The need for canadians to save more for retirement is reflected in many pre-budget submissions for the 2014 federal budget by the financial services industry.
Recommendations include eliminating payroll taxes on employers’ contributions to group RRSPs and providing tax incentives to individual taxpayers to save for long-term health-care costs in order to help Canadians deal with expenses in retirement. Other issues include access to certain investment products or limits on investment options.
Some of the major recommendations:
Group rrsps. Submissions from both the Investment Funds Institute of Canada (IFIC) and the Investment Industry Association of Canada (IIAC) strongly recommend the elimination of payroll taxes on employer contributions to group RRSPs. The feds argue that because individuals can make withdrawals from group RRSPs, it’s earned income for the employee and should be subject to Canada Pension Plan (CPP) and employment insurance deductions.
However, IIAC president Ian Russell believes group RRSPs are used primarily for retirement savings and that there aren’t a lot of withdrawals from them. He notes that group RRSPs are the primary retirement savings vehicle offered by small and mediumsized businesses, and the requirement of payroll deductions discourages companies from introducing or enhancing these plans.
One solution that the IFIC paper suggests is to lock in the employer contributions, as that would ensure the employer contributions are used only for retirement.
The IFIC paper also recommends that companies be allowed to enrol employees automatically in group RRSPs. The evidence shows that few employees opt out of such plans, so this is a good way to increase retirement savings.
The submission from Canadian Life and Health Insurance Association Inc. (CLHIA) not only suggests automatic enrolment in group RRSPs but also automatic escalation of contributions.
Long-term care (ltc) insurance. The CLHIA paper says Canadians aren’t saving enough to cover LTC costs and so recommends tax incentives to encourage such savings or the purchase of LTC insurance.
One possibility is an RESP-style account with or without a similar government grant. The savings would grow tax-deferred and be available if needed. Another option would be a full or partial tax deduction for LTC premiums.
U.s. rules on canadian mutual funds. The U.S. considers units in Canadian mutual funds held by U.S. citizens residing in Canada to be passive foreign investment corporations (PFICs) and thus requires Americans holding these fund units to file special forms.
To complete these forms, unitholders need the mutual fund company to provide a PFIC statement based on U.S. tax principles.
If the forms are not filed, the U.S. will treat all the income earned as ordinary income, so the unitholders lose the tax benefits from earning capital gains and dividend income. This discourages Americans living in Canada from owning units in Canadian mutual funds, severely limiting these individuals’ investment options and creating an administrative burden for Canadian mutual fund companies.
The IFIC paper urges the federal government to negotiate an agreement with the U.S. that no longer designates Canadian mutual funds as U.S. PFICs or allows Canadian tax-reporting slips to be used as substitute forms for U.S. PFIC reporting purposes.
General rate reduction (grr) on mutual funds. Canada’s Income Tax Act tries to ensure integration: investment income earned by a corporation and then flowed through to investors is taxed in the same manner as if investors held the securities directly. This is accomplished for dividend and capital gains income through personal income-tax deductions for these sources of income and through the GRR for interest income and income from foreign sources.
However, the main problem is that Canadian mutual fund companies can’t use the GRR, so unitholders are subjected to double taxation. The IFIC paper recommends that the GRR be extended to the mutual fund companies.
Unitholder rule. Mutual funds are subjected to heavy taxation if they have fewer than 150 unitholders. That would be OK except that pension plans and registered pension plans (RPPs) are counted as single unitholders even though these plans represent hundreds or thousands of investors, as the Portfolio Managers Association of Canada’s (PMAC) submission points out. PMAC’s solution is easy: count pension plans and RPPs as multiple unitholders.
Designated stock exchanges (dses). This is another PMAC concern. Equities investments in RPPs, deferred profit-sharing plans and RESPs are restricted to securities listed on DSEs. Of Canada’s 40 DSEs, only three are in emerging markets, which the PMAC paper explains, limits risk diversification and optimum asset allocation. PMAC would prefer to see the DSE rule discontinued; but, if not, at least expanded to include more emerging markets.
Small-business investment incentives. The IIAC wants incentives to invest in small businesses. Among the measures IIAC’s paper proposes are rollovers of capital gains if proceeds are reinvested within six months in eligible investments and lower effective capital gains taxes for initial public or secondary offerings.
Abuse of joint accounts (jas) and powers of attorney (poas). This is an increasing concern for the Canadian Bankers Association. The risk is that an individual who’s a JA holder or has a POA will use the money for his or her own purposes.
This can be tricky, as those assigned to JAs and POAs are usually close relatives or trusted advisors. Rules allowing banks and others to disclose potential abuse to family members or the authorities without the consent of the assets’ owner were proposed in September 2011.
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