For retirees, the cupboard is bare

In the spirit of belt-tightening, federal Finance Minister Jim Flaherty had few bones to throw to seniors. Aside from a return to fiscal prudence, what he did offer was rather narrowly focused.

For advisors dealing with clients who have holdings south of the border, there was some unexpected news, according to Terry F. Ritchie, a principal at Transition Financial Advisors Group in Calgary.

“It would appear that the budget will reinstate the 50% inclusion rate for U.S. Social Security benefits for Canadian residents who have been in receipt of such benefits since before 1996 and for their spouses and common-law partners who are entitled to receive pension benefits,” says Ritchie. “This addresses changes to the Canada-U.S. tax treaty that increased the inclusion rate to 85%, as of January 1, 2006 and applies to such benefits received in 2010 or later.”

Prior to the budget, Canadian residents who are entitled to receive U.S. Social Security benefits were subject to an inclusion rate in Canada of 85%, he notes. By contrast, U.S., residents entitled to receive the same benefits were either entitled to include either 50% or 85% of the benefit as income depending on specific income thresholds.

So, in many cases, those in Canada who received U.S. social security benefits were having to include much more of the benefit as income (85%), whereas if they were in the U.S. they might only pay as much as 50%.

In other areas, there is an estate planning element in the budget which eases the rules for rolling over a RRSP or RRIF to a disabled family member. In the past, this could only be done if the disabled recipient was deemed to be infirm. Under the new rules, the infirmity condition has been lifted, and the registered account may be rolled over into a Registered Disability Savings Plan.

“You wouldn’t have it taxed in your final return, it would just transfer over to the surviving child or grandchild,” says Myron Knodel, CA and director, tax and estate planning in advanced financial planning support at Investors Group. “The only requirement for opening an RDSP is that the family member be disabled.”

As with the new U.S. Social Security provisions, this is a narrowly focused policy, and Knodel says he would have liked to have seen more broad-based tax cuts or an expansion of either the RRSP or TFSA programs.

“As the minister himself stated in the budget, it was really a reiteration of changes and opportunities introduced in past budgets,” says Liz Lunney, senior vice-president, Fiduciary Trust Company of Canada.

Lunney says she would have liked to have seen a broader definition of “income” for senior income splitting, and there was some hope that contribution limits on the TFSA would have been increased. But TFSA contribution increases have been limited to $500 increments, so they are unlikely for some years to come.

“The challenge today in a low interest rate environment is trying to seek out alternate sources of tax-efficient yield,” Lunney says. “That remains the challenge after the budget.”

She says it was reassuring to see the federal government has a plan in place to manage to deficit, and says this should help to restore some confidence.

“We’ve heard from the federal government and we would look next to provincial governments,” she says. “That may have greater significance to individual Canadians. The federal government has been successful in holding tax rates in line, the question will be: do the provinces have that luxury?”

For some, just knowing that the purse strings are tightening is reassurance enough.

“It’s kind of a visionary budget, in that they are showing fiscal prudence, I think,” says Gary Robertson, a financial advisor at Edward Jones in North York, Ont. “They’re not throwing money around all over the place when we have a huge deficit to start with.”

“Anyone who was worried about their social benefits, according to what they said in the budget, they shouldn’t have to worry about it,” Robertson says.

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