The penny's days are numbered

The federal budget is guaranteed to leave Canadians pennilessliterally.

Among the victims of cutbacks outlined by Finance Minister Jim Flaherty in the government's 2012 federal budget on Thursday is Canada's one-cent coin.

Citing low purchasing power and rising production costs, the government has decided to phase the penny out of existence starting this fall, when the Royal Canadian Mint will stop distributing the one-cent coin to financial institutions.

Over time, that will lead to the penny effectively becoming extinct, although the government noted on Thursday that one-cent coins will always be accepted in cash transactions for as long as people still hold on to them.

The value of the penny has decreased to about 1/20th of its original purchasing power. Indeed, the lowly penny has fallen so far that Ottawa described it as a "burden to the economy" in a pamphlet explaining the change on Thursday.

In part because of rising prices for the metals it's made of, it actually costs 1.6 cents to produce every penny. The government estimates it loses $11 million a year producing and distributing the penny, and that doesn't include the costs and frustrations for businesses and consumers that use them in transactions.

A 2008 report by Quebec-based bank Desjardins estimated the penny's existence cost Canada's economy about $150 million in 2006. Canada's big banks alone handle more than nine billion pennies a year, which costs them $20 million annually to process.

The solution Ottawa is proposing is to do away with the penny in cash transactions. Instead of fiddling with a few cents at the cash register, prices will be rounded up or down to the nearest five-cent increment.

'Free your pennies from their prisons.' Jim Flaherty on Canadians' piggybanks

That rounding will happen after any applicable sales taxes have been implemented.

Take a cup of coffee in Medicine Hat, Alta., that currently costs $1.80 and is subject to five per cent GST. A consumer today would pay $1.89 for that drink. Once the penny plan is implemented, that price would be rounded up to $1.90.

But the nickel and diming can work both ways. A sandwich combo at a deli in Oakville, Ont., that today costs $4.86 after HST would round down to $4.85 under the plan.

A 2005 study by the Bank of Canada concluded that doing away with the penny wouldn't lead to any inflation. And Ottawa says similar systems implemented in Norway, Australia, New Zealand and elsewhere didn't lead to systemic price increases.

Pennies themselves will continue to hold their inherent cash value, so Canadians can always trade them in at financial institutions, a government press release was quick to note.

Banks can then return those pennies to the mint for recycling into their base materials. Which meansbefore too long, the penny will be mostly removed from the Canadian economy except for the jars in Canadians' closets.

"Free your pennies from their prisons," Flaherty quipped before the budget was released on Thursday.

Credit, debit and cheque transactions will be unaffected, so one cent is still going to be the base unit of Canadian currency.

But once the mint stops cranking out the 7,000 tonnes worth of pennies a year it currently makes, there will be a lot less copper jiggling in the pockets of Canadians.