What’s in store for Budget 2015?

Industry groups have lobbied Finance Minister Joe Oliver for tax breaks and rule changes in the 2015 budget.

CPA Canada wants the federal government to reduce personal income tax rates once the economy picks up, since our trading partners have lower rates. If necessary, it says, the feds could increase consumption taxes, such as the GST, to compensate for lost revenue. The government had expected a $1.9-billion surplus in 2015-2016, but falling oil prices are hurting tax revenues, says a January TD Economics report.

Instead, the government will post a $2.3-billion deficit, TD forecasts. The firm projects there won’t be a surplus until 2017, unless there are new measures to raise revenues or cut spending.Despite these conditions, Oliver expects a $1.6-billion surplus. Either way, such a slim margin will make it difficult to introduce any new tax breaks, TD says.

TFSA improvement

The Investment Funds Institute of Canada (IFIC) wants the federal government to honour its 2011 commitment to increase the annual TFSA contribution limit to $10,000 once the budget is balanced. “The government wouldn’t take a huge hit in tax revenues with these measures,” says IFIC president and CEO Joanne De Laurentiis, noting the federal Conservatives estimated the government would only lose $30 million in tax revenue in the first year of doubling the limit. For perspective, the government collected more than $130 billion in taxes in 2013-2014, according to the Public Accounts.

De Laurentiis explains that, more importantly, TFSAs “encourage Canadians to build savings, which has been a concern of this government in wanting individuals to be better prepared for retirement.”

Industry wants changes

IFIC wants Ottawa to harmonize the rules governing retirement savings products to make employer contributions to group RRSPs exempt from payroll tax, CPP and EI (IIAC is also interested in a deduction of CPP and EI payments for employer and employee contributions to group RRSPs).

IFIC also wants to ensure employer RRSP contributions are locked in. Currently, an employee can withdraw those contributions at will (albeit triggering additional taxes ), IFIC senior policy advisor Graham Smith points out. “This means contributions intended for retirement savings can be used for other purposes, thereby undermining the public policy objective of the program.”

Read: Falling oil prices may hobble federal tax cuts

She adds that other savings vehicles, such as defined contribution pensions and pooled registered pension plans (PRPPs), forbid employees from withdrawing employer contributions except in limited circumstances.

The government should also permit automatic employee enrolment in group RRSPs with reasonable opt-out provisions, De Laurentiis said in her brief to the House of Commons Standing Committee on Finance. She told AER she favours the same approach used for PRPPs, where employees are automatically enrolled and given a 60-day opt-out period.

De Laurentiis also referred to a 2014 report by the C.D. Howe Institute that noted mandatory minimum withdrawal rules for RRIFs haven’t kept pace with gains in Canadian life expectancy. She’d like an increase in the mandatory age for initial RRIF withdrawals (currently 71), a reduction in the 4% minimum drawdown amount, or both options, to “mitigate the risk that seniors outlive their savings.”

Read: Raising TFSA limit not as good as it sounds

The Conference for Advanced Life Underwriting (CALU) is also concerned about Canadians’ longevity. It recommends that long-term care insurance qualify for registered accounts, or that annuitants be allowed to withdraw up to $2,000 annually from their RRSP or RRIF, tax-free, to buy policies.

In its pre-budget brief, CALU referred to a Canadian Life and Health Insurance Association estimate that increased baby boomer longevity will result in a $600-billion funding shortfall for provincial long-term care programs over the next 35 years.

Meanwhile, IFIC says the age limit for RRSP contributions should be raised to 75, and RRIF income-splitting prior to age 65 should be allowed. Currently, registered pension plan (RPP) income can be split with a spouse or common-law partner prior to age 65, but RRIF income can only be split once the annuitant reaches 65.

Further, IIAC wants compensatory adjustments for Canadians who have missed annual RRSP contributions due to job loss, having children or because they returned to school. Managing director Barbara Amsden says she’d prefer that the average of preceding working years’ income be used as the basis of RRSP calculation for years when someone isn’t employed. “In the case of the self-employed with fluctuating incomes, we encourage the federal government to allow—and provincial governments to press for—annual RRSP contribution room based on average income with a carry-forward or back into years of leaner earnings.”

Read: Federal budget delayed until April, says Oliver

As for RRIFs, IIAC wants the minimum annual withdrawal requirement removed.

Increased access to advice?

IFIC wants those who save through low-cost, pooled registered pension plans to have the option to receive advice through their PRPP, says Smith. “Including an advised option—or standalone advice component—within the menu of PRPP investment choices would help ensure that plan participants reach their financial goals.” The organization also says mutual fund companies should be allowed to apply the 13% general rate reduction to their full-rate taxable income, like most corporations. Mutual fund companies currently pay the full tax rate on interest or foreign income. “If the imbalance were corrected, the tax burden of Canadian mutual funds would be reduced,” says Smith, and that “would increase investor returns by lowering costs.”

Tax reform

In its submission to the Finance Committee, the Chartered Professional Accountants of Canada said the Income Tax Act needs to be simplified, especially since the Act hasn’t been reviewed since 1966. That suggestion made it into the committee’s own pre-budget report.

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The CPA would also like Ottawa to investigate how to streamline the tax system, and consider creating a permanent tax simplification office, as in the U.K. “The only way to make fundamental change in the long term is to look at systemic problems with existing legislation,” Gabe Hayos, CPA Canada’s vice-president of taxation, told AER. “But in the short term, we believe the government can take steps to review and simplify the legislation where possible.”

by Christopher Guly, an Ottawa-based financial writer.