Supplementary Pension Plan: C.D. Howe

[Shakespeare]

New Supplementary Pension Plan Needed to Fill Gap in Canadians’ Retirement Saving: C.D. Howe Institute
Toronto, May 29 – Shortcomings in workplace pensions and individual retirement saving plans mean millions of Canadians face large declines in living standards when they retire. The answer, according to a Commentary released today by the C.D. Howe Institute, is a major new supplementary pension plan for Canadians. In the study, The Canada Supplementary Pension Plan (CSPP): Towards an Adequate, Affordable Pension for All Canadians, author Keith Ambachtsheer outlines the factors that jeopardize the ability of Canadians to put away adequate retirement savings and proposes a practical solution to the problem – the CSPP. The CSPP would have automatic enrolment, investment and annuitization features. As Ambachtsheer points, out, the CSPP would ideally be nation-wide, but can also work on a subnational or provincial level.

Study (pdf)

[Shakespeare]

From the pdf:

The model
has three critical elements:
1. A retirement savings accumulation/decumulation formula likely to generate
adequate, affordable post-work lifetime payment streams.
2. Complete workforce coverage and job-to-job portability across Canada.
3. Pension delivery institutions that are transparent and cost-effective, and operate
solely in the best interests of the people they are meant to serve.
The new pension model addresses two major shortcomings in workplace pension
plans and individual retirement savings. First, an estimated 3.5 million Canadian
workers are not members of a workplace pension plan, and are not accumulating
sufficient retirement savings to maintain a decent post-work standard of living. The
second shortcoming relates to the 5.5 million Canadian households who currently
have their retirement assets invested in retail products with high sales and management
costs, which make it difficult for many of these 5.5 million households to
generate adequate pension income at affordable retirement saving rates.
To address these flaws, the paper offers the Canada Supplementary Pension Plan
(CSPP) as a solution that is both theoretically sound, and practically feasible.

[George$]

Thanks for the link Shakes. A good summary of issues, problems and a possible solution on an important topic - that most folks don't address.
As you know I have an abiding interest in all things "pensions".

[brucecohen]

I agree with most of what Ambachtsheer wrote, but:

1. I can understand why he included an opt-out provision: political palability, especially for a paper to be published by C.D. Howe. But, based on low RRSP participation rates, I fear that too many would opt out.

2. The idea rests squarely on creation of a publicly run version of Vanguard. Govt of Canada has been loath to step on Bay Street's toes. For example, Finance never acted on a consulting group's recommendation that the CSB sales group be used to copy the US govt's Treasury Direct program which sells T-bills and govt bonds to individual Americans at institutional rates.

As I read the paper, I kept asking myself if it wouldn't be a lot easier to simply let people buy additional CPP credits -- assuming CPP Investment Board could handle that much more money.

[Shakespeare]

assuming CPP Investment Board could handle that much more money.

What "much" more money? I don't think many people would contributed, given the low RRSP contribution rates you noted in Point 1.

[pitz]

All Canadians can sign up for the Saskatchewan Pension Plan.

[Bylo Selhi]

I agree with most of what Ambachtsheer wrote, but...

Agreed -- buts included.

I don't think many people would contribute, given the low RRSP contribution rates you noted in Point 1.

In which case what was the point of Ambachtsheer's exercise?

All Canadians can sign up for the Saskatchewan Pension Plan.

With an MER of 90bp vs. DIY for 30bp or less.

[Shakespeare]

In which case what was the point of Ambachtsheer's exercise?

Just because it's a windmill doesn't mean nobody should tilt.

(I think there needs to be some sort of disincentive for opting out.)

[brucecohen]

All Canadians can sign up for the Saskatchewan Pension Plan.

That surprised me. Links to the governing legislation and regs didn't work so I phoned them. Sure enough, residents of other provinces can join. The residency requirement was ended in 1992 when the Sask govt stopped matching contributions.

The money is run as a balanced fund by Greystone and Leith Wheeler.

Quickly comparing 1-, 3-, 5- and 10-year returns to those for Morningstar's Canadian neutral balanced MF, it looks like SPP performance was below-average.

They don't report an MER but the numbers are in the annual report for those who want to put them together. The picture is a little complicated because the contribution and annuity fund seem to be run together.

[Bylo Selhi]

They don't report an MER

The 90bp I mentioned above came from p.12 of the AR, "Administrative expenses are paid from Plan earnings and SPP focuses on providing efficient service at a reasonable cost. In 2007 total expenses for the CF were 0.9 per cent of the average market value of assets held in the fund. Total expenses for the AF were 0.5 per cent of the average market value of assets held in the fund." (AF doesn't hold any equities.)

[pitz]

Yeah I guess the Sask. Pension Plan (SPP) fees are quite high, but still very competitive with balanced funds that are sold through non-DIY channels.

The big disadvantage of the SPP is the $600/year limit of contributions, which makes for many small accounts. With the TFSA in existence as of 01/01/2009, the relevance of the SPP is further diminished.

But the point I was making, along with other posters, is that there are additional options available for Canadians if they choose to avail themselves of them, without resorting directly to the big bad banks and their 250bp MERs.

My personal criticism of RRSPs and pensions is that they are based on a predetermined maximum level of income the government dictates you 'should' be allowed to contribute. What would happen, for instance, if the government would eliminate the 18% rule, and simply allow everyone over 18 to contribute $20k/year, indexxed to inflation, instead of the 18% formula, etc. We've already shown numerous times in these forums that retirement usually doesn't usually bring lower marginal tax rates, so why not let Canadians contribute as much as they want??

[parvus]

It was unclear to me what role RPPs and RSPs are to play in the new system. If 18% of income is to be available to the CSPP, then he surely can't intend tax credit limits of 36%. So is it negative billing unless you opt for RPP, RSP or something else?

• Provide an opt-out option: employers/employees share the automatic default CSPP contribution deductions equally. However, if a complete noncompulsion philosophy is maintained, either or both employers and employees can opt out of this particular plan feature.

• Provide an opt-in option: employers/employees who choose to opt out of the CSPP’s automatic default contribution mechanism can still use the CSPP infrastructure to accumulate retirement savings in personal retirement saving accounts in any manner they choose within the existing tax/regulatory structure.

• Provide an RRSP assets transfer option: Canadians also have the option to move their accumulated RRSP assets into their CSPP personal retirement saving account.

At first sight, it would seem the CSPP is a replacement:

• Operate within the existing tax and regulatory regime for pensions: to further maximize implementation simplicity, the CSPP would operate within the current three Canadian pension pillars and the current tax/regulatory regime regarding pensions. So, for example, CSPP contributions would be subject to the current maximum tax deductibility rule of 18 percent of earnings up to a maximum contribution of $20,000. This implies $111,111 is the current earnings ceiling to which the full 18 percent deduction applies.

But:

• Set an automatic default CSPP contribution rate: again, in the interest of implementation simplicity, the automatic CSPP contribution rate between $30,000 and $111,000 might be set at 10 percent of earnings. The CSPP contributions of lower income earners (say in the $30,000 to $45,000 tranche) could go to TFSA-type accounts.

So we're not just following the existing tax treatment of retirement savings, but potentially something very different. (I recognize that all the bullet points are things Ambachtsheer threw out for further study.)

[brucecohen]

What would happen, for instance, if the government would eliminate the 18% rule, and simply allow everyone over 18 to contribute $20k/year, indexxed to inflation, instead of the 18% formula, etc.

There would be horrendous legislative and regulatory problems.

The 18% RRSP limit was not plucked out of thin air. It seeks to level, or at least better balance, RRSP and DB pension funding. Before the big 1989-90 reform, the tax rules gave DB plan members a substantial edge over those with RRSPs and DC plans.

The 18% RRSP limit represents the maximum allowable DB accrual rate -- 2% -- times the Factor of 9. The Factor of 9 is the result of a study done by Finance in the early '80s of the average annual savings required to fund $1 of annual pension comparable to the pension for federal employees. 2% x 9 = 18%.

The RRSP dollar cap also equates to the max for DB pension plans. The maximum DB pension payable in 2007 was $2,222 per year of service. That's 1/9th of 2008's $20,000 RRSP maximum. (RRSP limits run on a one-year lag to give employers time to calculate and report pension adjustments.)

Increasing the RRSP rate would mean increasing the DB accrual maximum or abandoning integration. Since the DB accrual rate is typically applied to all years of service, increasing that rate would substantially increase the amount of tax-deductible money that DB plan sponsors could contribute and, for jointly sponsored plans, members too. The federal and provincial govts would face a huge loss in current revenue. They could avoid the retroactive hit by requiring plans to calculate two pensions -- one at the old rate covering service to a certain date and a second at the new rate for service after then. But employers rightly cry that DB pension rules are already way too complex.

BTW, this year marks the 20th anniversary of the first target date for DB-DC-RRSP integration with funding limits then indexed to growth in the average wage. After lots of stops and starts, we're still not there, but are on track to reach the goal in 2011.

[Bylo Selhi]

There would be horrendous legislative and regulatory problems.

You bet. Here's another one. Suppose you're a high-income earner making at least $200k per year. If you put ~50% of your income into an RRSP you'd pay no income tax, so your net would be $100k (or more.) Under the current tax regime you'd net ~$135k on the same $200k gross (allowing $20k/year for RRSP contributions) so your lifestyle would not be that badly affected. Certainly one can live very comfortably on $100k a year.

But with the other $100k/year (or more) going into your RRSP you could probably afford to retire comfortably in your 40s or early 50s. And the higher your earnings, the closer your ATR is to MTR so the sacrifices you'd have to make to put 50% of gross into an RRSP become increasingly smaller.

So pitz, is that good public policy? How would you explain the optics to the "average" Canadian who struggles to make maximum RRSP contributions even at 18%?

[pitz]

But with the other $100k/year (or more) going into your RRSP you could probably afford to retire comfortably in your 40s or early 50s. And the higher your earnings, the closer your ATR is to MTR so the sacrifices you'd have to make to put 50% of gross into an RRSP become increasingly smaller.

Sure.... A RRSP contributor who is making $200k/year would be putting money in at the 45% tax bracket, and removing most of it in the 45% tax bracket (per the thread we saw the other day...). So the net tax loss to the government would be zero.

Didn't we have a lengthy discussion about this chart:

So pitz, is that good public policy? How would you explain the optics to the "average" Canadian who struggles to make maximum RRSP contributions even at 18%?

Investors, HNW or not, have plenty of tools to accomplish RRSP-like functionality (ie: tax deferral) without actually contributing to a formal government-sanctioned RRSP. The chart above makes a prima facie case that RRSPs themselves aren't significantly beneficial for Canadian investors who target to find themselves in anything other than the very narrow 'sweet spot' of income between $16k and $31k/annum incomes.

I'm sure some populist politicians will rail against those who are perceived to be rich, but truth be told, the rich already have the tools at their disposal to defer almost as much tax as they really want to defer. Might I add, using those tools effectively probably contributed significantly to the formation of their wealth in the first place. You don't get rich by handing over half your income to the CRA, or working as a wage slave .

<insert blonde's 10%'er comments here...>

[brucecohen]

Sure.... A RRSP contributor who is making $200k/year would be putting money in at the 45% tax bracket, and removing most of it in the 45% tax bracket (per the thread we saw the other day...). So the net tax loss to the government would be zero.

Over time. But there's a short-term cost for many years until the RRSP money is withdrawan.

Didn't we have a lengthy discussion about this chart:

I didn't bother to look carefully at it after several posters spotted flaws in the rates used and, I believe, some of his calcs.

Investors, HNW or not, have plenty of tools to accomplish RRSP-like functionality (ie: tax deferral) without actually contributing to a formal government-sanctioned RRSP.

So there's no reason to undermine a system that has taken decades to develop and that has won praise from retirement policy wonks around the world.

The chart above makes a prima facie case that RRSPs themselves aren't significantly beneficial for Canadian investors who target to find themselves in anything other than the very narrow 'sweet spot' of income between $16k and $31k/annum incomes.

If you believe the chart above.

I'm sure some populist politicians will rail against those who are perceived to be rich, but truth be told, the rich already have the tools at their disposal to defer almost as much tax as they really want to defer. Might I add, using those tools effectively probably contributed significantly to the formation of their wealth in the first place. You don't get rich by handing over half your income to the CRA, or working as a wage slave .

What Canada's tiny minority of truly rich do or don't do is irrelevant to discussion of pension-RRSP policy just as RRSPs are irrelevant to their financial affairs. The real "battle" -- such as it is -- is between a relatively small group of financially disciplined upper income earners who max the room they have and want more, and the great mass of Canadians at lower income levels who don't. The key question is how much tax should x number of guys earning minimum-to-average wage pay to cover the carrying cost of providing one fairly high income person with a retirement tax shelter. Historically, the retirement tax shelter has covered between 2 and 3 times average wage. It's now at about 2.5.


<insert blonde's 10%'er comments here...>[/quote]

[pitz]

Over time. But there's a short-term cost for many years until the RRSP money is withdrawan.

Just out of interest, when the government permits tax deferral on RRSP contributions, they are, in essence, becoming a partner with the RRSP contributor in their investment.

All other things being the same, are high-net-worth RRSP investors better investors than the people who put $2000-$3000 a year into their RRSPs? Do the people who max out their RRSPs year after year achieve higher ROI than people who only contribute a minimum to their RRSPs?

I suspect the answer is in the affirmative, to wit: the larger the RRSP contributions made by an investor, the better the ROI achieved in percentage terms. The $2k/year RRSP contributor is, IMHO, more likely to have their money in a low-yielding GIC or high-MER mutual fund, while the $15k/year contributor is more likely to be in ETFs, common stocks, or higher yielding GICs.

Since the government is a partner, and actually shares in the returns of the RRSP (through taxation at withdrawal), the 'rich', with their more effective investment style and greater sophistication, actually provide the government with a greater return than would have otherwise been provided had the government partnered with a lower-contributing individual and a less effective investment style.

So there's no reason to undermine a system that has taken decades to develop and that has won praise from retirement policy wonks around the world.

It doesn't work for business owners, it doesn't work for people who work inside the home (ie: homemakers), it doesn't work for people who derive much of their income from outside the traditional employee-employer relationship. The current system is only of use to a narrow group of individuals who derive the bulk of their income strictly from a traditional employee relationship.

The current 'system' says that a homemaker is not allowed to make RRSP contributions. Do you agree with this facet of the current system? Should (mainly female) homemakers be disenfranchised of the tax deferral features (and perhaps, just as important, the creditor protection features) of RRSPs simply because the tax code doesn't recognize their contributions to society as being taxable income?

What Canada's tiny minority of truly rich do or don't do is irrelevant to discussion of pension-RRSP policy just as RRSPs are irrelevant to their financial affairs. The real "battle" -- such as it is -- is between a relatively small group of financially disciplined upper income earners who max the room they have and want more, and the great mass of Canadians at lower income levels who don't. The key question is how

Well, I've yet to see any evidence led that would suggest that RRSPs are a major tax loss to the government. If some millionaires want to take their wealth, and throw it into a RRSP, with all of the arcane rules that surround RRSPs, including limitations on borrowing, limitations on investments, the RRIF minimum withdrawal rules, and the high effective marginal tax rates (that usually exceed contribution tax rates), then what's really the problem?

I'd argue that governments would be better off if the rich put all their money into RRSPs. Imagine the kind of taxes they'd collect off of Warren Buffet if he was forced to liquidate 10% of his BRKA holdings each year. Or Ted Rogers and his empire, because of his age and the minimum RRIF withdrawals. Instead, both men will live probably to 100, and will face much lower effective tax rates than they would have ever paid if their wealth was 100% in RRIFs. And I trust Warren Buffet and Ted Rogers to invest money far more efficiently than the government could, or the general public at large. Neither gentleman got rich by being unintelligent or innefficient operators of business, that's for sure.

[kcowan]

I dunno pitz, you are starting to sound like me when MURBS were introduced. I said" If the gummint wants me to do it, it cannot be good!"

Instead I joint-ventured a MURB with a developer and sold it to some dentists at significant profits. My buddies who bought MURBs retail in Calgary paid for that mistake for years.

The difference with RRSPs is the timeframe. And TFSAs just up the ante so that people will be more likely to wean themselves off the government assistance that they have contributed to for their whole working lives.

This might have some fiscal responsibility but on a personal level it does not look good on average.

[pitz]

I dunno pitz, you are starting to sound like me when MURBS were introduced. I said" If the gummint wants me to do it, it cannot be good!"

MURBS? (probably before my time, right?)

And yes, I do believe RRSPs and RPPs are a huge profit centre for the federal and provincial governments, on average, if you measure the entirety of their economic contribution and the present value of the taxes derived therein. Not a tax loss by any stretch of the imagination.

Since the civil servants, not the politicans, run and own this country, lock, stock, and barrel, if they whole-heartedely approve, it must be good for the government, and not for the people.

[brucecohen]

All other things being the same, are high-net-worth RRSP investors better investors than the people who put $2000-$3000 a year into their RRSPs? Do the people who max out their RRSPs year after year achieve higher ROI than people who only contribute a minimum to their RRSPs?

I'm not aware of any data on that.

I suspect the answer is in the affirmative, to wit: the larger the RRSP contributions made by an investor, the better the ROI achieved in percentage terms. The $2k/year RRSP contributor is, IMHO, more likely to have their money in a low-yielding GIC or high-MER mutual fund, while the $15k/year contributor is more likely to be in ETFs, common stocks, or higher yielding GICs.

Again, there's no data to support that. Data from group RRSPs and DC pension plans does show an inverse relationship between frequency of trading and return. So, it's quite possible that the unsophisticated small investor who puts money into a mutual fund and leaves it there does outperform the savvy sophisticate over time. One DC plan study done several years by Morneau Sobeco found that the self-directed investments of a workforce of highly educated engineers on average underperformed the garden variety balanced fund they were offered.

Also, there is no correlation between high RRSP contributions and investing ability. A substantial number of high dollar contributors are lawyers, doctors and other busy professionals who have little knowledge of, time for, or interest in investing. Indeed, these are the very "sophisticated investors" who fell prey to the MURB fiasco.

Since the government is a partner, and actually shares in the returns of the RRSP (through taxation at withdrawal), the 'rich', with their more effective investment style and greater sophistication, actually provide the government with a greater return than would have otherwise been provided had the government partnered with a lower-contributing individual and a less effective investment style.

If that's the intent of the program, there should be no retirement tax shelter at all. Govt should simply take an amount equivalent to the tax expenditure and invest it with George Soros.

In any event, your proposition that the rich deserve more tax shelter because they investment geniuses does nothing to address the goal of approximately balancing tax-sheltered savings opportunities between those with good DB plans and those without. Actually, your logic would suggest that the rich should be denied retirement tax shelter in order to increase DB funding since DB portfolio managers rank among Canada's most sophisticated investors.

It doesn't work for business owners

Why doesn't it? Unincorporated sole proprietors currently get RRSP coverage on $111,111 of net business income. Few are at that level. Incorporated business owners can avail themselves of IPPs as well as RRSPs, plus the $750,000 capital gains exemption which is doubled if the spouse is a significant shareholder -- and extended still further if the kids hold shares. With business owners in mind, years ago Finance rejected the idea of imposing a penalty tax on pre-retirement withdrawals. This enabled business owners to continue to use an RRSP to average income -- and many do. In what ways doesn't the system work for business owners?

...it doesn't work for people who work inside the home (ie: homemakers)

Retirement funding is based on income replacement. A full-time homemaker has no income to replace. Nevertheless, the system provides for these people by allowing spousal RRSP contributions, CPP splitting, pension income splitting, CPP survivor benefits and pension survivor benefits. And, spousal RRSP contributions and CPP splitting reduce govt's take when the split income is taxed. In what ways doesn't the system work for homemakers?

...it doesn't work for people who derive much of their income from outside the traditional employee-employer relationship.

The current system is only of use to a narrow group of individuals who derive the bulk of their income strictly from a traditional employee relationship.

Bullfeathers. As I've just shown, it provides for employees, unincorporated self-employed, incorporated self-employed and even homemakers. Who's left -- and how many of them are there?

The current 'system' says that a homemaker is not allowed to make RRSP contributions. Do you agree with this facet of the current system? Should (mainly female) homemakers be disenfranchised of the tax deferral features (and perhaps, just as important, the creditor protection features) of RRSPs simply because the tax code doesn't recognize their contributions to society as being taxable income?

First, where did you get the idea that RRSPs are creditor-proof? They are in PEI, Manitoba, and I think Saskatchewan. Elsewhere, they're creditor-proof only if invested in insurance products such as seg funds. Uniform creditor-proofing will be granted if amendments to the federal Bankruptcy Act are enacted but they've been pending for years.

Second, a homemaker who earns no money has no tax to defer. Where do these homemakers get money on which to live? If it's from their spouse, the couple is living on one income and its income replacement ratio should be based on one income. The spousal contribution provision and other rules cited above provide means for them to cover the spouse.

Well, I've yet to see any evidence led that would suggest that RRSPs are a major tax loss to the government.

Then you haven't seen the annual book in which Finance itemizes the govt's "tax expenditures." While one can quibble with their methodology -- and the Canadian Institute of Actuaries has -- there is obviously a current operating cost if govt foregoes the collection of x thousand dollars from a person for many years. Would you like to lend me $20,000 with no principal or interest due for 40 years, at which time you'll receive 30% of the account's value?

If some millionaires want to take their wealth, and throw it into a RRSP, with all of the arcane rules that surround RRSPs, including limitations on borrowing, limitations on investments, the RRIF minimum withdrawal rules, and the high effective marginal tax rates (that usually exceed contribution tax rates), then what's really the problem?

Well, for starters:
1. Many Joe 6-packs will have to pay more tax to cover the operating loss until the RRIF drawdown begins
2. What's to prevent the millionaire from leaving Canada and cashing the bulging RRSP or RRIF at the 25% expatriate rate?
3. Where did you get the idea that tax rates on withdrawal "usually" exceed tax rates at contribution? Marginal tax rates now are lower than the rates from 1970 to the mid '90s when much of today's RRSP money was contributed. I remember when Ontario's top MTR was 50% and it kicked in at a much lower level than today's 46.4% MTR. Indeed, it was only about a decade ago that an Ontarian hit the top bracket at $55,000. You're also forgetting that, absent other pension income, the first $2,000 of RRIF withdrawal at 65 is tax-free and you're forgetting the new pension income splitting provision.
4. For that matter, aside from the leverage ban, which RRSP rules do you find "arcane?" As I think about it, you can leverage an RRSP. Simply pop into your local bank or FA's office and arrange a nice, big "catch-up" loan that's repayable over many years.

I'd argue that governments would be better off if the rich put all their money into RRSPs. Imagine the kind of taxes they'd collect off of Warren Buffet if he was forced to liquidate 10% of his BRKA holdings each year. Or Ted Rogers and his empire, because of his age and the minimum RRIF withdrawals.

As executives of incorporated companies, both men are entitled to cadillac DB pension plans that are even more generous than those of federal civil servants and Ontario teachers. And they can get top-up RCA pensions funded on a tax-efficient basis through the use of life insurance, or so the insurers say. Since capital gains are taxed only when realized, an RRSP would be of significant benefit to Buffet only to the extent that he decides to sell BRKA. Yet he's a buy-and-hold investor and someone with his savvy surely does capital loss harvesting to provide an offset reservoir for those rare times when he does choose to sell. And, of course, neither Mr. Rogers nor Mr. Buffet would expose their fortune to mandatory drawdown when they can easily leave Canada and liberate it at 25% tax.

Astute as they are, Warren Buffet and Ted Rogers are rarities. Would you trust, say, Fred Eaton or Edger Bronfman to invest money far more efficiently than the government could, or the general public at large? The sad reality is that today a significant portion of Canada's super-rich are wastrals who simply inherited their money and excel pretty much only at blowing it.

The bottomline is that, IIRC, only 5% of taxfilers use at least 90% of their RRSP room and, according to CRA's interim 2007 stats, only 4.6% of taxfilers had taxable income -- from all sources -- above $100,000. So, increasing pension/RRSP limits would not have a material positive or negative effect economically but would have a materially negative impact on public opinion. As I think about it, there could be a materially negative impact economically since the $100,000+ group is heavily populated by public sector employees whose DB pensions are substantially taxpayer-funded and the increased cost of their pension funding would ripple among all taxpayers.

[parvus]

I dunno pitz, you are starting to sound like me when MURBS were introduced. I said" If the gummint wants me to do it, it cannot be good!"

MURBS? (probably before my time, right?)

And yes, I do believe RRSPs and RPPs are a huge profit centre for the federal and provincial governments, on average, if you measure the entirety of their economic contribution and the present value of the taxes derived therein. Not a tax loss by any stretch of the imagination.

Since the civil servants, not the politicans, run and own this country, lock, stock, and barrel, if they whole-heartedely approve, it must be good for the government, and not for the people.

While the two types of tax avoidance* are quite different, they both involve risk. Consider, for instance, the sad history of MURBs — a bureaucratic designation for Multiple Unit Residential Buildings, or what most of us would call apartment buildings. Back in the 1970s, Ottawa decided to encourage investment in this sector by allowing investors in new apartment buildings to claim their annual depreciation against other income for tax purposes. Promoters quickly took advantage of that offer and constructed leveraged deals that allowed MURB investors to put down as little as 10% of their total investment while giving them an immediate tax break almost as big as their initial cash outlay.

All of which was fine until the real estate market crashed in the late 1980s, vacancy rates soared and a lot of clever taxpayers found they couldn't sell those lovely tax-assisted MURBs for love or money. The lesson? "The prospects of immediate tax savings blinded people to the economic reality of the underlying investment," says Robert Brown, former CEO of PriceWaterhouse Canada, former head of the Canadian Tax Foundation and a long-time observer of the tax planning industry. "Investors weren't thinking about the long-term implications."

*Like many right-wing populists, Peter Shawn Taylor doesn't quite understand the nuances among (legitimate) tax planning, (GAAR-able) tax avoidance and (criminal) tax evasion. Laird help Maclean's.

[parvus]

Well, I've yet to see any evidence led that would suggest that RRSPs are a major tax loss to the government.

Then you haven't seen the annual book in which Finance itemizes the govt's "tax expenditures." While one can quibble with their methodology -- and the Canadian Institute of Actuaries has -- there is obviously a current operating cost if govt foregoes the collection of x thousand dollars from a person for many years. Would you like to lend me $5,000 with no principal or interest due for 40 years, at which time you'll receive 30% of the account's value?

Scroll down here for tax expenditures on RPPs and RSPs.

Code: Select all

Registered pension plans
Deduction for contributions  ($b)
2001  2002  2003  2004  2005  2006  2007  2008 
4,575 5,325 6,615 8,270 8,395 8,700 9,015 9,325

Non-taxation of investment income
2001  2002  2003  2004  2005  2006   2007   2008
2,785 335 11,465 9,630 10,215 10,670 11,405 12,165

Taxation of withdrawals
  2001  2002    2003  2004    2005  2006   2007   2008
-6,415 -6,670 -6,905 -7,140 -7,235 -7,560 -8,055 -8,495

Net tax expenditure
2001  2002  2003    2004  2005     2006   2007   2008
945 -1,010 11,175 10,760 11,375 11,810 12,365 12,995

Registered retirement savings plans                 
Deduction for contributions
2001  20002 2003  2004  2005  2006  2007  2008
6,225 5,915 6,000 6,655 7,030 7,520 8,030 8,555

Non-taxation of investment income
2001  2002  2003  2004  2005  2006  2007  2008
1,280    17 6,300 4,995 5,360 5,645 6,115 6,610

Taxation of withdrawals
2001     2002  2003    2004  2005   2006   2007   2008
-3,465 -3,510 -3,670 -4,050 -4,285 -4,720 -5,275 -5,855

Net tax expenditure
2001  2002  2003  2004  2005  2006  2007  2008
4,040 2,425 8,630 7,600 8,110 8,445 8,870 9,310

Present value of tax assistance for retirement savings plans($b)
2001  2002  2003  2004  2005  2006  2007  2008
5,670 5,850 6,820 8,040 8,490 8,990 9,380 9,850

Lots of other figures to play with over about 10 rows and eight columns.

[pitz]

I'm not aware of any data on that.

I'm not either. But I'd suggest that investment management costs, as a percentage of assets under management, would be lower for someone with a large RRSP versus a smaller RRSP. I'd suggest that a GIC salesperson could probably offer a better GIC rate for someone bringing a $15k RRSP contribution, than someone putting in $1000. But without research and hard numbers, you're correct, I have no solid point based on facts to assert, just suspicions.

If that's the intent of the program, there should be no retirement tax shelter at all. Govt should simply take an amount equivalent to the tax expenditure and invest it with George Soros.

Well since I don't believe that there is, in fact, a net tax expenditure due to the RPP/RRSP programs, there would be no money to give to Mr. Soros and company .

In any event, your proposition that the rich deserve more tax shelter because they investment geniuses does nothing to address the goal of approximately balancing tax-sheltered savings opportunities between those with good DB plans and those without. Actually, your logic would suggest that the rich should be denied retirement tax shelter in order to increase DB funding since DB portfolio managers rank among Canada's most sophisticated investors.

No, I suggested that, by removing caps on RRSP contributions altogether, the government could augment the NPV of its future tax assets since they'd only be ensnaring the rich (who are probably decent investors and who probably won't have the chance to do tax bracket arbitrage in any significant way), or the stupid..

Why doesn't it? Unincorporated sole proprietors currently get RRSP coverage on $111,111 of net business income. Few are at that level.

But that's all based on *income*. That's the fundamental problem, IMHO, is that income is a very narrow measure of the means in which wealth is created and used by Canadians, and by using such a very narrow measure in determining the sort of wealth one can put aside for a pension, a great number of Canadians are disenfranchised.

Lots of Canadians in small business spend their entire lives building up a business which consists of some property and machinery. The property and machinery they've accumulated over the years appreciates in value, the result of a lifetime of improvements (especially in farming, for instance). They go to retire, sell the farm/business, but because much of their wealth was 'unearned', they aren't entitled to shelter much of it in a RRSP or similar.

Such as?

Quite simply put, people who survive and create wealth without creating taxable income.

Second, where do these homemakers get money on which to live? If it's from their spouse, the couple is living on one income and its income replacement ratio should be based on one income. The spousal contribution provision and other rules cited above provide means for them to cover the spouse.

Why not give the (usually female) spouse in the family the ability to have some RRSP room while she's out of the workforce having kids? Shouldn't the government give at least some credit for unpaid work in the home ?

Then you haven't seen the annual book in which Finance itemizes the govt's "tax expenditures." While one can quibble with their methodology -- and the Canadian Institute of Actuaries has -- there is obviously a current operating cost if govt foregoes the collection of x thousand dollars from a person for many years. Would you like to lend me $5,000 with no principal or interest due for 40 years, at which time you'll receive 30% of the account's value?

The analysis, IIRC, does not include the savings to the government in terms of the GIS or OAS clawbacks in its calculations of the present-value gain or loss to the government, which really has the effect of nullifying their figures. Like a few posters in this forum, they consider GIS/OAS to be seperate programs altogether (and legally they are), and not integrated into the overall tax and benefits system made available to Canadians.

2. What's to prevent the millionaire from leaving Canada and cashing the bulging RRSP or RRIF at the 25% expatriate rate?

That's obviously a loophole that would have to be closed. Probably should be anyways, regardless.

Anyways, interesting stuff... If I had more RRSP room, I am pretty certain that I wouldn't be running out to use it, even though my (maxed out) RRSPs are now less than 3% of my net worth.

[pitz]

Scroll down here for tax expenditures on RPPs and RSPs.

I think, in the interests of showing the 'complete picture', incremental OAS/GIS clawbacks should be netted out of those figures, as well as incremental reductions in other social benefit expenses.

Would you like to lend me $5,000 with no principal or interest due for 40 years, at which time you'll receive 30% of the account's value?

More accurately, you should be asking, "Would you like to lend me $5000 with no P/I for 40 years, at which time you'll receive 45% of the account's value.".

The answer to that question, if I am to believe that you are a good (or at least slightly better than myself) investor, is unequivocally, YES, because my rate of return will be exactly equivilant to your rate of investment return.

(plus the government will also benefit due to 2nd order effects of the investment, for instance, the $11,111 investment (45% tax bracket) will likely generate additional taxable activity in the economy....).

[parvus]

Well since I don't believe that there is, in fact, a net tax expenditure due to the RPP/RRSP programs, there would be no money to give to Mr. Soros and company .

Take a glance at the chart I posted.

But that's all based on *income*. That's the fundamental problem, IMHO, is that income is a very narrow measure of the means in which wealth is created and used by Canadians, and by using such a very narrow measure in determining the sort of wealth one can put aside for a pension, a great number of Canadians are disenfranchised.

Lots of Canadians in small business spend their entire lives building up a business which consists of some property and machinery. The property and machinery they've accumulated over the years appreciates in value, the result of a lifetime of improvements (especially in farming, for instance). They go to retire, sell the farm/business, but because much of their wealth was 'unearned', they aren't entitled to shelter much of it in a RRSP or similar.

In the days before income taxes were generalized, there were property, i.e., wealth, taxes, regardless of the liquidity of that wealth. And, oops, now we have a lifetime capital gains exemption for farms/fishers/family firms, because their businesses are their nest egg for retirement. If we change that, I can see some interesting mark-to-market tales about imputed profit arising here.

Then you haven't seen the annual book in which Finance itemizes the govt's "tax expenditures." While one can quibble with their methodology -- and the Canadian Institute of Actuaries has -- there is obviously a current operating cost if govt foregoes the collection of x thousand dollars from a person for many years. Would you like to lend me $5,000 with no principal or interest due for 40 years, at which time you'll receive 30% of the account's value?

The analysis, IIRC, does not include the savings to the government in terms of the GIS or OAS clawbacks in its calculations of the present-value gain or loss to the government, which really has the effect of nullifying their figures. Like a few posters in this forum, they consider GIS/OAS to be seperate programs altogether (and legally they are), and not integrated into the overall tax and benefits system made available to Canadians.

Can you show the math on this? If you look at your tax form, you'll note items for CPP overpayments. But OAS (and let's skip the GIS nonsense)? Now why would that be, do you think? Recall in Ambachtsheer's paper the three pillars: OAS, CPP and RPP/RSP/private savings || universal pension/state-enforced savings/private savings.

Anyways, interesting stuff... If I had more RRSP room, I am pretty certain that I wouldn't be running out to use it, even though my (maxed out) RRSPs are now less than 3% of my net worth.

But you have maxed them out, so clearly they've served some purpose, yes?