Clouds and silver linings — Advisors react to budget

(February 18, 2003) The federal budget has something for everyone, though some advisors say it could have done more to put money into the hands of their clients.

One budget gem is the incentives for small-business owners. Clients who fall into this category will be thrilled with the fact that the low 12% tax rate will apply to $300,000 of small-business income over the next four years; currently, it only applies to $200,000 of income. “Small businesses are the backbone of the economy and if they don’t have to pay out as much in tax, it creates jobs,” says Heather Clarke, director of advanced financial planning at Investors Group in Winnipeg.

For low-income earners, there was the increase in the Canada Child Care Tax Credit (CCTC), expected to reach $10 billion by 2007, up from the current $8 billion. “By giving [low-income earners] more tax breaks, you’re giving them more access to saving for retirement,” notes Ross Young, a chartered accountant and Certified Financial Planner at First Merchants Advisory Corp. in Calgary.

RRSP contribution levels, were an area of concern for many in the financial services community, and though they were raised to an $18,000 limit over four years, some advisors wish Manley had gone further. Amin Mawani, a CMA, CFP and a professor of taxation at York University in Toronto, notes that about 70% to 80% of Canadians are not currently using up their RRSP contribution room. “Only those who make more than $75,000 a year can benefit from the contribution limit raise, and within that segment, only the sub-segment that is currently maximizing their room actually will,” he says. For many, this is only a theoretical benefit; however, it does provide an opportunity, Mawani says. “About 40% of Canadians have been set back in their retirement planning by five years or more due to the recent bear market.”

Clarke adds that the move is not good enough for investors who are relying on RRSPs as their sole investment vehicles. “People often think that as long as I contribute whatever the government tells me to contribute, they’re saving enough for retirement. But they haven’t done the calculations.”

Sandy Pahwa, a CFP and chartered life underwriter at Ottawa-based TMS Financial, says Manley should have guaranteed consistent increases after 2006, which would also factor in rising inflation.

Given the current market conditions, investors may still shy away from their RRSPs, Mawani adds. “The market is still uncertain and losses inside an RRSP are more tragic because you cannot offset capital gains.”

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While increased contributions to registered pension plans ($15,500 for 2003 and up to $18,000 by 2005) help balance out retirement savings, it would be better if RPPs and RRSPs weren’t linked together so directly, says Clarke. “If I have a pension plan, I can put very little into my RRSP because of the pension adjustment,” she says. “It’s not like you can do any doubling up.”

Healthcare also ranked top of the list with some advisors. Ottawa will spend $17.3 billion over the next three years on healthcare measures, including an immediate $2.5 billion transfer to the provinces. “Healthcare funding is good news for all of us,” Tina Tehranchian, a CFP with Assante Capital Management in Richmond Hill, Ont., adds. “We are a large baby boomer population that is very interested in healthcare spending.”

But advisors also expressed some disapproval with the budget. “I’m pleased to see that the RRSP contribution limits were raised slightly but I think it could have been done a long time ago and the amounts that they are being increased by really aren’t meaningful,” says Jack Panteluk, a CFP with CIBC in Calgary. He calls the budget “unremarkable.” He would have liked to have seen RRSP limits immediately rise to $18,000, rather than over the four years. “In the long-term, if the government had gone with a higher RRSP limit initially, it would have gotten it back in taxation of gains, which they would have seen in the next years as baby boomers begin to withdraw larger sums of money.”

Panteluk says he personally would have preferred to see a tax cut, a reduction of capital gains tax, dividend income tax or a move to make mortgage payments deductible. These options could have had more broadly based tax savings for more Canadians, he explains.

But life is not all about tax cuts, Mawani points out. “For now you might enjoy lower lineups at the ER, or less debt as you pursue your post-secondary degree, or maybe you are now eligible for a scholarship,” he says. “That’s more than a tax cut would have helped you anyway.”

As far as Craig Brenzan is concerned, the budget had too much spending. “Not much will affect my clients,” explains the CFP with Cartier Partners in Edmonton, though he notes that about 20% will be able to take advantage of the increased RRSP limits and the majority of the rest — his clients with young families — will be able to take advantage of the CCTC. Brenzan says he would have preferred to see focus on reducing the national debt.

Tehranchian agrees that there is some concern that this budget spends too much. “This spending might create a deficit, or really wipe out the surpluses that have been created in the last few years,” she says.

“Overall, it’s a budget at the expense of debt reduction and tax relief,” adds David Salloum, vice-president at RBC Dominion Securities in Edmonton.

That said, Salloum is eager to share the some of the budget’s good news. He plans to discuss it tonight at a special seminar he’s holding for his clients. “I will talk about what the changes mean for them,” he says.

Filed by Deanne N. Gage and Jennifer McLaughlin, Advisor’s Edge.

(02/18/03)

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