By Brian Lewis
The Province
Money Section
Sunday, February 27, 2005
Last week's federal budget demonstrates, once again, that the Wizards of Ottawa are a wily lot.
The Paul Martin government tells us, for example, that the changes they propose for registered retirement savings plans -- raising contribution limits and eliminating the 30-per-cent foreign-content rule -- are of earth-shaking magnitude.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "In my view this [raising the 18% limit] would have been a much better way to go. This would have given many more Canadians an opportunity and a choice for putting more into their RRSPs.”
In fact, the RRSP earth will move very little for most Canadians, i.e. those who have annual incomes or salaries of less than $100,000. Wednesday's budget outlined how Ottawa will raise RRSP contribution limits from the current level of $16,500 in the 2004 tax year to $22,000 by 2010.
Wow! That's an increase of $5,500, right?
Wrong.
Watson Wyatt, a worldwide pension benefits and financial management firm, points out in its post-budget analysis that the current RRSP rules would have triggered increases in the contribution limit anyway.
Under these rules the limit would have increased to $18,000 in the 2006 tax year and then by annual increases of the Average Industrial Wage after that.
Watson Wyatt's calculation shows the limit would have reached $19,868 by 2010. That's a difference of $3,368, not $5,500.
True, it's a step in the right direction -- but that step only benefits higher-income Canadians because, in addition to the cash limit, two other limiting factors are at play here.
The rules also restrict RRSP contributions to 18 per cent of your previous year's "earned income," which is gross salary for most of us. The third factor applies to those with company pension plans who must subtract these contributions from RRSP limits under the so-called "pension adjustment."
But it's under the 18-per-cent rule where Ottawa impales average wage-earners.
Assuming you don't belong to a company pension plan, someone earning $50,000 before deductions today would only be allowed to contribute $9,000 to an RRSP -- regardless of the fact that the current maximum cash limit is $16,500.
Next year that limit increases to $18,000, but even then to contribute the full amount, you'd have to earn $100,000.
If the Wizards of Ottawa had truly wanted to help average Canadians save for retirement they would have increased the 18-per-cent limit to 20 or 25 per cent. This way the person earning $50,000 would be able to save a maximum of $10,000 under 20 per cent or $12,500 under a 25-per-cent limit.
"In my view this would have been a much better way to go," says financial adviser Adrian Mastracci, owner of Vancouver-based KCM Wealth Management Inc. "This would have given many more Canadians an opportunity and a choice for putting more into their RRSPs," he says.
Raising the 18 per cent, which, by the way, Ottawa reduced from 20 per cent a number of years ago, has benefits even if you cannot currently max out your RRSP.
For many of us, children and mortgages leave little or nothing for RRSPs today but you're not always going to be in that stage of life. There'll come a day when the kids have left, the mortgage is paid off and in many cases an inheritance surfaces.
Unused RRSP contribution room accumulates so when you're in an improved financial position, the wherewithal is there to catch up on RRSPs.
(If Ottawa ever tries to remove the RRSP accumulation rule, scream bloody murder.)
As for eliminating the 30-per-cent foreign property rule on RRSPs, advisers say it won't have much impact on individual investors because loopholes such as "clone" funds could be used to increase foreign exposure anyway.
Regardless, the benefits will trickle down to individuals with company pension plans because pension-fund managers will have much more investment flexibility, they say.
But this budget proposal may also give the securities industry a basis for launching sales pitches enticing you to load up on foreign mutual funds or securities.
Remember, however, that buying securities first has to make investment sense -- and that transactions usually draw fees.
Another budget item of note: The list of qualifying investments for self-directed RRSPs is expanded to include gold and silver bullion coins and bars or their certificates.
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