Changes to RRSP and CGE Rules Recommended

The Investment Industry Association of Canada (IIAC) believes that increasing RRSP contribution maximums would help pre-retirees, and that deferring capital gains when shares of a small business are reinvested within six months of a sale would be a great way to boost economic growth.

The IIAC would also see the elimination of mandatory minimum withdrawals for RRIF holders, amongst the changes recommended.

These positions taken by the IIAC were reported last week by Investment Executive, media sponsor of the Distinguished Advisor Conference, November 8-11, where IIAC President, Ian Russell will also be welcomed to the podium.

These suggestions are interesting, given the current demographic in Canada.  It may indeed be just the right time to go further, and open up RRSP contribution limits in certain instances.  For example, back in 1995, the federal government eliminated the opportunity to rollover retiring allowances to an RRSP on a tax-free basis for post-1995 employment. In addition, the opportunity to rollover pension benefits to a spousal RRSP ended in 1994.

Changing the rules back would allow retiring Canadian couples a better opportunity to equalize and average taxes on RRSP pension benefits prior to age 65, when pension income splitting kicks in.

Along the way, those who save for retirement within an RRSP are restricted to investing 18% of earned income to a maximum dollar limit of $24,930 in 2015.

According to Statistics Canada and a poll conducted by Pollara in late 2013, about 2/3 of Canadians have an RRSP and they contribute an average of $3500 annually. By 2018, Statistics Canada estimates the unused RRSP contribution room these Canadian leave on the table will reach $1 Trillion.   Unused contribution room can be carried forward.  However, governments might wish to consider raising the 18% maximum for those lower earners who have maxed their contributions along the way.  Perhaps 25% of earned income in the five years before retirement could turbo charge savings for those who transition out of their workplaces.

The tax refunds generated from these increased RRSP contributions could be put into a TFSA to bolster retirement income security for the future, on a tax-free basis, especially when planned in conjunction with taxable withdrawals from RRSPs.

The RRSP-TFSA flip is also a better way to maximize pension income in retirement than increasing the CPP. The CPP pension is inefficient in retirement because it is taxable. It's also inefficient for estate planning purposes, as the CPP survivor benefits can be lost when both spouses qualify to receive the maximum CPP retirement benefits. The CPP lump-sum death benefit is also capped, without indexing, at $2500.

The opportunity to defer capital gains on the proceeds from the sale of a business will also help boomers who want to transition their businesses to their heirs—to keep the business in the family without a tax hit in passing assets from one generation to the next. This would be especially relevant when businesses fail to qualify for the Capital Gains Exemption (currently $813,600 for qualifying small business corporations; $1Million for qualifying farmers and fishers), or where shareholders have previously used their exemption.

What’s your view? Please weigh in on KBR’s August Poll question: Should governments reconsider the opportunity to allow RRSP rollovers of retiring allowances and termination pay to an RRSP and/or a spousal RRSP?

Evelyn Jacks is President of Knowledge Bureau and author of 51 books on the subject of personal tax preparation, tax planning and Real Wealth Management™.