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By Peter Shawn Taylor
Macleans
February 16, 2007 Issue
Canada's last great asset-based social policy was a major national achievement, 50 years ago
The big news in the 1957 federal budget was the removal of a 10 per cent tax on candy, pop and chewing gum. All but ignored in the final budget of the St. Laurent government was the introduction of what Liberal finance minister Walter Harris called a "registered retirement annuity." Today we know it as the RRSP.
Adrian Mastracci, fee-only portfolio manager at
KCM Wealth Management in Vancouver, says, "The growing popularity is due to the simplicity and flexibility of RRSPs for tax-planning purposes."
From humble beginnings, the annual RRSP deadline has become a February ritual for millions of Canadians, that is celebrated as a kind of retirement-saving Super Bowl. In the view of at least one policy expert, the birth of the RRSP should be considered a major watershed in Canadian history, on par with the opening of the West. The past half-century has been quite a ride for an idea once upstaged by a candy tax.
"The RRSP is not just another program," says Tom Axworthy, chair of the Centre for the Study of Democracy at Queen's University in Kingston, Ont., and a former policy guru in the Trudeau government. "It is a special policy because it has an important set of values behind it." He sees the RRSP as an example of asset-based social policy, distinct from income-support programs such as welfare. "The RRSP entails a government incentive for people to save and acquire their own property and wealth. It is the essence of the middle class." Axworthy places the RRSP in the pantheon of great Canadian asset-based social policies such as the disbursement of Crown land to immigrant settlers in Ontario and the Prairies during the 19th and 20th centuries, plus the Veteran's Charter of the late 1940s, which provided education and facilitated home ownership for returning soldiers.
The RRSP certainly didn't start off as a history-changing policy. In 1957, Harris was merely responding to the lobbying efforts of doctors and lawyers who, as self-employed professionals, were unable to make tax-deductible pension contributions. This first retirement annuity was very narrowly defined with a maximum value of $2,500 per year. It wasn't until the 1970s, when baby boomers started thinking about retirement savings and the banks began to get involved, that RRSPs really took off. Now February has become an extravaganza of RRSP ads and attention.
This year, approximately six million Canadians will contribute an estimated $33 billion to their RRSPs. According to the federal projections, Ottawa will forgo $8.8 billion in tax revenues due to RRSPs. In 1957, Harris figured the cost to the Treasury would be no more than $40 million. The growing popularity is due to the simplicity and flexibility of RRSPs for tax-planning purposes, notes Adrian Mastracci, a financial planner in Vancouver. "Nothing else comes close," he says. "You can put just about anything you want into an RRSP and you get an immediate deduction for tax purposes." To take the pressure off public pension programs, Ottawa has steadily broadened RRSP rules so that it is now possible to hold unlimited foreign investments as well as exotic items such as gold, hedge funds or even your own mortgage in an RRSP.
Is all this a good thing? Monica Townson, a research associate at the Canadian Centre for Policy Alternatives, laments the one-sided aspect of the RRSP revolution. Asset-based social policies fail people who lack disposable income to invest, she observes. Very modest contribution rates from low-income earners suggest to her that RRSP tax deductions are simply subsidies for the rich. "This is a transfer from low-income taxpayers to people at the upper end," Townson says.
Yet Axworthy is unrepentant in lauding the RRSP and encouraging more asset-based social policies. "We should be getting people out of the welfare trap and inculcating in them the values of planning and saving," he says. "Becoming an owner is a very powerful instrument for breaking people out of poverty."
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