Benefits and pension industry experts are weighing in on the federal budget, and the verdict is: underwhelming.
Most observers agree that Finance Minister Jim Flaherty’s budget was bereft of any bold moves, and contained only one minor surprise in the form of a tax-free savings account (TFSA). The TFSA is of interest to all Canadian workers for different reasons, according to a report by Morneau Sobeco. High-income workers who are already contributing the maximum to their RRSP now have room for an extra $5,000, tax-free. Seniors and lower-income workers are free to contribute past age 71 (the RRSP limit) and funds withdrawn from a TFSA will not reduce the Guaranteed Income Supplement or Old Age Security pension.
Janet Rabovsky, practice leader, investment consulting, with Watson Wyatt Worldwide in Toronto suggests that a TFSA is a potential benefit, but caution should be taken when contributing to one, especially for middle to lower-income workers. “It’s good to be able to earn tax free interest, but our concern is that some people may use it improperly,” she says. “Some are already using their RRSP as a bank account and a TFSA might steer them away from tax-free savings. If they have $5,000 they might be better off putting it toward their mortgage or other debts.”
In a report on the budget, Watson Wyatt states: “It may also be possible for employers to either sponsor or match contributions to a TFSA. However, employers considering such a move should be aware that, as the account is tax-assisted, it will likely be considered a Capital Accumulation Plan (CAP), and may therefore be subject to CAP guidelines developed by the Joint Forum of Financial Market Regulators.”
Morneau Sobeco’s report on the budget points out that the TFSA is a step in the right direction, but highlights Canada’s restrictive rules regarding tax-deferred savings. It states that the 18% contribution cap on earnings is roughly half of other countries, and the ability to save an additional $5,000 annually with tax-free investment accruals will only partially address the current disparity. Rabovsky agrees. “This does nothing to bring us up to the level of the U.S., U.K., or Australia,” she says.
Another notable item in the budget provides flexibility with regards to life income funds (LIFs). Three changes proposed in the budget are:
1. People 55 and older with LIF holdings of up to $22,450 will be able to wind up their LIF accounts, and have the option to convert the LIF to a tax-deferred savings vehicle.
2. People 55 and older are entitled to a one-time conversion of up to 50% of LIF holdings into a tax-deferred savings vehicle with no maximum withdrawal limits.
3. Anyone facing financial hardship will be entitled to unlock up to $22,450.
A report by Hewitt Associates points out that these changes only apply to workers who participate in federally regulated pension plans (typically sponsored by companies such as airlines and banks), and whose benefits are held in a LIF. Hewitt says this reflects a continuing trend toward allowing individuals more access to funds locked-in under pension standards legislation.
For more federal budget coverage, click here to read our special online section, Budget 2008: Special Report.
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