With the glut of baby boomers approaching retirement, several associations that represent the Canadian financial services industry are calling on the federal government to review its treatment of taxes related to retirement savings, pension plans and insurance products, among other things, for the upcoming 2011 federal budget.

For instance, the Canadian Bankers Association and the Investment Funds Institute of Canada, both based in Toronto, have recommended that the feds look at employing lifetime rather than annual RRSP contribution limits in their pre-budget submissions.

The CBA and Toronto-based Canadian Life and Health Insur-ance Association Inc. recommend eliminating the employment requirement for multi-employer defined-contribution pension plans, so that self-employed and other workers unattached to an employer are able to participate. The benefits of belonging to such pension plans are in the economies of scale — in terms of administration and the quality of professional investment-management services that aren’t available to individuals — as well as in a structure that can encourage regular additions to retirement savings.

The CLHIA is also recommending that tax and financial assistance be provided for the purchase of long-term care and critical illness insurance. One option would be through an RRSP-type vehicle, in which the tax-sheltered money is used to buy such insurance. Another would be to provide a tax deduction, similar to the one offered for charitable donations, for these policies’ premiums.

Another CLHIA recommendation is that RRSP contribution limits be calculated based on investment income as well as earned income. This is not aimed at helping the rich, who would still have limits on how much they can contribute. Rather, it would help small-business owners who may take their profits in the form of dividends rather than a salary, explains Ronald Sanderson, the CLHIA’s director of policyholder taxation and pensions: “Does it really matter where the income comes from?”

These are just some of the recommendations that the three groups have made. Here’s a more detailed look at what these organizations — and the Toronto-based Investment Counsel Association of Canada — have suggested:

> rrsp limits. The argument for a lifetime RRSP limit is that people’s ability to save during their pre-retirement years can change, so they should be allowed to put away more money when it’s easier for them.

In addition, people may get an unexpected inflow of income — say, from a generous bonus or inheritance — and should be able to lock some or all of this away into retirement savings. This is particularly helpful for people who experience periods of unemployment or low earnings, when it’s not possible to make contributions.

If lifetime RRSP limits are not introduced, IFIC suggests, those people who leave the workforce for specified reasons — such as a job loss or child care — could be allowed to continue accumulating RRSP contribution room during those absences.

In addition, IFIC suggests, self-employed individuals who have incomes with large variations could be able to use an average income over a period of time to calculate their annual RRSP contribution room.

> Pension Plans. The CBA and the CLHIA would both like to see multi-employer DC pension plans encouraged by removing the employment requirement so that everyone, including the self-employed, can participate. The reason that DC plans, rather than defined-benefit plans, are recommended, Sanderson explains, is that benefits can’t be reduced for DC plans — as they could be for DB plans — if there aren’t enough assets in place to pay the benefits.

The CLHIA recommends that workplace pension plans be mandatory for all businesses employing 20 or more employees. Sanderson says this wouldn’t be expensive for a company because there would be “off the shelf” plans that could be used.

Furthermore, there would be no obligation for the employer to make contributions for employees. Sanderson notes that many small businesses offer supplementary health insurance because it’s easy to do; he believes such firms would be happy to add pension plans if they were as easy to put in place.

Employees would be able to opt out if they didn’t wish to participate, as they can with health insurance. Experience, however, suggests that most workers don’t opt out, partly because they would have to do so formally.

The CLHIA also sug-gests that individuals be allowed to put their unused RRSP contribution limits into DC multi-employer pension plans.

As well, the CLHIA recommends that pension plan participation be mandatory with an offer of employment — and that escalation of contributions be permitted as wages rise.

The increase in contributions would be based on a higher percentage of earnings — the theory being, Sanderson explains, that people can afford to save more proportionately as their incomes rise.@page_break@Employees could opt out or decide to keep contributions at a particular percentage level or dollar amount. But, he adds, research shows that most employees go along with what’s done automatically.

IFIC isn’t formally recommend-ing this measure but says the idea should be explored. Its submission notes that the adoption of automatic enrolment in the U.S. “resulted in employee participation rates rising often to above 90%, especially among lower-income and minority workers.”

> Employer Contributions To RRSPS. The CLHIA and IFIC recommend that employer contributions to group RRSPs be excluded when Canada Pension Plan contributions, employment insurance premiums and other payroll taxes are calculated — as is the case with pension plan contributions.

The CLHIA and IFIC also suggest permitting the locking-in of employer contributions to RRSPs — at least, for the duration of employment. IFIC’s submission notes that without this measure, there’s a risk of “undesirable depletion of accumulated capital.”

> RRSP Withdrawals. The CLHIA suggests the age at which RRSPs have to be converted into RRIFs be raised to 73 vs the current 71. The CBA also recommends an increase in this age, but doesn’t specify what it should be.

The CBA and IFIC also recommend that the minimum withdrawals from RRIFs be reduced to reflect an older population, longer lifespans and the current low interest rate environment.

IFIC also suggests an increase in the amounts that can be transferred from DB pension plan to RRSPs for the same reasons.

> TFSAs. The CLHIA suggests that annuities be allowed in TFSAs because many Canadians expect to use their TFSAs to supplement their retirement income. Currently, only liquid assets are allowed to be held in TFSAs.

> Income-Splitting. The CBA, IFIC and the CLHIA all urge that the age to qualify for the pension tax credit and retirement income-splitting be reduced to 55 from 65 for everyone. Only members of pension plans can now qualify at age 55.

> Dividends, Capital Gains And Losses In Tax-Deferred Vehicles. The CBA and IFIC both recommend more equitable treatment of dividend income and capital gains earned inside a tax-deferred plan.

The issue is that dividend income from Canadian companies earned outside of these plans receives a tax break in the form of the dividend tax credit; and only 50% of capital gains is taxed. Conversely, income earned within these plans is fully taxed upon withdrawal.

The CBA suggests reducing the tax rate on income from tax-deferred plans to compensate for this inequity.

IFIC suggests providing relief for those who may have faced, or face, substantial market losses in their RRSPs by allowing them to deduct some of the losses from ordinary income.

> Taxes On Financial Products. The introduction of a harmonized sales tax in Ontario and British Columbia on July 1, 2010, has the investment industry fuming because it means the higher taxes add to the costs of saving for retirement — saving that governments want to encourage.

IFIC suggests exempting management, advisory and administrative services provided to mutual funds from the GST/HST and instead taxing these services at a single, low rate.

The ICAC recommends exempting discretionary investment-management services provided to all retirement savings plans from the provincial portion of the HST.

> Mutual Funds. The ICAC still recommends reducing the number of unitholders required for trusts to qualify as mutual fund trusts to 10 from the current 150.

The ICAC believes the “150 rule” penalizes investment counsellors and portfolio managers who use unit trusts or pooled funds that are identical to mutual funds but don’t have 150 unitholders.

> Non-Resident Trusts And Foreign Investment Entities. The ICAC is also urging the feds to ensure that future amendments to the non-resident trust and foreign investment entity rules do not inadvertently tax pensions, including both traditional plans and DC plans, as well as RRSPs.

> Designated Stock Exchanges. The ICAC wants to see an expansion of the designated stock exchange list for registered plans to allow Canadians to diversify their RRSP investments even further. Registered plans currently can invest only through stock exchanges that are on this list.

> Financial Literacy. The CBA’s submission notes the importance of financial literacy, saying the CBA is looking forward to the recommendations of the Task Force on Financial Literacy and specifically urging that financial education be part of high-school curricula across the country.

IE