Eliminate labour fund tax credit, says C.D. Howe

(March 9, 2004) Ottawa could save $100 million a year by scrapping the federal tax credit for labour-sponsored investment funds (LSIFs), says the C.D. Howe Institute. That’s one of several tax reforms suggested in C.D. Howe’s shadow budget, which was released today.

Most labour funds qualify for a federal tax credit of 15%, usually matched by provincial governments. The maximum annual investment amount eligible for the federal credit is $5,000.

C.D. Howe says the credit has “promoted the growth of funds with high management fees and low return on investment. Furthermore, many labour funds invest alongside unsubsidized venture capital funds, suggesting good projects can attract funding without subsidies.”

Personal income tax rates would also be reduced under the research foundation’s fiscal plan, with the lowest rate falling by one percentage point in 2005, and all rates dropping by one percentage point in 2007. Future personal tax rates would be indexed to wage growth, rather than inflation.

“The revenue foregone as a result of these measures will exceed $8 billion annually, or more than $500 per family,” say the shadow budget’s authors, Finn Poschmann and William Robson.

Poschmann and Robson also dust off their annual recommendation that Ottawa introduce tax prepaid savings plans (TPSPs), a new vehicle for retirement savings aimed at lower income Canadians.

Unlike RRSPs, TPSPs contributions are not eligible for tax deduction. However, earnings inside the plan are not taxed, nor are withdrawals in retirement. TPSPs are also exempt from clawbacks, allowing Canadians to save “without fear of losing other means-tested benefits, such as coverage by provincial drug and long-term care plans,” C.D. Howe says.

In last year’s budget, the federal government promised to study TPSPs, but has been silent on the subject since then.

The shadow budget also calls for the elimination of the foreign property rule, which prevents Canadians from holding more than 30% of their RRSP assets in foreign securities.

“The foreign property rule affects all Canadians who save for retirement through RRSPs and registered pension plans, increasing their risks and lowering their returns, while providing no benefit to Canadian investment,” the report claims.

In addition, C.D. Howe suggests increasing the age at which RRSPs must be converted to RRIFs to 71 to 69, with a further increase to 73 in 2005.

“With life expectancy rising, many Canadians will extend their working lives and will wish to continue saving longer.”

Federal Finance Minister Ralph Goodale will unveil his first budget in Ottawa on Tuesday, March 23.

Advisor.ca will feature extensive coverage of the federal budget the evening of March 23, including exclusive reports from the lock-up.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com