Better a consumer than a saver be: Ottawa prefers
Canadians spend rather than sock away for the future
National Post
Sat 01 Oct 2005
Page: FW5
Section:
Financial Post: Weekend
Byline: Jonathan Chevreau
Column: Personal
Finance
Source: Financial Post

The outgoing head of Canada's mutual fund lobby group,
Tom Hockin, this week warned that Canadians under 50 are not saving enough for
retirement.

Rather, they are "dissaving" -- content to watch previously made investments
grow in value. Or they feel wealthy when the value of their homes rise, then tap
their home equity to boost consumption rather than add to savings.

Blame the federal government for consistently sending the message Canadians
should be consumers rather than savers. Believe it or not, Ottawa actually
levies its consumption tax -- the GST -- on the mutual funds many use for their
retirement savings! Hockin and Assante Corp. CEO Joe Canavan reminded attendees
of this dismal fact at the annual conference of the Investment Funds Institute
of Canada, held in Toronto mid-week. Canavan said the goods and services tax
adds 20 basis points to fund fees, deriding the practice as "ridiculous."

After all, the whole idea of retirement savings is to fund consumption in the
far future. Ottawa gets its pound of flesh when RRSPs become RRIFs and forced
withdrawals are fully taxable. Then, upon death of the second spouse, it will
grab close to half of what remains, a point many angry seniors are making as the
income trust debacle unwinds.

Nothing illuminates political ambivalence over taxation and savings like the
shifting stance on income trusts. As we reported this week, Canada's seniors are
worried the finance department might tax income trusts as harshly as it does
corporations.

Ottawa frets it loses $300-million a year on corporate taxes that income
trusts avoid. However, seniors argue they are fully taxed on income trust
distributions. They embraced high-yielding income trusts because they couldn't
live on the paltry interest paid by bonds, nor did they wish to take on the
stock market risk of equity funds.

Finance has received 350 letters from anxious retirees about income trusts.
Canada's Association for the Fifty Plus says the last time seniors were so
incensed was in the 1990s, when then Finance Minister Paul Martin tried to
introduce the Seniors Benefit. That was a shot at accelerating the clawback of
Old Age Security benefits for middle-income retirees who had been self-reliant
enough to put aside decent sums in their RRSPs.

Conscious that no government can stay in power while alienating seniors,
Martin backed off. Now, with an election looming, his successor -- Ralph Goodale
--will no doubt feel pressure to lay off income trusts.

The public has until the end of the year to comment on income trust policy.
It's clear federal finance intends to level the playing field between
corporations and trusts. If it really wants to stem the tide of "dissaving," the
government would make it more attractive to receive dividends by cutting the tax
rate on them or boosting their tax credits. Going the opposite route of raising
taxes on trusts would increase the ire of the giant Baby Boom generation, whose
lead members are now hitting age 60.

If it opens the Pandora's box of income trusts, our leaders would be
well-advised to look at the broader context of its tax policies on investments,
registered and non-registered. A good place to start is the C.D. Howe report on Tax Competitiveness issued last week,
which said only one of 36 Western nations had higher taxes on investments than
Canada.

"We need to move to a more tax-friendly savings environment," says Jamie
Golombek, vice-president of taxation at AIM Trimark Investments.

Actuary Malcolm Hamilton has long argued it is "futile" for Canadians to save
outside RRSPs; average Canadians are better off buying bigger homes or
purchasing vacation property.

Those who save outside RRSPs are duly punished: A non-registered investment
in bonds or GICs may yield 4% pre-tax but if you're in the top tax bracket, you
can kiss goodbye half of that. After inflation, you're treading water. Ottawa's
message seems to be it prefers Canadians to splurge on hot tubs or large-screen
televisions rather than save outside RRSPs. Its reluctance to introduce the
Tax-Prepaid Savings Plans (Roth IRAs) enjoyed by Americans seems to reinforce
this message.

But it's almost impossible for high-income workers to retire just on their
RRSPs or employer-sponsored pensions. Canadians have half the tax-assisted
savings room as the British or Americans. RRSP contribution amounts will rise to
$22,000 by 2010, Golombek says, but you have to make well over $100,000 to get
that much room, and even then only if you have no employer pension. Those with
more modest salaries would have been better off if the percentage of earned
income used to calculate RRSP limits had been raised from 18% to 20% or more.

The perennial use of tax shelters has always been a symptom of how
beleaguered consumers react to overtaxation. Their history in Canada has long
been one in which smart lawyers identify loopholes for their well-heeled
clients. Eventually, the masses catch on and tax officials close the door on
latecomers.

The past three years have seen the rise of charitable "buy low, sell higher"
donation schemes. These were supposedly shut down by the finance department two
years ago, but new variations skirting the rules continue to proliferate.

Oddly, Ottawa continues to sanction one type of tax shelter: flow-through
limited partnerships. It provides tax breaks to encourage investors to put up
capital for risky mining and energy exploration deals. Vancouver broker Don Nash
recommends these as "the rich man's RRSP" for his wealthy clients.

These can work for top- bracket earners who expect to be earning less in a
few years. Many of the deals let investors write off 85% to 100% of their
investment in the current year. But this year's crop is going fast: all that's
left is Middlefield Explorer 3 and Mavrix 2005, Nash says.

As has been apparent with labour-sponsored investment funds, the zeal to
avoid taxes often means investors must put capital at risk. Money-losing
investments that "save" on taxes are hardly the route to financial independence.
While wealthy professionals can consider this route, seniors relying on income
trusts cannot. That's why so many were mortified when their trusts fell 7%
within days of Ottawa's pronouncements on the sector.

Tax policy on investments deserves to become a major issue in the next
election. If it doesn't, Canadian investors are even more apathetic than I'd
feared.

Illustration:
• Colour Photo: Chris Wattie, Reuters
/ With an election on the horizon, will Finance Minister Ralph Goodale back off
his attack on seniors' ability to save, as his predecessor, Paul Martin,
did?
• Colour Photo: Jim Young, Reuters / (Paul Martin).
• Black &
White Photo:

Edition: Toronto
Story Type: Business; Column

Note: [email-masked].
Length: 1049 words