IFIC offers bold suggestions for retirement savings plans

IFIC has released its annual wish list for the next federal budget. While many of the proposals will seem familiar, they have been repositioned around the Conservative Party’s platform in the hope of getting them through. IFIC’s key message this year: do something to help boomers before they go bust.

“A large portion of the population will be retiring over the next two decades and it is essential that they take steps today to save adequately for their retirement,” says IFIC president Joanne De Laurentiis. IFIC believes the objective of the federal government should be to encourage Canadians to save for themselves.

According to AIM Trimark Investments’ vice-president, taxation & estate planning, Jamie Golombek, who worked on the IFIC submission, one of the most effective ways to get Canadians to save for retirement would be to implement a tax pre-paid savings plan, or TPSP for short.

The TPSP isn’t a new idea. Three years ago the proposal had some traction under the Liberals before it fizzled. Originally conceived by the C.D. Howe Institute, the TPSP concept would allow workers to contribute to a savings plan out of their after-tax income. Although these contributions wouldn’t receive any tax deductions as they do with RRSPs, TPSPs would allow money saved in the plan to grow without the burden of future tax liability. At the same time, retirees future withdrawals would not be taxable or subject to benefit clawbacks.

The authors of the study for the C.D. Howe Institute, Jonathan Kesselman, professor of economics at the University of British Columbia, and Finn Poschmann, senior policy analyst with the institute, say the TPSP would provide “a new savings vehicle with additional contribution room, [which] would appeal to higher-income workers constrained by the current limits on RRSP and pension contributions.”

TPSPs wouldn’t replace RRSPs, since these plans wouldn’t shelter the money from tax. They would, however, remove the income from the clawback calculation. “There is a real disincentive to save in a registered plan because when they take the income out, it’s straight income, and that affects their eligibility for government programs,” Golombek says.

IFIC’s submission for the 2007-08 budget adds a new twist on the idea. As Golombek explains, the proposal suggests providing lower-income Canadians (those with personal incomes below $35,000 a year) with a grant similar to the Canadian Education Saving Grant Program for RESPs. IFIC believes providing a grant of $200 for every $1,000 a lower-income individual contributes to a TPSP creates an incentive for Canadians to save for retirement.

IFIC’s proposal goes hand-in-hand with the Conservatives’ election promise to eliminate the taxation of capital gains if the money is reinvested within six months. “Something like the tax pre-paid savings plan that would allow you to eliminate the capital gains while it’s inside the plan,” Golombek says, would be a big boost for Canadians wanting to invest for their retirement.

However, given the administrative challenges associated with eliminating the capital gains tax, IFIC suggests another way to go about achieving a similar goal. IFIC suggests instating a simple capital gains exemption with lifetime limit of, say, $100,000 or $150,000.

In one media report, Global Insight (Canada) economist Dale Orr is quoted as saying that a lifetime capital gains exemption of $150,000 would cost an estimated $425 million in lost taxes.

But how likely is it that the Conservatives will implement this in the next budget? According to Jack Mintz, the former head of the C.D. Howe Institute, writing in a recent column in the National Post, “you can bet your favourite income trust units.”

Mintz might be getting a bit ahead of himself. Jim Flaherty, Minister of Finance, was asked recently whether the provision would be included in the next budget. His answer was little more than a non-committal “we’ll see” — hardly the answer many were waiting for, especially since the minister said in May after presenting the 2006-07 budget that it was possible the capital gains reduction would be dealt with in the next budget.

Golombek, like Mintz, is convinced there will be some mention of the exemption in the next budget. But the real question in Golombek’s eyes is not when capital gains exemptions will be brought in, but how they will be implemented.

The question that has to be asked is if Canadians are going be expected to take responsibility for more of their retirement savings, will they have help? It’s widely thought that most Canadians don’t have the investment knowledge or the will to do the proper due diligence to invest.

As David Agnew, head of the Ombudsman for Banking Services and Investments, likes to say, “Most Canadians spend more time shopping for a TV than they do for investments.” And those investments are becoming more complex. So, again, will they have help?

Possibly. Golombek says not all advisors go chasing after the higher end of the market. He adds that degrees of service are already available to lower-income Canadians.

“We always read about the high-net-worth and that advisors only want the high-net-worth but there are many successful practices, especially in smaller towns, where advisors have thousands of clients and they are lower-income clients,” he says. He concedes that the complexity of services may vary among income groups, but an appropriate level of service is always provided.

Even if some advisors do serve lower-income Canadians, the average advisor doesn’t appear to be making a commitment to that part of the market. According to The ADVISOR Group’s annual Dollars & Sense Survey, which was conducted earlier this year, the average client portfolio is $146,200.

Predicting the next budget is a fool’s game, but regardless of what Flaherty decides to put in the next budget — barring a snap election between now and then — one thing is certain: Canadians will have to take more responsibility for their retirement.

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(10/23/06)