C.D. Howe’s

(February 12, 2003) The federal government should raise RRSP limits, introduce a new tax-advantaged retirement savings plan, reduce personal income taxes and phase out the capital tax in next week’s budget, the C.D. Howe Institute recommends in its “shadow” budget, released today.

RRSP limits should be immediately bumped up to $15,500 or 20% of earned income for 2003, C.D. Howe says. Future annual increases would bring the limit to $18,500 by 2005, indexed to inflation after that. Taxable withdrawals from an RRSP should create future contribution room, the shadow budget suggests, and the age at which an RRSP must be converted to a RRIF should be raised to 71 from 69 in 2003, and to 73 in 2004.

In addition, C.D. Howe recommends scrapping the 30% foreign content limit for pension plans, which it says will have no impact on federal revenue.

Tax prepaid savings plans, an idea C.D. Howe has been championing since 2001, should also be on Ottawa’s budget agenda, the research institute says. TPSP contributions would generate no tax deductions, but no taxes would be paid on earnings within the plan or future withdrawals, an advantage to lower income workers, C.D. Howe says. “For those with modest earnings, saving through RPPs or RRSPs makes little sense.”

Personal income tax rates should be indexed for 2004 by 3% or the annual inflation rate, whichever is greater, C.D. Howe says, “making up lost ground and ensuring that inflation neither raises people’s income tax nor erodes the value of the benefits they receive.” As well, the lowest personal income tax rate should be cut by one percentage point in 2004 and all rates should be reduced by a further single percentage point in 2006.

C.D. Howe also suggests lowering corporate tax rates and phasing out the capital tax, which it calls “an obvious discouragement to domestic investment.”

“Lower tax rates and other measures can shrink the tax gap between Canada and its peers, bringing Canada more investment and better jobs,” the report states.

The shadow budget also includes additional spending on healthcare and defence. Federal healthcare transfer payments should by topped up by $2.5 billion, C.D. Howe says, and spending on defence should be increased 5% annually over the next three years.

C.D. Howe suggests reforming the employment insurance system by ending employee premiums. “The EI account has a notional surplus of $42 billion, roughly 2.5 times the amount needed to finance the program.” The shadow budget proposes that in future, employer premiums should fund the entire program.

The shadow budget was written by C.D. Howe Institute president Jack Mintz, senior policy analyst Finn Poschmann and senior vice-president William Robson.

Federal Finance Minister John Manley reveals the real thing on Tuesday, February 18. Advisor.ca will have extensive budget coverage that evening, with reports from Ottawa and reaction from associations, analysts and advisors across the country.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca