Promoting saving and investment

In other areas, the Canadian Life & Health Insurance Association Inc. (CLHIA) is urging industry input on the proposed revised test for exemption from taxation of life insurance policies, which has been presented in the 2012 federal budget. (See stories below and on page B6.)

And the Investment Industry Association of Canada (IIAC) continues to suggest measures that could increase investment in small and mid-sized companies.

Here’s a look at some of the recommendations in more detail:

RRSPS. The IIAC recommends that RRSP/ RRIF withdrawals not be included in the calculation of taxable income used for clawbacks of old-age security. The IIAC also recommends that individuals be allowed to compensate for the RRSP room lost because of job losses or fluctuations in income by basing contribution limits on an average of preceding working years contributions. In the case of the self-employed, the limit should be based on average income, with a carry-forward or -back into years of leaner earnings.

RRIFS. The IIAC recommends that the age at which RRIFs have to be established be raised to 73 from 71. Industry advocacy groups also want the minimum required withdrawals from RRIFs lowered. The consensus is that, given extended life expectancies, people need to be able to save longer and withdraw only what they need in any particular year.

TFSAS. The Investment Funds Institute of Canada (IFIC) recommends an increase in the annual maximum contribution to tax-free savings accounts (TFSAs). IFIC’s president, Joanne De Laurentiis, sees this strategy as an excellent way to increase Canadians’ savings – not just for retirement but also to pay for long-term health care.

GROUP RRSPS. IFIC also recommends eliminating payroll taxes from employer contributions to group RRSPs because this is the only kind of employer-sponsored registered pension plan (RPP) that is subject to these taxes.

The IIAC agrees and also recommends eliminating taxes on employee contributions to group RRSPs, as well as on employer contributions to individual RRSPs.

IFIC also recommends aligning the features of group RRSPs with those of pooled registered pension plans (PRPPs), such as allowing employers to: enrol employees automatically, provide an investment default option and lock in at least some – preferably all – of their contributions.

@page_break@ Numerous studies show that employees seldom opt out of programs in which they are automatically enrolled, making this a good way to get Canadians to save more for retirement, De Laurentiis says. She adds that this would get more young people, many of whom don’t think they need to save for retirement yet, into group RRSPs.

Many employees initially put their group RRSP contributions into money market funds and then forget to make decisions about a more appropriate asset mix, De Laurentiis notes, thereby reducing their eventual retirement income. A default option that puts the money in a balanced fund would eliminate this problem.

EMPLOYER-SPONSORED RPPS. The Portfolio Managers Association of Canada (PMAC) recommends measures to encourage participation in PRPPs that would apply to all employer-sponsored RPPs. These include:

1. A temporary employer retirement savings tax credit, like the home-renovation tax credit, which would apply to any new RPP.

2. A one-time exemption from the RRSP limits for initial contributions to PRPPs, with the equivalent offered to new employee participants in other new or existing RPPs.

3. A new retirement savings grant, modelled on the education grants for RESP contributions, for contributions to RPPs.

LONG-TERM CARE INSURANCE. Given the combination of extended life expectancies and soaring costs for home or institutional care, CLHIA continues to recommend an RESP-type savings vehicle or tax incentives to encourage the purchase of long-term care insurance.

PROMOTING INVESTMENT. The IIAC recommends some incentives to increase investment in the high-tech and biotech sectors. These include:

1. A tax exemption for capital gains earned by individuals on financial assets if the proceeds are reinvested in qualifying investments within six months.

2. An extension of flow-through shares to these sectors.

3. A lower capital gains tax rate for listed, traded shares and/or initial and secondary public offerings.

4. An extension of the small business tax rate and investment tax credits to midsized public companies.

MUTUAL FUNDS. PMAC continues to recommend that pension plans and RPPs be counted as multiple holders in mutual funds so that funds don’t run the risk of heavy taxation if the number of their unit-holders drops below 150.

FATCA. This legislation requires non-U. S. financial services institutions to identify American clients subject to U. S. taxation and report them to the U. S. Internal Revenue Service. (See story on page B3). Canadian financial services groups are urging Ottawa to negotiate an alternative agreement with the U. S.

© 2012 Investment Executive. All rights reserved.