2007 Federal Budget Impact Paper

This paper was prepared by the Compensation Sector, Accounting, Banking and Compensation Branch, Public Works and Government Services Canada (PWGSC). It should be noted that this document is not all encompassing. Employees may find this document informative from a personal perspective.

The following items, which are relative to the compensation product, were introduced in the Federal budget speech that was presented by the Honourable James M. Flaherty, Minister of Finance for the Government of Canada on March 19, 2007.

ITEMS AFFECTING PWGSC COMPENSATION SYSTEMS

Spousal and related tax credits

Starting in 2007, the budget proposes to increase the amounts used for calculating the spouse or common-law partner amount and the amount for an eligible dependant (currently $7,581 for each credit) so that the amounts match the basic personal amount, which is $8,929 for 2007. The credit amounts will increase to match previously announced increases for the basic personal amounts.

Impact: PWGSC compensation systems will be programmed to reflect the change for 2007 in July 2007. It is expected that the Canada Revenue Agency (CRA) will provide employers with the adjusted tax credit rate, which will take into consideration the first six months of 2007, by June 2007.

Age limit for RRSPs and RPPs

The Income Tax Act currently requires that an individual's registered retirement savings plan (RRSP) be converted to a registered retirement income fund (RRIF), or be used to acquire a qualifying annuity, by the end of the year in which the individual turns 69 years of age. Similarly, registered pension plan (RPP) payments must generally begin by the end of the year in which the pension plan member turns 69 years of age. This budget proposes to increase the RRSP/RPP maturation age limit to 71 years of age, effective for the 2007 and subsequent taxation years.

RRIF owners must withdraw a specified minimum amount each year following the year in which the RRIF is established. This requirement will be waived for 2007, for those RRIF owners who turn 71 years of age in 2007, and for 2007 and 2008, for those RRIF owners who turn 70 years of age in 2007. An RRIF annuitant who is age 71 or younger at the end of 2007 may convert the RRIF back to an RRSP, so long as the plan is converted back to a RRIF before the end of the year he or she turns 71.

Impact: PWGSC compensation systems will be programmed to reflect the change in the age limit to contribute to a RPP. In addition, Compensation Directive 2006-002 will be amended to reflect the change in the age limit to transfer a retiring allowance to an RRSP.

Phased retirement

The budget proposes to amend the tax rules for the 2008 taxation year to allow an employee to receive pension benefits from a defined benefit RPP and simultaneously accrue further benefits, subject to certain constraints.

Impact: The introduction of "phased retirement" will have a significant impact on compensation systems. All related administrative guides and directives will need to be reviewed to outline the details of this new initiative.

ITEMS OF INTEREST

New child tax credit

The budget introduced a new non-refundable child tax credit for parents based on an amount of $2,000 for each child under age 18 at the end of the year, starting in 2007. This credit will be indexed for inflation.

Impact: This tax credit will be incorporated into the 2007 income tax return.

Working Income Tax Benefit

The budget introduced the Working Income Tax Benefit (WITB), effective for the 2007 taxation year. The WITB will provide up to $500 for single individuals ($1,000 for families). This amount will be phased out at a rate of 15% of net family income in excess of $9,500 ($14,500 for families). The WITB will include an additional disability supplement for individuals eligible for the disability tax credit (DTC).

Impact: This benefit will be incorporated into the 2007 income tax return.

Registered Disability Savings Plan

The budget introduced a new Registered Disability Savings Plan (RDSP), effective for the 2008 taxation year, for individuals eligible for the DTC based on the existing registered education savings plan (RESP) design, to help parents save for long-term financial security of children with severe disabilities.

Impact: Individuals who are interested in learning more about this plan should contact the Department of Finance Canada.

Registered education savings plan

The $4,000 annual registered education savings plan (RESP) contribution limit will be eliminated and the lifetime RESP contribution limit will be increased to $50,000 from $42,000. The maximum annual Canada Education Savings Grant (CESG) will be increased to $500 from $400 beginning in 2007.

Impact: This plan will be incorporated into the 2007 income tax return.

Scholarships and bursaries

Scholarships and bursaries to attend elementary and secondary schools will be fully tax exempt starting in 2007 (currently, only $500 of such income is tax exempt)

Impact: This tax credit will be incorporated into the 2007 income tax return.

Public transit tax credit

The non-refundable public transit tax credit for the cost of monthly public transit passes will be extended to accommodate new electronic fare products and weekly passes used on an ongoing basis.

Impact: This tax credit will be incorporated into the 2007 income tax return.

Previously Announced Measures

Implementation of the Tax Fairness Plan which includes increasing the age credit amount by $1,000 to $5,177 and allowing pension income splitting.

To review the 2007 Federal Budget documents, please visit this site:

http://www.fin.gc.ca/fin-eng.html