Financial services advocacy groups’ pre-2015 federal budget submissions address the fact that it’s becoming more and more difficult for Canadians to finance retirement, especially as life expectancy keeps increasing. In many ways, the difficulty arises because people aren’t saving enough; however, government regulations prevent the best use of retirees’ assets, as well.
Thus, various measures are recommended to encourage more savings, including: increasing the contribution limit for tax-free savings accounts (TFSAs) and RRSPs; increasing the age limit for RRSP contributions; a tax credit for long-term care (LTC) insurance premiums; and supplementing income for low-income seniors.
Also recommended were measures to help retirees make the best use of their existing retirement savings, including: eliminating mandatory withdrawals from RRSPs; and allowing income splitting in registered retirement income fund (RRIF) withdrawals before age 65.
But these are not the only issues raised in pre-budget submissions. Others include: increasing capital for publicly traded small-cap stocks; taxation of group RRSPs and mutual funds; and changes in pension rules.
A closer look at some of the proposals:
– Encouraging savings. When TFSAs were introduced in 2008, the federal Conservative government promised to double the $5,000 annual contribution limit to $10,000 when the federal budget is balanced. A small surplus is expected in the 2015 federal budget, so the Investment Industry Association of Canada (IIAC) and the Investment Funds Institute of Canada (IFIC) both are urging that the budget raise the contribution limit.
The IIAC’s submission also suggests that this rise be accompanied by “modest complementary” increases in RRSP contribution limits.
IFIC’s submission recommends that the age limit for RRSP contributions, now age 71, be raised so that individuals still working can contribute longer. (Recent studies suggest that 75 would be an appropriate age limit.)
As savings may have to be used to pay for expensive medical care, particularly LTC, the Canadian Life and Health Insurance Association Inc.’s submission recommends a 15% tax credit for LTC premiums.
– Supplementing income for low- income seniors. IFIC’s submission notes that recent research found that elderly singles, mainly women, who live alone are four times more likely to be below the low- income cutoff threshold – commonly known as the “poverty line” – than seniors in general. Thus, IFIC’s submission recommends that the guaranteed income supplement be raised for elderly people living alone and the Canada Pension Plan (CPP) survivor benefit be raised to 100% from 60% of a deceased spouse’s entitlement.
– Increasing flexibility for registered retirement assets. With the increased life expectancy, retirees now may outlive their RRIF assets. Thus, IFIC’s submission supports reducing minimum withdrawals; the IIAC’s submission recommends eliminating them.
Splitting pension income with a spouse or common-law partner to keep taxes down is allowed for income from registered pension plans (RPPs) but not for RRIF withdrawals. IFIC’s submission recommends that this anomaly be corrected.
– Capital for small-cap companies. The IIAC submission notes that venture capital for small-cap companies has collapsed to near-record lows in the past three years. This submission recommends a “rollover” or deferral of capital gains taxes if the proceeds of a sale of real or financial assets are invested in shares of small-cap listed Canadian companies within six months, possibly with a specified holding period for the new investments.
The IIAC submission also recommends tax relief for startup and emerging companies.
– Taxation of products. Both the IIAC and IFIC submissions urge that group RRSP contributions not be subjected to payroll taxes, specifically CPP and employment insurance contributions, as is the case for pooled registered pension plans (PRPPs) and RPPs. To ensure that the employer contributions are used only in retirement, the submission from IFIC suggests that they be locked in, as they are for PRPPs and RPFs; the IIAC would go along with that.
As for investment-management services, the submission from the Portfolio Management Association of Canada (PMAC) says sales taxes should not apply and also urges that investment funds be exempt from trust-loss exemption rules, which prevents the use of previous capital losses to offset capital gains each time a large investor, such as a pension fund, gains ownership of more than 50% of a fund.
IFIC’s submission zeros in on the heavier sales tax burden that mutual funds face vs other investment products. It also recommends: counting pension plans and RFPs as multiple holders when investing in mutual funds to prevent heavy taxation if the number of unitholders drops below 150; expanding or eliminating the designated stock exchange list for investments by mutual funds, which includes only three emerging markets; and allowing mutual funds to use the general rate reduction for investment income that flows through to unitholders (as is the case for other corporations.)
– Pension reform. PMAC’s submission also urges that the rule limiting ownership in pooled funds, mutual funds and exchange-traded funds to 10% of the pension plan’s assets be modified or eliminated.
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