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New RRSP rules scrap 30% foreign content limit

Ottawa introduced two investor-friendly measures in yesterday's budget, scrapping the limit on foreign investments and jacking up the amount Canadians can sock away in retirement savings plans.

Tax relief in the budget is minimal, but there will be total freedom to invest globally in registered retirement savings plans and pension plans, a move that is expected to lead to better investment returns.

Meanwhile, contribution limits for RRSPs are rising, and deposit insurance for guaranteed investment certificates and bank accounts will increase to $100,000 from $60,000. Other measures include higher Guaranteed Income Supplement benefits for low-income seniors, and a gradual increase in the amount of money people can earn each year before taxes kick in.

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"Look at the gifts we've been given by the federal government," said an ebullient Don Reed, president of Franklin Templeton Investments.

Mr. Reed was especially pleased with the surprise news that the 30-per-cent limit on foreign content in RRSPs and pension plans would be eliminated as soon as the budget legislation is passed. "It's unbelievable," he said. "We're finally thinking globally as a country."

Donal Flanagan, a 39-year-old orthodontist in Vancouver, said he'll make use of the higher RRSP contribution limits. He also said he appreciates the flexibility gained from the elimination of the foreign content limit.

But Mr. Flanagan said he's disappointed the budget didn't go further in reducing income taxes.

"What I ultimately would have liked to have seen is reduction in the maximum tax rate," he said. "That would be the thing that would have the most effect on me."

Instead of lowering tax rates, the government will gradually increase the so-called basic personal amount to $10,000 over the next five years from $8,148 in 2005. It's an approach that offers tax relief to people at all income levels while putting special emphasis on low-income earners. However, the net impact is marginal, especially in light of the fact that there was already a mechanism to increase the basic personal amount annually to adjust for inflation.

Savings to taxpayers as a result of the changes to the basic personal amount will be minimal.

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An Ontario resident earning $80,000 a year would pay about $195 less in taxes in 2009 than he or she would have otherwise, said Tim Cestnick, managing director of national tax services for mutual fund company AIC Ltd. "The savings amount to about a cup of coffee a week."

The budget raises the contribution limit for RRSPs to $22,000 in 2010, up from an $18,000 limit that was to take effect in 2006. Starting in 2011, RRSP limits will be allowed to rise annually at the rate of average wage growth.

The higher RRSP limit is mainly a benefit to higher earners -- to make a contribution of $22,000 to an RRSP you'd need to have a salary of just more than $122,000. Few Canadians take full advantage of their RRSP limits. Statistics Canada reports that 78 per cent of tax filers in 2003 had extra room left over from previous years.

Canada's foreign content limit for RRSPs and pension plans was introduced in 1971 as a way of supporting the development of Canada's financial markets. Eliminating this cap may have the broadest long-term impact of any personal finance measure in the budget, despite some potential negatives, which include downward pressure on the dollar and on Canadian stock prices as investment dollars flow out.

Global stock markets, accessible to any investor through global equity mutual funds, have historically made higher returns than the Canadian market, which accounts for just more than 2 per cent of the world's stock market value. Canada's S&P/TSX composite index generated a compound average annual 9.2 per cent over the past 20 years, while the MSCI World Index made 11.1 per cent.

Still, there are those who don't see the higher limit as a huge benefit. "I can usually live fairly well with 30-per-cent foreign content," said Adrian Mastracci, a financial adviser in Vancouver. "The limit never bothered me."

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Many investors seem to agree. In a recent poll commissioned by Royal Bank of Canada, just 5 per cent of participants said they had reached the 30-per-cent foreign content limit and one-third had no foreign content at all.

The increase in the coverage that Canada Deposit Insurance Corp. provides for bank and trust company GICs, term deposits and savings accounts is the first since 1983. CDIC insurance is of special interest to seniors who keep much of their retirement savings in GICs and want to be sure their money is protected against the collapse of a financial institution.

Other personal finance measures in the budget include:

Increased flexibility for people who convert a locked-in RRSP (usually money taken out of a company pension plan) into a life income fund. They will no longer be required to convert the LIF into an annuity at age 80.

An expansion of the list of qualified investments for RRSPs to include gold and silver bullion coins and bars, and certificates for those investments.

Improvements in tax benefits for individuals with a disability and their families, including a doubling to $10,000 of the maximum that caregivers can claim on behalf of dependents for medical- and disability-related expenses. As well, there will be greater flexibility for registered education savings plans set up on behalf of students who are eligible for the disability tax credit.

Introduction of a tax credit of up to $10,000 to recognize certain costs associated with adopting a child.

The government said the increase in the basic personal amount will take 860,000 low-income individuals off the tax rolls when fully implemented by 2009.

Most Canadians will want a good chunk of their RRSPs invested at home, but even a modest increase over the old 30-per-cent foreign content limit could mean better returns. A side benefit for investors and financial services companies is that they no longer have to go to the trouble of monitoring foreign content levels in individual accounts to avoid penalties for exceeding the limit.

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