Budget 2011: The investor perspective

While a projected 25% reduction in the budget deficit for fiscal 2010-11 may have given the federal government “wiggle room” to undertake new spending measures beneficial to families and individuals, investors were not so lucky. Indeed, aside from a vague reference to Pooled Registered Pension Plans, some financial literacy announcements and a small positive change to Registered Education Savings Plans, the proposals were focused on curtailing the tax planning activities of investors.

John Hutson, an analyst with Deloitte Canada, was disappointed there were no increases to the thresholds for TFSA and RRSPs. He would like to see the TFSA limit doubled to $10,000 and more scope for making RRSP contributions. “The bigger issue here is getting the middle class to save more for their retirement,” he remarked.

Serge Pepin, director, BMO Investments, focused on the possibility the budget could be overturned in a non-confidence motion. “If the budget is rejected and an election called, it will create uncertainty and the markets hate uncertainty,” he declared.

However, he believes any negative reaction will be short-lived. “Canada will still be seen as fiscally responsible. The budget itself was fiscally responsible and the main opposition party, the Liberals, share the Conservatives’ concern for reducing budget deficits,” he added.

Pooled Registered Pension Plan
The federal and provincial governments are working to introduce a new pension plan called the Pooled Registered Pension Plan, which is aimed at people who typically do not have access to company pensions — notably the self-employed and employees of small- to medium-sized businesses. If it comes to fruition, it will likely be set up as a defined contribution plan.

“We would have liked to have seen more on the Pooled Registered Pension Plan,” said Doug Carroll, VP of taxation and estate planning for Invesco Trimark. “There wasn’t much detail in the budget. We were hoping for more considering Quebec brought down a budget last week that establishes a PRPP for that province.”

Financial literacy
Financial literacy is to be promoted. Of note, the budget announces that a Financial Literacy Leader will be appointed.

The Certified General Accountants Association of Canada applauded the government’s commitment to follow up on the work of the Task Force on Financial Literacy. “CGA-Canada research has shown the importance of financial literacy in resolving issues facing Canadians on escalating household debt,” noted senior communications advisor Stephanie Thatcher.

Income splitting through capital gains
The budget proposes to curtail income-splitting techniques based on capital gains. From the budget text: “These techniques involve capital gains being realized for the benefit of a minor on a disposition of shares of a corporation to a person who does not deal at arm’s length with the minor.” The measure applies to gains realized on, or after, budget day.

Sharing assets in Registered Education Savings Plans (RESPs)
Amendments are planned for RESPs. The intention is to put individual plans on the same footing as family plans when it comes to transferring assets among siblings. Presently, tax penalties and the repayment of grants “may apply to transfers of assets between individual plans unless they occur between plans for the same beneficiary or plans under which the beneficiaries are siblings, generally before the beneficiary under the receiving plan attains 21 years of age.” The amendment would allow transfers regardless of age (as family plans currently allow), provided “the beneficiary of a plan receiving a transfer of assets had not attained 21 years of age when the plan was opened.”

Anti-avoidance rules for Registered Retirement Savings Plans (RRSPs)
Legislative action will be forthcoming to deal more forcefully with tax planning schemes known as “RRSP strips.” These purport to permit RRSP holders to make tax-free withdrawals. The government has successfully challenged these schemes under the Income Tax Act, but they continue to evolve and be marketed to taxpayers.

Review of Employee Profit Sharing Plans (EPSPs)
The federal government intends to review the rules for EPSPs to combat increasing use for purposes other than to align the interests of employees with those of the business. Specifically, there are concerns about the use of EPSPs to direct profits to family members with the intention of reducing or deferring taxes on those profits. Another concern is avoidance of Canada Pension Plan and Employment Insurance contributions.

Changes to Individual Pension Plans (IPPs)
The budget seeks changes to IPPs in two ways. First, once a member turns 72, annual minimum amounts will need to be withdrawn, similar to minimum withdrawal requirements for Registered Retirement Income Funds. Second, contributions for past years’ service will need to first be funded out of a member’s existing RRSP assets (or require reducing contribution room).