By: Ian Jack
National Post
Budget 2003
Wednesday, February 18, 2003

Critics say there's nothing in budget for the middle class.

OTTAWA - The federal government will increase the amount of money Canadians can sock away in their RRSPs by one-third within four years in a bid to encourage more savings, but the majority of middle-income earners will see little tax benefit from yesterday's federal budget.

Registered Retirement Savings Plan contributions will rise to $18,000 a year in 2006, falling short of a recommendation from the House of Commons finance committee to raise the limit to $19,000 from the current $13,500.

The move is the most significant one in the budget for higher-income earners and comes amid worries from policymakers that the rate of savings in Canada is in decline.

In 2001, Canadians saved 4.6% of their disposable income, down from 9.2% in 1995.

But a Canadian would have to earn $100,000 in 2006 to take full advantage of the extra room, said Paul Hickey, a partner at KPMG.

The increase will be phased in, starting with a $1,000 boost this year to $14,500, then similar increases in 2004 and 2005. In 2006, the limit will increase $1,500 to $18,000 and become fully
indexed, meaning it will rise with inflation in subsequent years.

The limit has been frozen since 1996 but was already scheduled to rise to $15,500 in 2005.

Mr. Hickey was critical of how long it will take the government to reach the new limit.

"It's Chinese water torture," he said. "It's going in the right direction, but it's much slower than anticipated or hoped."

The biggest personal tax reduction is reserved for low-income earners with children. Those earning below $22,000 will get a $520 increase over four years in the child tax benefit, raising the total
amount to $3,243 for the first child, $3,016 for the second and $3,020 for each additional child in 2006, more than double the 1997 level.

"This budget puts in place a long-term investment plan to help low-income families," John Manley said in his budget speech.

But for those earning between $22,000 and $100,000 there is little new tax relief in what may be the only budget delivered by Mr. Manley, the Minister of Finance.

"There is nothing that addresses the middle class," said Don Drummond, chief economist at TD Bank. "It's because there are too many of them. You can't do anything for the middle class... that costs less than $1-billion."

The biggest item is a reduction in Employment Insurance premiums, but Mr. Hickey calculates that will be worth only $47 a year to taxpayers making the maximum insurable amount of $39,000.

"Don't spend it all in one place, middle-income earner," he said.

The rate will decline to $1.98 per $100 of insurable earnings from $2.10 in 2003. The government also said it will launch consultations to determine a way to set rates for 2005 and after, following years of criticism it overcollected premiums and used the money to fund general government business. Mr. Manley promised an end to the practice.

The Finance Minister argued in his speech Canadians are benefiting from the government's five-year, $100-billion tax-reduction plan introduced in the 2000 budget. And he emphasized Ottawa is making substantial investments that will benefit all Canadians, from health care to scholarships.

He said with the RRSP boost, "Canadians will be able to better plan for their retirement. They will be able to rely upon the sustainability and strength of all three pillars of Canada's retirement system: the Canada Pension Plan, Old Age Security and registered pension and retirement savings plans."

At a news conference later, Mr. Manley held out hope for deeper tax cuts if they are needed to keep the tax system competitive with the United States. "We have to look at what the U.S. ultimately does."

However, tax revenues here will still rise each year, hitting $192.3-billion by 2004-05, up from $171.7-billion last year.

The RRSP increases will also apply to employer-sponsored registered pension plans. Maximum pension limits will also increase, with the current maximum benefit of $1,722 per year of service rising to $2,000 in 2005.

Statistics Canada says only 17% of taxpayers hit their RRSP limit in 2001, with a median contribution of $2,600, down from $2,700 the year before. Only 34% of tax filers in 2001 made any contributions.

"It's definitely an advantage to somebody who's in the upper- income bracket. Right now, you're finding the average Canadian isn't even maximizing their RRSP contribution," said David Stewart, a Toronto-based advisor with Wise Riddell Financial Group.

Ann Rooney of Canada's Chartered Accountants said the RRSP changes may be aimed at future wage earners as fewer Canadian workers are covered by company pension plans. "More and more people are going to be responsible for their own retirement savings."

"RRSP investing is one of the very few investment vehicles that really brings home the bacon right now," Adrian Mastracci, president of KCM Wealth Management of Vancouver, said of RRSPs, which gave taxpayers a median tax saving of $2,600 last year.

The RRSP measure will cost Ottawa $105-million in 2003 and $165-million in 2004 in foregone tax revenue. The child benefit hike will cost $200-million in the first year and $300-million in 2004.

The budget also introduces a new child disability benefit of $1,600 for lower-income Canadians and $80-million a year to improve tax assistance for persons with disabilities.

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.