Promoting savings and helping seniors.
Those are two key personal finance targets of federal Minister of Finance Joe Oliver’s 2015-16 budget unveiled today, according to analysts.
Economic Action Plan 2015 also delivers on the Conservatives’ promise to return the federal government to a balanced budget for the first time since 2007-08.
Oliver’s budget speech underscored the value of rewarding savers, who have been hard hit by persistently low interest rates, and helping seniors shelter more of their income longer .
As telegraphed well before the budget was unveiled, the annual allowable contribution limit to Tax-Free Savings Account (TFSAs) has been increased to $10,000 from the current $5,500.
The TSFA program has come under fire from some quarters as benefiting primarily wealthier Canadians. The Canadian Centre for Policy Alternatives (CCPA) Senior Economist Armine Yalnizyan said the majority of benefits from the TSFA contribution increase go to those who need it least.
But Leith Wheeler senior vice-president and portfolio manager Jon Palfrey said the TSFA program “benefits savers across the board; forget the age; forget the wealthy or not wealthy.”
He said TFSAs provide benefits across all income asset levels and are far more flexible than other government initiatives like the first-time buyer’s program.
“[The TSFA program] enables people to save on a tax-free basis; so it has applicability to all ages and all income levels.”
Palfrey added that lowering the mandatory withdrawals from the Registered Retirement Income Fund (RRIF) is the other key personal finance change in Oliver’s budget.
Currently Registered Retirement Savings Plans (RRSPs) must be converted to RRIFs by the end of the year in which the RRSP holder reaches 71. Income, taxed at regular employment income rates, must then start to be draw out by the RRIF-holder. The minimum first withdrawal must be 7.38%. So $7,380 would have to be withdrawn from a $100,000 RRIF. Under the new rules, that first minimum withdrawal will be 5.28% or $5,280 from a $100,000 RRIF.
Palfrey said the change is long overdue.
He said the investment marketplace and demographics have changed significantly since the RRIF withdrawal schedule was set up in 1992, when bond yields that are now 2% were 8% and life expectancy was shorter.
“So this needed some attention. Forget politics, forget everything else, this needed to be aligned with [economic and demographic] realities today.”
He said leaving more money in the pockets of seniors longer benefits more areas of society than those in retirement because “seniors reduce the risk of outliving their money; they have money for health care later on and can self-fund their retirement, which are all positive things for society.”
But University of British Columbia economics professor Kevin Milligan questioned the budget’s focus on seniors.
“When I think about where the biggest challenges are in our society, the seniors, and especially the coming generation of seniors, look like they have a lot of the tools already. And I’m not sure if that’s true of people just starting off in life.”
Palfrey said the budget also raises the threshold for reporting foreign assets. Currently, increased reporting requirements apply to foreign assets over $100,000; that has been changed to apply to foreign assets over $250,000.
Charles Lammam, Fraser Institute Director of Fiscal Studies, said the government’s commitment to the idea of a balanced budget is a good example to set, but he said the budget lacks any big thinking on substantive economic policy like remaking the personal income tax system.
He said that while Canada has established competitive corporate income tax rates in the global market place, it lags behind key competitors in personal income tax rates.
Those rates, he said, are higher and apply to lower levels of income.
“This is important because it makes it difficult for companies and people operating in [Canada] to want to stay in the country or to attract people from elsewhere.”
Lammam said the string of “boutique” tax breaks for special interest groups need to be removed and the country’s income tax regime streamlined with broad-based tax reform.
With files from Jen St. Denis