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2012 Federal Budget Highlights

The March 2012 federal budget introduced various tax measures and credits aimed at seniors, families, registered plans and small businesses. Rather than trying to summarize every change I will focus on some aspects that I think will be of interest to you as investors.

Old Age Security:
The proposed changes to the OAS System will be phased in gradually starting in 2023. The government feels that an 11 year notification period, followed by a six year phase in period will provide enough time for individuals to make adjustment to their retirement savings plans. Therefore, if you are currently age 54 or older (born on or before March 31, 1958) these changes will have no effect on you. If you were born on or after February 1, 1962, you will not be eligible to receive your OAS/GIS benefits until age 67. Canadians born in between April 1, 1958 – January 31, 1962 will have an age of eligibility between 65 and 67 depending on the month you were born. Furthermore, starting July 1, 2013; you will be allowed to defer taking your OAS for up to 5 years; and receive a higher pension as a result.

Travellers’ Exemptions:

For those of us that like to shop south of the boarder; the amount we are allowed to bring back without having to pay duty or taxes (Including GST/HST) has gone up. The 2012 budget proposes the exemption for returning Canadians who are out of the country for 24 hours will increase from $50 to $200. If you are gone for more than 48 hours the exemption will now be $800, replacing the 48 hour and 7-day exemption amounts.

Elimination of the Penny:

The government has finally announced that it will eliminate the penny from Canada’s coinage system starting this fall. The penny will however retain its value indefinitely and can continue to be used in cash transactions. When pennies are not available, cash transactions will be rounded to the nearest five cent increment. For non-cash transactions such as debit cards, credit cards or cheque payments will continue to be settled to the cent.

Registered Disability Savings Plans:

The government introduced RDSP in 2007 as a way to help families ensure the long-term financial security of children with severe disabilities. Similar to the RESP, the government will contribute grants into such programs upon being established. The 2012 budget proposes to relax the rules for these plans making them more flexible for the beneficiaries and their families. If you have considered opening an RDSP in the past but found them too restrictive, it might be time to have another look.

Employee Profit Sharing Plans:

Employee Profit Sharing Plans (EPSPs) are arrangements that allow employers to share company profits with their employees. The contributions are tax deductable to the employer and taxable to the employee. The government noticed a significant increase in the number of EPSPs between 2005-2009; among small Canadian controlled private corporations. What was happening was small business owners were reducing their tax liability by splitting income with family members via EPSPs, deferring paying taxes until the following year and avoiding paying Employment Insurance (EI) premiums or making Canada Pension Plan (CPP) contributions.

The 2012 budget proposes a specific measure to discourage excessive employer contributions. The government has introduced a special tax that will be payable on any ‘excess EPSPs amounts where the employee does not deal at arm’s length (is a family member). The excess EPSPs amount will be considered any amount of an EPSP made to an employee; that exceeds 20% of the employee’s income.

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