February 23, 2005

The Federal budget was released on February 23, 2005.  This edition of Westcoast Watch! summarizes the budget proposals that relate to tax-assisted retirement savings, in particular Registered Pension Plans (RPPs) and Registered Retirement Savings Plan (RRSPs).

Proposed New RPP and RRSP Limits

The following proposed new retirement savings limits were announced in the budget (existing limits are shown for comparison):

*                MP = Money Purchase (Defined Contribution)
**              DB = Defined Benefit
Indexed      means increased at the rate of wage inflation for Canada.

Please note that the amounts shown for MP RPPs or RRSPs are annual maximum dollar contribution limits while the amounts shown for DB RPPs are annual maximum dollar pension limits per year of pensionable service.

The higher maximum limits may benefit only pension plan members or individuals who earn in excess of certain threshold levels.  For example the new money purchase limit for 2006 will only benefit members who earn in excess of $105,550 based on 18% of earnings; the new defined benefit limit for 2007 will only benefit members who earn in excess of $111,100 based on 2% of earnings.  The “magic factor of 9” is maintained, i.e., the defined benefit limit continues to be 1/9 of the money purchase limit.

Certain pension plans may have been worded such that new limits under tax legislation are automatically recognized.  The proposed increases in the retirement savings limits will add costs for some plan sponsors.  Sponsors of plans with plan texts that do not automatically reflect increases in limits should consider whether to make amendments to incorporate the proposed higher limits.

Other Proposed Change

• The 30% foreign content rule for investments in tax-deferred retirement plans has been eliminated effective immediately. Thus, a tax-deferred retirement plan now have its assets entirely invested in foreign financial instruments.