government’s consultations on EPSPs since August 2011.
PUBLIC SECTOR PENSIONS AND COMPENSATION
In the Budget, the Government announced that it will take steps to ensure that public sector pension plans are sustainable and consistent with pensions offered by other jurisdictions and the private sector. For employees who join the federal public service starting in 2013, the normal age of retirement will be raised from 60 to 65. The Budget announced changes related to federal public service compensation, including eliminating the accumulation of severance benefits for voluntary resignation and retirement.
The Government proposes to adjust the Public Service Pension Plan so that, in time, public service employee contributions will equal those of the employer (50/50). Comparable changes to contribution rates will be made to the pension plans for the Canadian Forces, the Royal Canadian Mounted Police and Members of Parliament. Adjustments to MP’s pensions will take effect in the next Parliament. The Government will work with Crown corporations to ensure that their employee pension plans are aligned with those available to federal employees.
PENSION BENEFITS STANDARDS ACT, 1985
The Budget provides that the Government will introduce technical amendments to the Pension Benefits Standards Act, 1985 applicable to federally regulated employment. The Budget does not specify what the changes will be, but they might include several measures previously announced.
WAGE EARNER PROTECTION PROGRAM
The Wage Earner Protection Program (WEPP) compensates eligible workers for unpaid wages, vacation, severance and termination, pay owed when their employer declares bankruptcy or is subject to a bankruptcy related receivership. The Budget proposes $1.4 million annually to ensure that WEPP applicants receive their benefits.
LONG-TERM DISABILITY PLANS
The Government will introduce legislation to require federally regulated private sector employers to insure, on a go-forward basis, any long-term disability plans they offer to their employees.
REGISTERED DISABILITY SAVINGS PLANS
The Budget proposes the following measures for Registered Disability Savings Plans (RDSPs):
- Greater access to RDSP savings for small withdrawals.
- Greater flexibility to make withdrawals from certain RDSPs by increasing the annual maximum withdrawal limit.
- Greater flexibility for parents who save in Registered Education Savings Plans (RESPs) for children with disabilities by allowing investment income earned in an RESP to be transferred on a tax-free basis to an RESP beneficiary’s RDSP.
- Greater continuity for long-term saving by RDSP beneficiaries who cease to qualify for the Disability Tax Credit in certain circumstances by extending the period that their plans may remain open.
- Improved administrative rules.
The Budget proposes to temporarily expand the definition of who may be the plan holder of an RDSP. A spouse, common-law partner, or parent will be able to become the plan holder and open an RDSP on behalf of an adult who might not be able to open a plan due to concerns about their ability to enter into a contract. These rules will be in place until the end of 2016, to provide provinces and territories time to develop long-term solutions to address RDSP legal representation issues.
MEDICAL EXPENSE TAX CREDIT AND HEALTH-RELATED GST/HST
The Medical Expense Tax Credit recognizes the effect of above-average medical and disability-related expenses on a taxpayer’s ability to pay income tax. The Medical Expense Tax Credit provides federal income tax relief equal to 15% of eligible medical and disability-related expenses in excess of a threshold that is the lesser of 3% of the taxpayer’s net income and an indexed dollar amount ($2,109 in 2012). The list of expenses eligible for the Medical Expense Tax Credit is regularly reviewed and updated in light of new technologies and other disability-specific or medically-related developments.
The Budget proposes to add to the list blood coagulation monitors for use by individuals who require anti-coagulation therapy, including associated disposable peripherals such as pricking devices, lancets and test strips. The cost of these devices will be eligible for the Medical Expense Tax Credit when they are prescribed by a medical practitioner. This measure will apply to expenses incurred after 2011.
The Budget also proposes exempting pharmacists’ professional services from the GST/HST, other than prescription drug dispensing services. It would also expand the list of health care professionals who can order certain medical and assistive devices zero-rated under the GST/HST.
GROUP SICKNESS OR ACCIDENT INSURANCE PLANS
The Budget proposes to include the amount of an employer’s contributions to a group sickness or accident insurance plan in an employee’s income for the year in which the contributions are made to the extent that the contributions are 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 or other plans described in paragraph 6(1)(a) of the Income Tax Act. This measure will apply in respect of employer contributions made on or after Budget Day to the extent that the contributions relate to coverage after 2012, except that such contributions made on or after Budget Day and before 2013 will be included in the employee’s income for 2013.
LIFE INSURANCE POLICIES
The Budget proposes to implement changes to the exemption test applicable to life insurance policies and that the Investment Income Tax (IIT) levied on life insurers be recalibrated. The exemption test determines whether a life insurance policy is an exempt policy under the Income Tax Act. Amendments will apply to life insurance policies issued after 2013.
The raising of the retirement age under the OAS and GIS had received no public airing until two months ago and so its announcement while our Prime Minister was in Davos caught most observers unaware.
While the government gave longer life spans as the main reason for moving the retirement to 67, this change is about more than just saving some OAS pension dollars. Over the last fifty years, we have seen the baby boomers stream into the job market in huge numbers, as well as a doubling of the female participation rate in the labour force from one third to two thirds of all working-age women. As a result, governments and employers were looking for ways to entice workers to retire early to make room for new workers, which is why they introduced, and then improved, a variety of pension programs. One of those measures, by the way, was the lowering of the OAS retirement age from 70 to 65.
Now that the female participation rate and the baby boomer effect have both plateaued, the pressure to retire workers early has evaporated. In fact, as the boomers start leaving the workforce in large numbers in the next ten years, we will need to start encouraging people in their 60s to keep working longer. Once we draw unemployment levels back down to their 1960s rates, the sexagenarians represent the only large pool of potential workers to keep the economy moving. From this perspective, the budget announcement and the timing of implementation are not a surprise. This is likely the right thing to do, at least from a demographic and economic point of view. Of course, demographic reasons would be cold comfort to some under age 54 who could lose approximately $12,000 in OAS payments they might have received from age 65 to 67.
Given that the increase in the OAS and GIS retirement age was introduced so suddenly, we could be forgiven for wondering whether the same might happen to the Canada Pension Plan at some point. After all, the above rationale would apply to the CPP as much as it does to the OAS. For now, the government is assuring us that an increase in the CPP retirement age is not contemplated because the 9.9% cost of the plan is deemed to be sustainable for the next 75 years. That could change if a future actuarial report on the CPP shows the cost is not sustainable or if the rationale for increasing the retirement age changes, as suggested above. By the way, we note that the 9.9% cost proved not to be sustainable under the Quebec Pension Plan, which now has a long-term cost of over 11%.
Whether it is justified or not, the deferral of OAS will involve considerable discomfort, not only on the part of workers under age 54 who must do considerably more now to prepare for retirement or keep working, but also for the provincial legislators who must decide to what extent they align provincial pension legislation with the change in OAS retirement age. For instance, the bridge benefit provided under registered pension plans must end currently by age 65, which would leave a gap once the OAS retirement age starts to change. The change to the normal age for OAS may foreshadow the day when provinces may seek to amend pension standards legislation to accommodate normal retirement ages older than age 65, or to do away with the concept of normal retirement age altogether.
The proposal under the federal public sector plans, which would see employees contributing at the same rate as employers, is similar to what was proposed in Ontario’s budget earlier in the week, and may be just as unworkable. If a large deficit arises that brings the total contribution rate above 35% of payroll, for example, it will be challenging to reduce benefits sufficiently to bring the cost to a more manageable level or to ask employees to shoulder half the cost. The government could show leadership by promoting true target benefit plans.