The Conservative government revealed its second federal budget on March 19, 2007. It contained a number of proposals that could affect businesses, financial security advisors and investors. This article doesn’t contain a complete list, but outlines proposals affecting those within the financial services industry.

Remember: The announced budget contains proposals, which may undergo revisions before becoming law, especially since a minority government is in power. It's not clear at this point whether the provinces will implement changes to their tax legislation.

Increased age limit for registered savings plans

Budget 2007 proposes to increase the age that plans must mature from 69 to the end of the year the individual turns 71. This change affects registered pension plans, deferred profit sharing plans and registered retirement savings plans (RRSP) including locked-in plans. This is proposed to take effect in 2007.

Under the proposals, RRIF annuitants who turn 70 and 71 during 2007, who were required to mature their RRSP under the old rules, will be now allowed to make RRSP contributions until the year in which they turn 71, if they have contribution room.

New and existing clients would not be required to make a withdrawal from their RRIF in the calendar years they turn 70 and 71. There would be no requirement to convert back from a RRIF to an RRSP, although it’s possible.

New phased retirement option

The budget proposes to amend registered pension plan (RPP) rules to allow qualifying employees to receive pension benefits from a defined benefit RPP and at the same time accrue further benefits, subject to certain restraints. This change is intended to help employers retain experienced employees.

These changes don’t apply to individual pension plans (IPPs) and other designated plans, or to persons who are connected with their employer as defined in the Income Tax Regulations.

Pending any necessary pension legislation changes, the budget proposes that 2008 would be the first year an employee can take advantage of this change.

Increased registered education savings plans (RESP) flexibility

The $4,000 maximum annual contribution per beneficiary will be eliminated, and the lifetime RESP contribution limit will increase to $50,000 per beneficiary from $42,000. The proposal applies to contributions made after 2006.

The budget proposes to relax the eligibility requirements to withdraw educational assistance payments (EAP) for part-time study effective in 2007. Current rules require students to spend at least 10 hours per week on course work. Under the proposed change, students enrolled in a qualifying program with a minimum of 12 hours per month will be eligible to receive up to $2,500 in EAP per 13-week semester.

Canada education savings grant (CESG)

The budget proposes increasing the amount of annual RESP contributions qualifying for the 20 per cent CESG to $2,500 from $2,000. This will increase the maximum CESG payable each year to $500 per beneficiary from $400. If there is unused CESG grant from previous years’ RESP contributions, the maximum CESG payable in a year will increase to $1,000 per beneficiary from $800. The lifetime maximum CESG is unchanged at $7,200 per beneficiary.

Introduces a registered disability savings plan

The budget proposes a new registered disability savings plan (RDSP) for individuals eligible for the disability tax credit. The RDSP’s goal is to help parents and others save for the long-term financial security of a child with a severe disability.

The RDSP will be designed much like the RESP, with some differences including:

The proposal is to take effect in 2008.

Pension income splitting

The budget stated that the government intends to proceed with permitting spouses and common-law partners, who are both residents of Canada, to split up to 50 per cent of eligible pension income each year. No details on how the proposal will be implemented were included in the budget. The proposal is to be effective for 2007.

Lifetime capital gains exemption

The income tax system provides a lifetime capital gains exemption to individuals for up to $500,000 of capital gains incurred on the sale of qualified farm and fishing properties, or qualified small business corporation shares. The budget proposes to increase the lifetime capital gains exemption to $750,000.

The increase in the exemption limit will be phased in as follows:

Donating publicly listed securities to private foundations

To encourage additional charitable donations to private foundations, the budget proposes that capital gains will not be taxable for gifts of publicly listed securities, mutual funds and an interest in segregated funds, to private foundations. The proposal would apply for gifts made on or after March 19, 2007.

Withholding tax on interest eliminated

The budget also announced eliminating the current 10 per cent withholding tax on interest payments between Canada and the United States, to be phased in once proposed changes to the Canada-U.S. tax treaty are finalized. It’s unlikely this would affect the withholding tax on insurance products, including segregated funds and annuities, or on mutual fund distributions.

For most people, eliminating withholding tax wouldn’t reduce the total taxes they pay, since withholding tax can be claimed as a foreign tax credit on their income tax return.

What’s not in the budget

Capital gains deferral

Prior to the budget the media alluded that the government might take a first step toward implementing its election promise to defer capital gains taxation when the proceeds were reinvested within six months. The budget contained no proposals on this topic.

Interest deductibility

The budget did not mention the October 2003 proposal regarding changes to interest deductibility. The last official announcement regarding this proposal was in the 2005 budget.

Income splitting

Although some journalists thought the budget might expand income splitting beyond pension income, there was no mention of this in the budget.

If you were to ask a typical Canadian what type of savings plan is the most favourable from a taxation point of view, he or she would probably answer, “RRSPs.”

The more accurate answer is: it depends on your current situation, your long or short-term goals and your needs. Choosing the best financial product for your situation takes some planning since different types of financial products serve different purposes, resulting in various tax advantages and depending on which product you choose. For example, an RRSP is designed to defer taxable income from the employment years to the retirement years. A life insurance policy is designed to provide protection when there is a life insurance need.

Depending on the type of life insurance product you choose, for example, a permanent life insurance policy, there may be additional benefits for you. Since the tax advantages vary by financial product, such as an RRSP or permanent life insurance, it’s worth knowing how and when each fits into a financial security plan.

A permanent life insurance policy (such as universal life and participating whole life) can allow you to accumulate cash values inside the life insurance policy, within certain legislative limits, without paying income tax on the growth. Cash withdrawals are subject to taxation based on the rates and rules in effect at the time you withdraw the funds. The death benefit is paid to the beneficiary of your choice tax-free upon death.

Which is the best product for you?

For Canadians who have maximized their RRSP contributions and have a need to protect their income or their family’s lifestyle, a permanent policy can also offer a way to provide tax-advantaged savings. For other Canadians who have identified a permanent need for life insurance and have purchased a permanent policy, they will also receive another benefit: having a tax-advantaged asset while they’re alive.

If you have a permanent life insurance policy, the cash values can be accessed to supplement a retirement income through a policy loan or partial surrender, or you may be able to use the policy as collateral for a consumer loan at a third-party lending institution. As well, the combination of a single-life annuity pension and a permanent life insurance policy can maximize your pension income while living and provide funds for a surviving spouse after your death. So not only does the cash value in a life insurance policy allow the policyowner a tax-advantaged way to save, it may also be possible to use the funds that have accumulated toward a special financial goal in a tax-advantaged way.

Contact your financial security advisor for more detailed information about the options and methods for accessing the accumulated cash value in a permanent life insurance policy and the benefits and risks associated with each option.