IFIC asks Ottawa to boost RESP limits

The House of Commons Standing Committee on Finance is currently holding public hearings and pre-budget consultations. IFIC is among the list of contributors who responded to the Committee’s call for submissions in July.

Past recommendations by industry members led to the government eliminating foreign content restrictions on registered savings plans earlier this year. After thanking the committee for its consideration in the matter, IFIC’s 2005 proposal makes four budget recommendations in the area of retirement and registered savings.

IFIC’s budget wish list this year calls for the committee to recommend that Ottawa introduce changes that provide increased opportunities for Canadians at all income levels to save for retirement. The proposal says larger limit increases in registered savings plans are needed, especially for Canadians who are self employed, or who do not benefit from an employer sponsored pension plan.

Along with this, IFIC is recommending higher contribution limits for RESPs beyond the current lifetime limit of $42,000 and annual limit of $4,000.

The paper points out that current RESP limits are not indexed for inflation or the rising cost of education. “Recent studies based on historical cost growth rates indicate that with the current lifetime contribution limit, a family with a child who will be entering post secondary education in 18 years will not have sufficient resources through an RESP to fund that child’s education,” it says. “For this reason we urge the committee to recommend immediate increasing in both the lifetime and annual contribution limits for RESPs.”

The paper also urges the committee to continue recommending to the Finance Minister that he establish Tax-Prepaid Savings Plans (TPSPs).

Such plans would allow people to make after tax contributions to a liquid savings plan that shelters investment returns. The idea was created to address concerns that lower income Canadians are penalized for saving because they run the risk of failing the different means tests and triggering clawbacks in social assistance.

In his paper on savings options for lower income Canadians, Derek Holt, assistant chief economist at RBC Financial Group writes that proponents say this new product, and variants like the Registered Development Savings Plan (RDSP) and other hybrids, would do one or both of two things: address inequities in the taxation of retirement savings and income that work to the detriment of lower income Canadians; and stimulate overall saving.

“Neither TPSPs nor RDSPs are likely to accomplish either of the two main objectives,” Holt argues. “On both counts, creative arguments have been employed to grossly overstate a problem and then to fix it with a very blunt, indirect, administratively costly, and relatively complex instrument that, depending on its exact form, may be overly restrictive, viewed with deep suspicion by lower income people and, ironically, be very regressive.”

IFIC, on the other hand, says “these plans are the only practical way in which lower income Canadians can save for their retirements.” In the 2004 budget, the Finance Minister said his department is continuing to review ideas about whether or not the new product could be appropriate for Canada.

Finally, IFIC is urging the government to enact Bill C-55, which extends creditor protection to all registered savings and income plans. The bill received first reading in the House of Commons on June 3.

Filed by Kate McCaffery Advisor.ca, kate.mccaffery@advisor.rogers.com