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Normandin Beaudry

Fiscal measures from the 2007-2008 budget concerning retirees and promoting phased retirement

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There, in black and white

NB Bulletin Vol. 10 N. 3, March 2007

When the Quebec government delivered its provincial budget on February 20, 2007, it unveiled fiscal measures for individuals, including certain measures that specifically target retirees. It also reaffirmed its commitment to promote phased retirement to meet the challenges posed by significant demographic changes in the coming years.

FISCAL MEASURES CONCERNING RETIREES

Two fiscal measures presented in the budget apply specifically to retirees. First, as of the 2007 taxation year, the maximum eligible retirement income used to determine the tax credit will be increased from $1,000 to $1,500. The tax credit is equal to 20% of the eligible income received by an individual (including life annuities paid under a pension plan and payments from an RRSP).

The second measure deals with retirement income splitting. As of the 2007 taxation year, taxpayers who receive retirement income will be permitted to allocate up to 50% of this income to their spouse. For spouses who have considerably different retirement incomes before splitting, retirement income splitting reduces the amount of income tax payable by the household. For example, a couple with one retirement income of $20,000 will pay $287 less in income tax. A couple with two retirement incomes totaling $70,000 will receive a tax cut of $535 (considering retirement incomes of $56,000 for one spouse and $14,000 for the other).

PROMOTING PHASED RETIREMENT

For a second consecutive budget, the Quebec government is committed to promoting measures encouraging the phased retirement of workers. Even though such measures are already in effect, very few workers are taking advantage of them.

Current phased retirement provisions

The measures currently stipulated in the Supplemental Pension Plans Act are outlined below. These measures are applicable to members who are less than 10 years from the normal retirement age and subject to an agreement with the employer to reduce work time.

  • Once a year, the member can receive a lump sum from the pension plan up to age 65. This amount is payable in a single annual payment and can not exceed the lesser of:
    • 70% of the pay reduction related to the decrease in hours worked;
    • 40% of the maximum pensionable earnings for the year ($17 480 in 2007); or
    • the value of the member’s benefits under the pension plan.
  • At final retirement, the benefits payable under the pension plan are reduced based on the value of the lump sums received.
  • The period not worked is treated as a leave of absence without pay (non-credited service).

Measures proposed in the "Promoting Phased Retirement" budget paper

Because these measures are financed by members from their accumulated pension benefits, very few members choose phased retirement in its current form. The constraints imposed by federal and provincial legislation currently in effect do not allow phased retirement to be funded through any other method.

To encourage individuals nearing retirement to continue to work, the Quebec government proposes to allow members to:

  • Receive a pension from their pension plan proportional to the decrease in work time; and
  • Accumulate service on the basis of the full-time salary they would have received.

Therefore, members could take advantage of the ancillary benefits offered by the plan, when applicable, including a bridging benefit and an early retirement subsidy, which are generally conditional to the payment of retirement benefits. These measures, however, are subject to an agreement with the employer and are allowed as of age 60 or 30 years of service.

The Quebec government will need to continue the discussions previously initiated with the federal government to amend the Income Tax Act before these types of measures can be put in place.

Comments

The new measures are attractive for both employees and employers. In certain cases, however, the impact will be limited given the size of the early retirement subsidies offered by the pension plans. In these situations, since members fail to take advantage of all of the benefits offered, it results in gains for the pension plans. It would be beneficial if the laws in force would allow for these gains to be used to enhance the offering to continue to work, especially by permitting some form of benefits increase. We feel that this flexibility is vital for optimizing efforts to encourage individuals to continue working, especially in light of the expected changes in the labour force in Quebec.

 

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