In our previous edition of The Fraser Report, we identified some of the new tax measures and planned tax initiatives being introduced by the federal government. The federal budget brought down on March 19 has confirmed some of these measures and introduced some pleasant surprises as well. [Note: The budget provisions identified below will only come into effect after the budget legislation is finally passed in the House of Commons and receives Royal Assent.]

The government has confirmed its intention to reduce federal debt over the medium term leading to a debt-to-GDP ratio of 25% by 2012–2013, lowest among major industrialized countries. Legislation is being introduced to dedicate all interest savings from this initiative (each year) to personal tax reductions. This will be accompanied by previously announced modest reductions in general corporate tax rates and elimination of the corporate surtax in 2008. While the direct tax reductions are modest, they continue in the right direction and will provide some stimulation to the Canadian economy. At the same time, our debt reduction program is one factor helping Canada keep a lid on inflation and interest rates. So far so good.

The proposal to allow pension income splitting, first announced in the fall of 2006, is also confirmed in this budget. This is a major and most welcome measure that will benefit many couples throughout their retirement years. Basically, any Canadian resident who receives income that qualifies for the existing pension income tax credit will be able to allocate up to 50% of that income to their spouse or common-law partner for tax purposes. If you are under 65, this generally means payments received under a registered pension plan. If you are 65 or over, the definition is broadened to include lifetime annuity payments funded by your RRSP or deferred profit sharing plan, or payments received out of a registered retirement income fund. All of this provides a great opportunity for reducing the combined taxes to be paid by you and your spouse. Most couples should derive some benefit from this. You should meet with your advisor to see in detail how this might affect your retirement income.

A significant surprise was the budget proposal to increase the age at which you must convert your RRSP. We covered the issues surrounding maturing RRSPs in our spring 2006 newsletter. At that time you were required to convert your RRSP to either cash, an annuity, or a registered retirement income fund at the end of the year in which you turned 69. The budget proposal is to raise the conversion age to 71 from 69. This means you have two extra years to make RRSP deposits (providing you have contribution room). There are also transition rules allowing you to waive minimum withdrawals if you have already converted to a RRIF and you are not yet 71.

These provisions may allow you to squeak in some final RRSP contributions to increase your nest egg and obtain additional tax reductions. Even if you have already converted your RRSP to a RRIF, it is a simple matter to open a new RRSP account so that you can make the additional deposits. If you are in the 68–71 age bracket, you should meet with your advisor to see how this might apply to your retirement plan.

Another surprise announcement concerned a number of measures designed to create far greater flexibility in registered educations savings plans (RESPs). These measures included increases to allowable annual contributions and to lifetime contributions. There was no increase to the lifetime Canada Education Savings Grant (CESG) per beneficiary. That remains at $7,200. However, the new flexibility will make it far easier for parents to catch up in later years through larger deposits so that the allowable $7,200 grants can be realized. Parents who have RESPs for their children or who are considering opening such plans will want to get fully briefed on the new rules.

Legislation containing these and other measures was introduced in the House of Commons on March 29. The required support that the minority Conservative government requires for these bills seemed to be in place at the time of writing, so barring any political reversals, passage seems likely within a reasonable period of time.