Issues relating to the application of the GST are among the major concerns that financial services industry organizations have raised in their pre-2010 budget submissions to the federal government.
The Investment Funds Institute of Canada<\/b> and the Investment Counsel Association of Canada<\/b> share worries about the impact of the proposed harmonization of the GST and provincial sales taxes in Ontario and British Columbia. Harmonization means that the broad GST tax base will apply to items not previously subject to provincial sales taxes, which substantially increases the tax load on mutual and segregated funds.
One solution for the three provinces is to provide rebates or equivalents to holders of mutual funds and seg funds \u2014 as the provinces that have already harmonized their provincial sales taxes with the GST have already done. However, this doesn\u2019t deal with the underlying problem: the way the GST is applied to different investment products. IFIC is recommending that this inequity be fixed. (For more on harmonization, see story on page B4.)
This inequity stems from the 1991 introduction of the GST, which replaced the manufacturers\u2019 sales tax, as the GST is applied to the funds\u2019 full management expense ratios. In contrast, the GST is charged on only some of the costs of other investment products.
Meanwhile, the ICAC is concerned about the issue of charging the GST on discretionary management fees. Although the Canadian Medical Protective Association won a court case challenging the application of the GST to these fees, the federal Finance Department has told the ICAC that it still believes discretionary management fees should be subject to the GST, says Katie Walmsley, the ICAC\u2019s president. She explains that the Finance Department didn\u2019t appeal the court case, but has the option of retroactively amending the Excise Tax Act to make them taxable.
IFIC and the ICAC have a number of other recommendations for the 2010 budget, while the Canadian Life and Health Insurance Association<\/b> has two aimed at encouraging retirement savings.
IFIC continues to recommend broader income-splitting; reducing the minimum withdrawal from RRIFs; eliminating the double taxation of dividends in registered retirement accounts; and eliminating the dividend gross-up from means testing for old-age security clawbacks.
IFIC also recommends that investors be allowed to claim $5,000 of capital losses annually against any income, not just capital gains. With the losses incurred in 2008, IFIC\u2019s submission claims, this would provide relief for some investors.
Meanwhile, the ICAC continues to recommend reducing the minimum number of unitholders required for trusts to qualify as mutual fund trusts to 10 from the current 150. The 150 rule, Walmsley says, penalizes the many investment counsellors and portfolio managers who use unit trusts or pooled funds that are identical to mutual funds but don\u2019t have 150 unithholders.
On the CLHIA\u2019s part, it recommends removing the employee relationship requirement from pension funds to provide broader access to pension funds. The CLHIA also advocates expanding the income base for retirement savings to all income, not just employment income, to increase contribution room for those with lower employment income.
Organizations such as the Canadian Chamber of Commerce<\/b> and the Canadian Bankers Association<\/b> are more focused on the broad economic issues, such as eliminating deficits as quickly as possible once the economy returns to growth and increasing Canada\u2019s tax competitiveness.
Here\u2019s a look at the various recommendations in more detail:
> Capital Losses. <\/b> IFIC notes that taxpayers were allowed to claim $2,000 of capital losses against any income before 1985. This was eliminated with the introduction of the lifetime $100,000 capital gains exemption in 1985, and wasn\u2019t brought back when the LCGE was removed in 2004.
IFIC recommends that the pre-1985 rule be reinstated with an amount that reflects inflation in the intervening period, suggesting that $5,000 would be appropriate.
> Dividends. <\/b> The dividend gross-up is 125% of the actual dividends received for ineligible dividends and 145% for eligible dividends. The use of the grossed-up figure in the means test for clawbacks of OAS and guaranteed income supplement payments means that two individuals with the same level of income may have different net income for social benefits calculations. As a result, the IFIC submission explains, the individual who has dividend income may experience more of a clawback than the other taxpayer.
IFIC also points out that inves-tors with RRSPs are being taxed twice on the dividends they receive in those accounts because those dividends have already been subject to corporate taxes. IFIC recommends that individual RRSP holders or RRIF annuitants be allowed to claim the dividend tax credit for those dividends in their registered plans and claim that amount on their individual tax returns for the calendar year in question.
@page_break@This recommendation would not be easy to implement, admits Jamie Golombek, managing director of tax and estate planning with Canadian Imperial Bank of Commerce<\/b>\u2019s private wealth-management group in Toronto and chairman of IFIC\u2019s taxation working group. IFIC has told the Finance Department that it would be happy to work with it to find a way to implement this recommendation, but no interest has been expressed by Finance thus far.
> Income-Splitting. <\/b> IFIC points out that individuals receiving benefits from defined-benefit or annuitized defined-contribution pension plans can split that income with a spouse at age 55. But others relying on RRSPs and other registered plans must wait until age 65. The recommendation is that couples be allowed to split income from all retirement-related plans from age 55.
> Registered Plans. <\/b> The C.D. Howe Institute<\/b> in Toronto recommends that the minimum RRIF withdrawal levels be eliminated. IFIC doesn\u2019t go that far, but recommends that these minimums be reduced and regularly updated because people are living longer. IFIC\u2019s submission notes that life expectancy has increased by 14 to 18 years for men and by 18 to 21 years for women over the past 30 years.
Meanwhile, the CLHIA recommends that allowable RRSP contribution levels be based on an individual\u2019s total income, not just earned income. CLHIA president Frank Swedlove notes that this concept is aimed at lower-income individuals whose employment income doesn\u2019t allow them maximum RRSP contributions but who may have other income \u2014 from an inheritance, a lottery win or the sale of a property, for instance. He argues that it\u2019s appropriate that these individuals be encouraged to put some of the windfall aside for retirement.
The CLHIA also recommends that the employment relationship requirement in pension funds be eliminated. This would allow for the creation of plans open to both small companies and individuals. Small firms would then not have to take on the liability of a pension plan or deal with the legal and regulatory requirements \u2014 and they would get the economies of scale that come with bigger pension plans. Employees of the small firms and the self-employed would get affordable pensions.
This could also encourage labour mobility, Swedlove notes, as there would be fewer instances in which the person in question has to consider the pension implications of a change in job.
Governments are already looking into how to encourage more participation in pension plans. There\u2019s a federal\/provincial task force gathering data and expected to report in December. Alberta and B.C., which are participating in the task force, would like to see a national plan but will probably do something on their own if that doesn\u2019t happen.
> Mutual Funds. <\/b>ICAC continues to argue for a reduction in the minimum number of unitholders required for trusts to qualify as mutual fund trusts to 10 from 150. If an investment does not qualify as a trust, it is subject to additional investment restrictions that are imposed on \u201cregistered investments\u201d \u2014 and is not exempt from the alternative minimum tax. The reason for the 150 rule is to make sure there aren\u2019t abuses resulting from related unitholders forming a trust that qualifies as a mutual fund trust. This can be avoided, Walmsley says, by specifying that the unitholders must be unrelated.\tIE<\/b>
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