Retirement savers, small-business owners, lower income families see tax benefits

By Scot Blythe | February 17, 2003 | Last updated on February 17, 2003
7 min read

(February 18, 2003) Retirement savers got a mixed tax break in federal Finance Minister John Manley’s first budget. RRSP contribution limits will go up but not as high as many expected. Still, the budget offered a glimpse of potential future tax assistance for retirement savings even as its focus was directed more toward small businesses and lower income families with children.

For advisors, the headline is that the maximum RRSP limit will jump to $14,500 this year — 12 months ahead of schedule. RRSP limits will be raised to $18,000 over three years and then, starting in 2007, indexed to average wage growth. An increase in RRSP limits was widely expected, but the budget figure is less than the $19,000 limit recommended by the House of Commons finance committee, and much less than retirement advocates like the Investment Dealers Association of Canada, Investment Funds Institute of Canada and Advocis have sought.

“It came in just below the two most popular recommendations,” said Jamie Golombek, AIM’s vice-president of tax and estate planning. “The House of Commons Standing Committee on Finance [were] recommending $19,000, based on 18% of $105,000” — roughly the starting point for the highest tax bracket. “C.D. Howe plumped for $18,500, so we got $18,000.”

“We didn’t get it right away; we get it in 2006,” he noted. “But it’s a step in the right direction.”

Existing and Proposed RPP/RRSP Limits 2003 2004 2005 2006 2007
Money purchase RPPs: annual contribution limit
Existing 14,500 15,500 Indexed
Proposed 15,500 16,500 18,000 Indexed

Defined benefit RPPs: maximum pension benefit (per year of service)
Existing 1,722 1,722 Indexed
Proposed 1,722 1,833 2,000 Indexed
RRSPs: annual contribution limit
Existing 13,500 14,500 15,500 Indexed
Proposed 14,500 15,500 16,500 18,000 Indexed
Source: Department of Finance Canada

“I think it’s great as long as you have the money to put in the RRSP,” said David Clarke, an accountant with Collins Barrow in Ottawa. However, not all Canadians will feel the impact of higher limits. “Really we’re looking at higher earning individuals who will benefit from the tax shelter of the RRSP,” he explained. “It would have been of more benefit to middle-income investors if the 18% contribution rate had been changed.”

Warned Tim Cestnick, managing director of national tax services at AIC Limited, “If you’re not making over $75,000 a year, you won’t notice the difference. I think, by and large, people with higher income having been saving enough for retirement,” he added. “I don’t think the average Canadian has done as well at that, so I don’t think this helps them at all.”

Tax-prepaid accounts

Since the RRSP system and the pension system are integrated — tax-sheltered retirement savings are currently slightly more generous than RRSP limits — the maximum pension benefit for defined benefit plans will rise from the current $1,722 per year of service to $2,000 in 2005, and will be indexed thereafter.

To ensure pension and RRSP benefits receive equivalent tax treatment, the government relies on a formula so that the maximum RRSP limit is nine times the maximum pension benefit. At present, the $1,722 maximum pension benefit would translate into an RRSP limit of $15,498. In 2003, the money-purchase RPP limit (essentially for group RSPs and similar vehicles) will rise to $15,500. Traditional RRSPs will achieve parity with RPPs in 2006, when the pension limit rises to $2,000 and the RRSP limit attains $18,000.

The federal government also said it would examine tax prepaid savings plans (TPSPs). Under such a plan, there would be no tax deduction for an initial contribution, but savings could compound and be withdrawn tax-free. The United States has already moved in this direction with Roth Investment Retirement Accounts. President George W. Bush’s budget included two TPSP proposals, a Lifetime Savings Account with a $15,000 (US) annual contribution limit for couples, and a Retirement Savings Account also with a $15,000 limit. The latter, however, could only be tapped after age 59 while the former could be used at any time.

More Budget Coverage

Return to Budget 2003 main page

“I can only see that as a good thing,” said Clarke. “If you’re looking at people who have available cash after they put money into their RRSPs, it’s definitely a benefit.

“It could help a lot of people who are in employment situations,” he explained. “People who own corporations have the option to defer tax within their own corporations. High earners who are employed don’t have that ability.”

Cestnick said he’s made representations on TPSPs to the finance department. “I’m certainly not holding my breath that that would happen in Canada.” Still, he said, “I really hope the government looks at this seriously. There are too few choices, basically RRSPs and non-registered accounts. I could see this fitting into someone’s personal plans.”

Family support

Most observers expected the Canada Child Tax Credit (CCTC) to be raised, but Manley went one better, creating a new Child Disability Benefit. The CCTC, currently $2,444 for the first child, will rise to $3,243 by 2007. Since it’s a means-tested benefit, the government is also promising to look at clawback thresholds, which are slated to rise from $33,487 in July 2003, to $37,176 in 2007.

The Child Disability Benefit, also means-tested, will provide up to $1,600 for families with incomes of less than $33,487 who have disabled children.

However, these child tax credits are targeted at lower income families, Cestnick noted. Indeed, the average Canadian family will see little tax savings: $46 a year in lower employment insurance premiums and a cut on the once-a-year plane trip they make, thanks to falling airport security taxes.

For families with disabled children who need constant care, the government is also proposing to raise the income measure used to calculate financial dependence from $7,634 to $13,814. That will allow parents and grandparents to roll over more of the proceeds of their RRSPs and RRIFs to infirm children when the parent dies.

“That’s always been a problem in the past, where a child had a certain amount of income and didn’t qualify for the rollover,” Golombek explained. “Now they’ve increased that quite substantially. Almost doubled it, so that’s a big benefit.”

Small business

The government plans to extend the low 12% rate on small-business income (13.12% with the federal surtax). Currently the first $200,000 of qualifying income is eligible for the lower tax rate. The budget proposes moving the limit up to $300,000 over four years, as well as some investment credits. In the past, small businesses have not been able to capture the full value of some credits.

“Refundable [research and development] credits are capped based on an expenditure limit of $2 million and the credits are ground down between $200,000 and $400,000,” explained Clarke. “They’re proposing to shift the grind up $100,000 so it will start at $300,000.”

In addition, the lower tax rate might “incent” small-business owners to invest more in their business rather than pull it out as a salary, said Cestnick.

The capital gains rollover for small-business investors introduced in the 2000 budget is also being improved. Investors who sold their businesses were entitled to reinvest $2 million of their original capital in a new enterprise and defer the capital gains, provided they did it within a short time period. The limit on the value of the old and the new investment is being removed, and the time limit for reinvestment is being extended.

“That’s a good thing for small-business investors,” Clarke added, noting that many business owners in the past haven’t been aware of those time limits and thus missed the deadline to reinvest and defer their capital gains.

The government is also easing tax definitions that inhibit pension funds from investing in venture capital partnerships. Venture capital partnerships count as foreign property unless they meet the definition of a qualified limited partnership. Until 2001, no limited partner could hold more than 30% of a limited partnership. Now the government has introduced more technical changes to the definition of a qualified limited partnership.

Overall, Golombek concluded, “We were looking for the RRSP limits and we were happy they were increased. We would have hoped that they would have been faster. We would have liked the full 19% but 18% is okay.”

As usual, there were a couple of disappointments, he said, including no change in the foreign content rule, and no exemption from capital gains for securities donated to charity, as is the practice in the U.S.

Detailed List of Indexed Personal Income Tax Parameters Including Budget 2003 Measures

Pre-2000 budget 2002 2003

Personal amounts andbracket thresholds
Basic personal amount 7,131 7,634 7,756
Spousal/equivalent-to-spouse amount 6,055 6,482 6,586
Net income threshold 606 649 659
Taxable income at which 22-per-cent bracket begins 29,590 31,677 32,183
Taxable income at which 26-per-cent bracket begins 59,180 63,354 64,368
Taxable income at which 29-per-cent bracket begins n/a 103,000 104,648
Credit amounts to reflect needs
Infirm dependant amount 2,353 3,605 3,663
Net income threshold 4,778 5,115 5,197
Caregiver amount 2,353 3,605 3,663
Net income threshold 11,500 12,312 12,509
Disability amount 4,233 6,180 6,279
Disabled child amount n/a 3,605 3,663
Allowable child care and care expenses n/a 2,112 2,145
Medical expense tax credit—3per cent ofnet income ceiling 1,614 1,728 1,755
Refundable medical expense tax credit supplement 500 535 544
Minimum earnings threshold 2,500 2,676 2,719
Family net income threshold 17,419 20,296 20,621
Age amount 3,482 3,728 3,787
Net income threshold 25,921 27,749 28,193
Old Age Security repayment threshold 53,215 56,968 57,879
Goods and Services Tax credit1
Adult maximum 199 213 216
Child maximum 105 112 114
Single supplement 105 112 114
Phase-in threshold for the single supplement 6,456 6,911 7,022
Family net income at which credit begins to phase out 25,921 27,749 28,193
Canada Child Tax Benefit1
Base benefit 1,020 1,151 1,169
Additional benefit for third child 75 80 82
Additional benefit for children under 7 years 213 228 232
Family net income at which base benefit beginsto phase out 29,590 32,960 33,487
National Child Benefit (NCB) supplement2
First child 955 1,293 1,463
Second child 755 1,087 1,254
Third child 680 1,009 1,176
Family net income at which NCB supplementbegins to phase out 20,921 22,397 21,529
Family net income at which NCB supplementphase-out ends 29,590 32,960 33,487
Child Disability Benefit3
Maximum benefits n/a n/a 1,600
Family net income at which Child Disability Benefitbegins to phase out n/a n/a 33,487

1 The GST credit and CCTB are paid on a benefit-year cycle beginning in July. 2 Includes Budget 2003 increase of $150 per child for July2003. 3 Introduced in Budget 2003.
Source: Department of Finance Canada

Filed by Scot Blythe,,


This special package brought to you by:

Scot Blythe