Tax reforms, not cuts expected in federal budget

(March 16, 2004) With little extra cash in the coffers, it seems unlikely Ottawa will introduce new tax cuts in the federal budget. But tax reforms are a possibility, experts say.

Jamie Golombek, vice-president, tax and estate planning at Aim Trimark Investments, doesn’t expect much in the way of tax changes from Federal Finance Minister Ralph Goodale when he unveils his first budget next week.

Still, with an election looming, Goodale could opt for a few investor-friendly tax goodies, Golombek thinks, such as the introduction of tax prepaid savings plans (TPSPs).

“We’re hoping for at least a commentary that they’re still studying it, although we would be very excited by some draft legislation,” Golombek says. “TPSPs would be a great incentive to encourage people to save outside of their RRSP for retirement.”

Unlike RRSPs, TPSP contributions are not eligible for tax deduction. However, earnings inside the plan are not taxed, nor are withdrawals. TPSPs are also exempt from retirement clawbacks, making them suitable for lower income Canadians who don’t get much benefit from the RRSP system.

David Watt, senior economist at BMO Nesbitt Burns, agrees that TPSPs may make an appearance in the budget, considering Ottawa said it would study the idea last year.

Another change Goodale may be mulling over is raising the age at which an RRSP must be converted to a RRIF. “People are living longer and age 69 seems to be very early,” says Golombek. “It may increase but I’m not sure whether it’s viable in this budget. But that would be very helpful for seniors.”

Both IFIC and Advocis recommended raising the RRSP conversion age to 71 from 69 in their pre-budget submissions. The two industry associations also suggested that Ottawa immediately increase RRSP contribution limits to $27,000 a year.

But Golombek doesn’t expect any movement on RRSP limits, an issue Ottawa dealt with last year.

In the 2003 budget then Finance Minister John Manley committed to gradually increasing RRSP levels with a rise to $14,500 for the 2003 tax year. By 2006, the limit will reach $18,000 with future increases indexed to average wage growth.

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Pundits have been debating the taxation treatment of income trusts, with some suggesting that Ottawa might tackle the controversial topic in the budget, with an eye to tightening the current rules. Don’t count on it, says Golombek.

“I certainly don’t think they’re going to touch the income trust issue,” he says. “There are some diverse opinions as to whether or not there really is a tax loss there at all. I don’t think there’s been enough work done yet on that, also politically I think it’s difficult to make it fly, especially in an election year.”

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The federal budget will be unveiled on Tuesday, March 23, and Advisor.ca will be in Ottawa with our own expert analyst to determine how it affects you and your clients. Be sure to check back to www.advisor.ca for our complete online package of coverage, which will include insights and feedback from industry observers and frontline advisors.

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Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com

(03/16/04)

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Doug Watt