Budget changes that need your careful consideration

We became used to government budgets being non-events in recent years, but the 2012 federal and Manitoba budgets should perhaps warrant a second look.

If you are under the age of 55, the future changes to the old age security age of eligibility will affect you.

While that announcement attracted the most headlines (and anger from opposition parties), several other changes should catch the attention of affected groups.

Among these are improvements to Registered Disability Savings Plans (RDSP), making them more attractive for people with disabilities and their families, and also increases to exemptions for people shopping outside of Canada.

In Manitoba, there was quiet tinkering with the dividend tax credit, which will cost many investors additional taxes, plus the headline-grabbing expansion to the tax base for provincial sales tax to many types of insurance premiums and personal services, plus increases to gasoline and cigarette taxes and car registrations.

OAS

Most Canadian residents age 65 or over receive OAS benefits. The maximum in 2012 is $540 a month, or $6,481 a year. To be eligible for any benefits, a person residing in Canada at 65 must have lived in Canada for at least 10 years after turning age 18, or if living outside of Canada at age 65, lived in Canada for at least 20 years after age 18.

OAS benefits are "clawed back" at a rate of 15 cents for every dollar of individual net income in excess of $69,562.

The 2012 budget introduced changes that will begin gradual implementation in April 2023, with full implementation by January 2029. People who were born after April 1958 will see one month added to their age 65 eligibility, and people born after February 1962 will see a full two years added to their age of eligibility.

To say that another way, people who are currently 52 will qualify one month after their 66th birthday, and people who are 50 today will be eligible for OAS at age 67, rather than age 65.

Retirement plans should now reflect this new reality for those affected.

The government is also offering the option for people to voluntarily defer their pensions for up to five years, to receive higher lifetime benefits as a result. This makes sense in view of our longer life expectancies and the reality of many people working past 65.

RDSP

The RDSP program began in 2008 to help families increase future financial security for children and adults with disabilities. RDSP plans can be established for people eligible for the Disability Tax Credit (DTC), and contributions to the plan may attract government grants, based on the net income of the family. Any tax on the investment income earned is deferred until withdrawn and then taxed to the beneficiary, similar to an RESP.

Currently, any withdrawal, termination of the plan or ineligibility of the beneficiary for the DTC results in an immediate repayment of the previous 10 years of government grants. This has always seemed unfair.

New rules will introduce a more realistic "proportional repayment rule" for withdrawals, requiring $3 of the government grant to be paid back for each dollar withdrawn, rather than all grants for the previous 10 years. Unfortunately, the 10-year rule will still apply for termination or loss of eligibility.

Parents may now be able to transfer investment earnings from an RESP to an RDSP, provided the RESP has been in place at least 10 years, beneficiaries are all 21, and a beneficiary has a severe and prolonged mental impairment expected to prevent post-secondary education.

Such transfers will reduce RDSP contribution room, however, and require termination of the RESP, with repayment of education grants.

For travellers outside of Canada, the duty and tax-free exemption is to be increased to $200 from $50 for trips of 24 hours or more, and all trips 48 hours or more will attract a new $800 exemption.

I can't see Canadian retailers being happy about that.

Tune in next week for a full run-down of the OAS eligibility rules for residency and how to make sure you get the maximum benefit.

David Christianson is a fee-for-service financial planner with Wellington West Total Wealth Management Inc., a portfolio manager (restricted).

dchristianson@wellwest.ca

Republished from the Winnipeg Free Press print edition May 4, 2012 B14