The investment industry is calling on the federal government to loosen the constraints on tax-assisted retirement savings vehicles and, to introduce new tax incentives for investing in startups.
In its latest pre-budget submission to the federal government, the Toronto-based Investment Industry Association of Canada (IIAC), calls on the government to bolster private retirement savings by boosting the annual contribution limits for both registered retirement savings plans (RRSP) and tax-free savings accounts (TFSA), and by increasing the flexibility in RRSP contributions. It also says that the government should do away with required annual withdrawals from registered retirement income funds (RRIF).
In its submission, the IIAC notes that the federal government has previously committed to doubling the annual contribution limit for TFSAs once the budget is balanced; and, it says that this should happen in the next budget. It also calls for “modest increases” in RRSP contribution limits. And, it says those limits should be adjusted for people who have missed annual contributions due to temporary employment disruptions such as losing a job or exiting the workforce to take care of children or to upgrade education/qualifications.
It also proposes that group RRSP contributions should be exempt from payroll taxes, such as CPP and EI, in the same way as defined benefit and defined contribution pension plans. And, it argues that, in light of longer life expectancies and lower investment returns, the required minimum annual withdrawals from RRIFs should be dropped to avoid people outliving their savings.
In addition to these recommendations for reform to the retirement savings system, the IIAC also calls for action to help bolster the availability of equity capital to startups. IIAC president and CEO, Ian Russell, says, “We are facing a crisis of available equity capital needed to finance the startup and expansion of small and mid-sized businesses in Canada, the engine of growth and job creation.”
Russell reports that the stock of available capital for small business is about half of what it was five years ago, and he calls for the next federal budget to “confront this crisis head on.”
The IIAC is recommending the introduction of two new tax incentives to stimulate the flow of new capital for startups. It suggests that the government introduce a tax-free rollover provision that defers capital gains tax when the proceeds are reinvested in eligible startups. It also proposes a personal income tax credit that would provide an exemption from capital gains tax on shares in startups, providing that the shares are held for at least two years.
“The tax-free rollover provision would unleash large amounts of existing capital now trapped in mature investments and re-deploy this capital to productive opportunities in small and mid-sized businesses across the country,” Russell suggests.
And, the IIAC says that the proposed personal tax credit program would complement existing angel investors and venture capital funds. It notes that a similar program in the UK “has had a profound impact on financing small business in the UK.”
“We believe that Canada can achieve similar results,” it says, adding, “the benefits to the Canadian economy would greatly outweigh the expenditure of the program.”