RRIF Conversion

Several years ago, in a pure revenue grab, the law changed to require conversion of RRSPs into RRIFs by age 69 instead of age 71. This budget reverts the age back to 71, starting in 2007.

This has different implications, depending on how old you are currently. If you turn 69 in 2007 or 2008, you obviously will be able to defer the conversion until age 71. If you turn 70 or 71 in 2007 or 2008, and have contribution room that couldn’t be used with a spousal RRSP contribution (due to the age of your spouse, or because you weren’t married), you can return to making RRSP contributions until the calendar year end of your 71st birthday.

If you are under age 71 in 2007 and already have converted to a RRIF, you can undo this and reconvert back to an RRSP until you do turn age 71, at which time you will reconvert once more to a RRIF. Practically speaking, this is a bit of a nuisance at your financial institution, as you will have to open a new RRSP account and transfer the registration of all of your securities, mutual funds, etc to the new RRSP (and then do this again when reinstating your RRIF).

In the alternative, for those who were forced to convert to a RRIF in 2005 or 2006, you can leave that RRIF intact and instead waive the annual withdrawal requirement until the year you turn age 72. This is likely the simpler route and achieves the same result of postponing the taxation of amounts in your RRIF. Remember, however, that you need to be able to get by without those funds in the waiver years. Be aware as well that your financial institution may have standing instructions for when to make your annual RRIF payout, so you may need to communicate with them sooner than later to stop the payment if that is what you wish. Lastly, the law is not retroactive; therefore, any withdrawals you have had already cannot be reversed.

See also, this article on the InvestorU website.

Disability Savings Plan

As expected, a new disability savings plan kicks in for 2008, which is modeled after the RESP concept. As such, there is no tax break for contributing but the investment income earned and government matching grants will be tax-deferred until the funds ultimately are received by the recipient disabled person. The lifetime limit is $200,000 with no annual limit, and contributions must cease when the disabled party reaches age 59. The government matches contributions to a limit of $70,000 and only up to the disabled’s 49th year. The matching rate formula is a bit hair-raising and looks to the family net income of the contributor. Commencing at age 60, annual withdrawal will be required according to a formula involving the value of the plan and some measure of life expectancy. Note that, unlike RESPs, the contributor’s capital is not refundable but must pass to the disabled or his/her estate.


The long standing spousal/dependent deduction will be enhanced slightly starting in 2007 with an increase of $1,348, which is a tax saving of $209 federally. However, the “tax-free” income level of the dependent will be removed, which somewhat mitigates the value of this increase.

Many years ago we had a general tax break for children. It will be restored for 2007. The break will add to the long and ever-growing list of credits. It will be a $2,000 deduction per child under age 18, which converts into a federal tax saving of $310.

New Low Income Credit

A new tax break comes into effect in 2007 for low-income working people. The calculation of this new credit is unfortunately a bit complicated. For starters, the deduction is calculated as 20% of employment plus self employment income in excess of $3,000, to a maximum of $500 ($1,000 for couples or single parents), but then reduced by 15% of net income in excess of $9,500 ($14,500 for couples and single parents). The tax value of this new credit is only a maximum of $78 to $155 per year.

Public Transit Credit

Last year’s new transit credit has already received some tinkering in this budget. Commencing in 2007, the credit also will apply to the purchase of four consecutive weekly passes for unlimited transit use. The issue in the previous legislation was that low-income people perhaps couldn’t afford to pre-purchase a whole month’s pass.


The previous year’s budget made the surprising, bold and generous move to make scholarship income totally tax-free at the post secondary level. Secondary school scholarships were only tax free to $500, but starting in 2007, they, too, will be totally tax-free.


This budget once again tinkers with RESPs. The government matches contributions at the rate of 20%, to certain limits. This matching contribution has not been changed over a life-time, but the speed at which the life-time grant can be received has improved. Starting in 2007, the maximum annual matching grant will increase from $400 to $500. Correspondingly, the annual contribution to trigger the higher maximum increases from $2,000 to $2,500.

Secondly, there no longer will be an annual maximum contribution limit, which means, for instance, you could fund the RESP with a very large contribution up front. Unfortunately, this strategy does not precipitate the receipt of the 20% matching money from the government. Presently, the government will only match a maximum of two years worth of contributions in any given year.

Pension Splitting

It’s a very big year for pensioners. New tax law changes will see many pensioners’ tax bills decrease in 2007 and beyond.

Earlier, the government brought forward a proposal for income splitting for retired couples. This is proceeding and will be effective for 2007. This proposal was “out of the blue” and is a fairly major tax saving for those who qualify.

There are a few qualifying conditions. First, there must be “qualifying income”, which means pension income qualifying for the pension credit. This includes income from a company pension plan regardless of the age of the recipient. It also includes income from a RRIF, or RRSP annuity, if the recipient is age 65 or older.

Second, both parties must sign elections agreeing to the pension sharing. The amount that can be split is entirely at the couple’s discretion, to a maximum of one half of the qualifying income. Also, the splitting decision stands on its own year-by-year, ie it is not a one-time permanent decision (like CPP splitting). Thus, if a couple’s income situations change in future years, they can split whatever amount they choose, or none at all, for that particular year.

The process itself is extremely facile. Each spouse should determine the regular taxable income, deductions and credits as they normally would. Then, they look at their two situations and decide how much qualifying pension income to transfer from one spouse to the other to achieve maximum advantage. The main advantage derives, of course, from the two having different marginal tax brackets. However, it is a little more complicated than that because their revised net and taxable incomes after the splitting will affect other aspects of their tax filings; specifically the various credits that drive off net income, eg age credit, medical credit, dependent credit, etc. Furthermore, various other credits in the past have been moved between the spouses to fine tune, eg donations. Lastly, the dreaded clawback will be impacted, too, in this new process. The transferor partner’s net income will decline and this may reduce any clawback owing. But, it is possible that the transferee partner may draw up into clawback territory, costing that party extra taxes.

In conclusion, this new provision will provide a significant tax planning and minimization tool that can be executed “on the fly” in the final moments before tax returns are finished. It emphasizes, even more than in the past, that tax returns are engineered, not prepared!

Lastly, this new, gratis income splitting should not deter couples from practicing long term tax planning and splitting, as existed in the old days up to 2006. What can be given in a flash, can be taken away in a flash!

Click here for follow-up analysis and more information.


There has been some tinkering with depreciation classes, which is effective for asset purchases after Budget day.

For manufacturing and processing businesses, related equipment bought through December 31, 2008 will have a higher depreciation rate of 50% straight line and buildings acquired for this purpose will go into a new class with a rate of 10%.

New buildings acquired for other business purposes (ie not rental) will have a new class and higher rate of 6% (from the present 4%!).

The Class 45 computer hardware rate will increase from 45% to 55%

Tax-free Capital Gains

The lifetime capital gains deduction applies solely to certain farmers, fishers and entrepreneurs, based upon meeting certain qualifications. The tax-free amount has been at $500,000 for several years, but will be increased effective from the Budget Day to $625,000 for the remainder of 2007 and to $750,000 starting in 2008.