Federal Budget 2008

The new Federal Budget offers some movement on several issues that CARP has been advocating.

The Federal Budget brought down on February 26, 2008 walked a careful line and offered few surprises. However, CARP Online readers will be pleasantly surprised to finally see some movement on several issues that CARP has been advocating.

Your Finances

Greater Flexibility in managing your own finances

• The unlocking of Life Income Funds/Locked in Funds

Canadians want to decide how and when to use their retirement savings but unlike RRSPs and other pensions, certain federally registered pension funds are subject to strict withdrawal limits.

CARP has advocated that such withdrawal limits be removed entirely.

Alberta and Manitoba have allowed a one time unlocking of 50% of the fund, Ontario and New Brunswick have allowed 25% to be unlocked and only Saskatchewan has allowed 100% withdrawal.

The federal budget proposes to allow a one time 50% withdrawal for individuals 55 or older to be transferred to a tax deferred vehicle such as a RRSP or RRIF which have no annual withdrawal limits.

Individuals 55 or older with small holdings of up to $22,450 will be able to wind up their accounts with the option to convert to a tax-deferred savings vehicle. The threshold for small holdings will increase with the average industrial wage.

All individuals facing financial hardship (e.g. low income, high disability or medical-related costs) will be entitled to unlock up to $22,450. This maximum will also increase with the average industrial wage.

• Tax-free Savings Account

On the theory that federal tax cuts have freed up more money for Canadians to save, the surprise announcement of the Tax Free Savings Account (TFSA) will allow Canadians to earn investment income on up to $5000 annually tax free starting in 2009. The contributions will not be deductible and the withdrawals including income will not be taxed. The income will not affect eligibility for income support programs such as GIS.

The TFSA provides a welcome option for seniors who are over the age of 71 and are required to begin drawing down their retirement savings. Based on current savings patterns, seniors are expected to receive one-half of the total benefits provided by the TFSA.

Help for Low income Seniors

• Removing disincentives to work – increasing level of exemption from claw back of GIS

Whether by choice or necessity, seniors are participating in the labour force in greater numbers than ever. However, any GIS they receive is reduced by 50 cents for every dollar of other income. To encourage labour market participation, 20 per cent of employment earnings up to $2,500 is exempt, that is, does not result in a claw back.

Budget 2008 is proposing to fully exempt the first $3,500 of earnings— the average amount of earned income by seniors in receipt of the GIS. This means the typical GIS recipient will be able to keep more of his or her hard-earned money without any reduction in GIS benefits, encouraging labour market participation and providing support for low-income seniors.

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