No, “quinquennial” is not part of my everyday vocabulary. It is however a handy milestone for evaluating retirement planning progress, if not on an immediate personal basis then at least in terms of changes in the tax landscape.
By its nature, the retirement/tax system evolves incrementally, principally in step with the annual federal budget process. To those of us involved day-to-day in the financial advisory field, at times such change may seem to flow as slow as molasses in January. By contrast, the general population might only contemplate these matters periodically – often only when prompted by their advisors – so developments may appear more momentous once brought to their attention.
However, over the most recent five-year stretch, it could be argued that the sum of these developments is nothing short of astounding, whether planning your own retirement or advising others. With that in mind, consider how the following items will affect retirement planning conversations today compared to a mere quinquennium ago.
2008 – Pension income splitting
Technically a little outside the timeframe, pension income splitting was announced in the Halloween 2006 Economic Statement and introduced in the 2007 Budget. The first opportunity to elect to split up to 50% of such income with a spouse would have been in filing one’s 2007 tax return in/by April 2008.
In addition to the obvious potential to push income to a lower bracket spouse, the maneuver could help preserve the pensioner’s age credit, fend off OAS clawback and assist in making fuller use of the spouse’s pension credit.
2009 – Tax-free Savings Account
Introduced in the 2008 Budget, Canadian residents over the age of 18 received their first $5,000 annual allotment of TFSA room on January 1, 2009.
The structure allows for contribution of after-tax funds, with any subsequent growth and withdrawals being tax-free. In addition, there is a dollar-for-dollar credit on those annual withdrawals that increases contribution room the next January 1st. Apart from being a welcome gift for those with excess cash to invest, the TFSA offers lower bracket individuals a more viable alternative or complement to the traditional RRSP structure.
The indexing formula boosted the annual dollar limit to $5,500 beginning in 2013.
2010 – Canada Pension Plan
While it is patently obvious that this is not a new program, the 2009 triennial review proposed significant changes to the CPP. These changes were legislatively approved in 2010.
With the elimination of the work cessation test, it became administratively simpler to commence a retirement pension, and all future pensions will be marginally improved as the low earnings drop-out increases from 7 to 8 years. However, the decision as to when to commence that pension has become more complicated with new mandatory premium payments for working beneficiaries (voluntary after 65), an increased monthly early take-up penalty from 0.5% to 0.6%, and an increased monthly deferral premium from 0.5% to 0.7%.
2011 – Registered Disability Savings Plan
The RDSP was actually introduced in the 2008 Budget, but took 2 or 3 years of tweaking before those in the target population could fully avail themselves of the program.
A key benefit is the access to matching Grant and free Bond support money. The 2010 Budget made provision for carryforward of unused Grant and Bond entitlements. Perhaps the most important modification occurred in the 2011 Budget with the relaxation of stringent rules that up to then would have forced mass repayment of Grant and Bond money at inopportune times.
The RDSP is now coordinated in many ways with the beneficiary aspects of RRSPs, RRIFs and RESPs, making for much more flexible planning options for individuals and families with disability planning needs.
2012 – Old Age Security
The 2012 Federal Budget will probably be most remembered for raising the OAS qualification age from 65 to 67. Those born prior to April 1958 will remain eligible at 65, with those born after January 1962 having to wait all the way to 67. The rest of us will be somewhere in between, with the phase-in period ranging from April 2023 to January 2029.
As well, as of July 2013 an eligible individual may defer OAS pension for up to five years, in exchange for a 0.6% increase in the pension amount per month deferred.
2013 – Pooled Registered Pension Plan
As we head into the next quinquennium, the PRPP warrants mention before signing off.
Discussed since 2010, the program is aimed at encouraging workplace savings where no current pension arrangement is in place. The federal tax amendments out of the 2012 Budget are now passed, but there is yet to be any concrete action from the provinces. As the program design dovetails contribution room with RRSPs, ever more opportunities and trade-offs may lie ahead, further feeding those retirement planning conversations.