THE FEDERAL GOVERNMENT should consider making a number of changes to its retirement savings and taxation regime, says the Portfolio Managers Association of Canada (PMAC), a financial services industry group. These changes could be implemented immediately while the feds continue to consult with the provinces on possible enhancements to the Canada Pension Plan (CPP).
“It’s going to take awhile, if the government does want to make some changes to CPP and get provincial support,” says Katie Walmsley, president of PMAC in Toronto. “But these changes are in [federal] jurisdiction. They don’t need to get the provinces onside.”
PMAC’s 2016 federal pre-budget recommendations letter to Finance Minister Bill Morneau, released in February, asks the government to consider treating CPP contributions as tax deductions – as opposed to tax credits, as is the case now – and increasing the RRSP contribution limit by 20% to $30,000 from $24,930.
“The government making an announcement of this kind sends a message about the importance of personal retirement savings, even to someone who has never contributed a dollar [to an RRSP],” Walmsley says.
PMAC’s letter also urges the government to introduce tax incentives to spur participation in pooled retirement pension plans (PRPPs), which so far have failed to gain much traction outside Quebec.
PMAC’s letter argues that PRPPs would be the preferred solution to filling the retirement savings gap, created by a decline in employer-sponsored pension plans, rather than the expansion of public pension plans.
“[PRPPs] are a low-cost, viable pension reform solution,” argues the PMAC letter.
The federal government has stated that improving retirement income security for Canadians is a priority. In February, Morneau said that he intends to work with the provinces to make enhancements to the CPP “this calendar year.”
PMAC’s letter states that the association supports “minor enhancements” to the CPP, but prefers changes that would allow Canadians more flexibility in saving for their retirement.
Reverting to treating CPP contributions as deductions, as they were in the past, would align the treatment of CPP, RRSP and other pension contributions for tax purposes, the PMAC letter argues.
Also, because tax credits are calculated at the lowest federal marginal tax rate and reduce taxes owing, while deductions are calculated at the highest marginal rate and reduce taxable income, treating CPP contributions as deductions would result in tax savings to taxpayers whose income puts them in the middle-income tax bracket or above.
“If [CPP contributions] went to a deduction, the winners are going to be higher-income individuals,” says Rick Robertson, associate professor with the Richard Ivey School of Business at the University of Western Ontario in London, Ont. “Having said that, the federal government just increased its tax rates considerably [to 33% for income above $200,000 in 2016 from 29% in 2015], so giving [higher-income taxpayers] a break wouldn’t be all bad in my mind.”
However, the government is very unlikely make such a change, says Jamie Golombek, managing director of tax and estate planning, wealth advisory services, with Canadian Imperial Bank of Commerce in Toronto. He argues that virtually all tax deductions were changed to tax credits as part of tax reform in the late 1980s on the principle that a tax credit is universal – that is, worth the same to every taxpayer.
“Reverting [CPP contributions to a deduction] would be seen to be benefiting only the middle-class and the wealthy and having no impact on the average [lower-income] Canadian,” says Golombek. “That would seem to be contrary, I would think, to general tax policy right now.”
Increasing the RRSP contribution limit ceiling would help Canadians save more for retirement, and is especially needed in today’s environment of low interest rates and high market volatility, the PMAC letter adds.
“The simple fact is that people are not getting the same types of returns on their investments as they used to,” Walmsley says. “And as [people] age, they’re also ‘derisking’ their portfolio, resulting in their return being even less. So, they need to increase the amount of savings they require to generate the same average return.”
Golombek, for his part, thinks there is merit in a relatively modest increase in the RRSP contribution limit, despite the fact that most Canadians don’t, or can’t, use the RRSP room they already have.
“You want to encourage high-income Canadians to save,” he says. “The only reason given to put a ceiling on RRSP contributions is that it’s too expensive. You can’t have an unlimited amount, because it would cost the government a lot in terms of lost revenue that wouldn’t be [generated from] investment income in the RRSP.”
PMAC’s letter also asks the government to consider offering incentives for employers to introduce PRPPs. Although contributions to a PRPP generally reduce the contribution room available for an RRSP, the PMAC letter suggests there be a transitional exemption for first contributions into PRPPs, so that RRSP contribution limits are not affected in that year.
The letter also suggests a retirement savings grant, similar in structure to RESP grants, to be invested in a PRPP.
PMAC’s letter argues that the suggested PRPP incentives would cost less to administer than setting up the Ontario Retirement Pension Plan program, the implementation of which recently was delayed for one year.
Quebec has passed legislation, to be phased in over the next several years, requiring that businesses with more than five employees offer a PRPP – called a Voluntary Retirement Savings Plan (VRSP) in Quebec – if the employer doesn’t already offer a qualifying pension or retirement savings plan. However, employee enrolment in a VRSP is voluntary.
OPPORTUNITY IN ORPP DELAY
Financial advisors should take the opportunity created by the Ontario government’s recent announcement that it will delay implementation of its public pension plan to remind clients of the value of taking control of their retirement plans.
“The whole impetus for the Ontario Retirement Pension Plan [ORPP] in the first place was that people aren’t saving enough,” says Jamie Golombek, managing director of tax and estate planning with Canadian Imperial Bank of Commerce’s wealth advisory services division in Toronto. “But you, as a financial advisor, can sit down [with a client] and say, ‘Well, actually, I think you are saving enough.’ And, with a written financial plan, you can demonstrate that to the client.”
Ontario’s government proposed the ORPP to close what the province believes is a retirement savings gap. Employers in Ontario that don’t offer a “comparable workplace pension” plan would be required to offer the ORPP and match employee contributions of 1.9% of earnings.
In February, the Ontario government announced that large employers with 500 or more employees will not have to begin remitting ORPP premiums until January 2018 instead of beginning in January 2017. Enrolment in the ORPP program also was pushed to January 2017 from the original date of January 2016.
Ontario’s Liberal government, in making these decisions, stated it wanted to grant employers’ requests to have more time to set up their ORPPs. The Liberals also wanted to give more time to the federal government and all the provinces and territories to come up with a range of potential enhancements to the Canada Pension Plan (CPP) in time for a meeting of the federal and provincial finance ministers scheduled for June.
The financial services sector, in which companies have been almost universal in their criticism of the ORPP since it was first proposed, lauded the Ontario government’s decision to delay implementation of the proposed pension plan.
Wolfgang Klein, portfolio manager and senior investment advisor with Canaccord Genuity Corp.’s wealth-management group in Toronto, believes the ORPP would hurt businesses in Ontario and that a delay in implementation is warranted.
“Delaying [the ORPP] by a year and giving businesses a chance to catch up is certainly a good thing,” Klein says. “It is going to be disadvantageous to Ontario businesses, as the cost structure will put them out of sync with businesses in the rest of Canada.”
Katie Walmsley, president of the Portfolio Managers Association of Canada in Toronto (PMAC), agrees with Klein. Because the ORPP will be very costly to implement and administer and because it would be a plan implemented by one province alone, she says, the plan would suffer from issues of inefficiency and portability. Furthermore, she adds, PMAC hopes the delay will become indefinite: “All the waste and the integration and administration that go with [starting the ORPP from scratch] is so unnecessary, and for what benefit?”
PMAC and Golombek prefer an expansion of or enhancements to the CPP, which would have the benefit of being universal and cost-efficient. “It’s the simplest thing to do,” Golombek says.
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