Retro those RRSPs

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Filip Palda

RRSPs are supposed to be safe havens for retirement money. The idea is that interest and capital gains in the haven are not taxed as they accrue, but only when money is taken out. By keeping interest away from Revenue Canada’s pincers, RRSPs allow untaxed interest to compound upon untaxed interest and contributions. At the going income tax rate, the RRSP makes retirement more lucrative than if you saved money outside the plan.

Such is the illusion. It works if we believe that government will not raise income and other taxes to make a nonsense of the tax we avoid by saving in RRSPs. Nonsense is what seems to have happened in the last decade. Since 1989, average incomes rose by 15.8 percent while taxes rose by 26 percent. This explains in part why, in spite of the furious rate at which Canadians have squirrelled money away in RRSPs, their after-tax incomes are 6.1 percent lower in 1999 than a decade earlier.

Every great confidence trick diverts the gaze from its true objective. Canadians may think they are holding some ground against current tax increases by investing in RRSPs. They may wish to think again.

They are sitting on a pot of deferred taxes that grows at more than $26 billion a year. That’s 26 billion reasons for politicians to consider a retroactive tax. These politicians have proved themselves reluctant to find ways to save money by making government efficient. Instead, they have honed their wits to find new ways of making taxpayers carry the load of government folly and misadministration.

The "R" word is seldom spoken but often practised in Canada. The idea behind retroaction is to lure investors to put their money in ventures that government promises will be safe from tax. Once these investors have fluttered into the coop, government draws down the chicken wire and plucks its captured fowl, dollar by dollar.

The Mulroney government showed how well it could pluck in the 1980s. Ottawa enticed people to invest by offering them a $500,000 capital gains exemption. Once the investments were in - you guessed it - the exemption fell, first to $100,000, then, when Paul Martin became finance minister, to $0 as he did away with the $100,000 exemption. In 1975 Ontario’s Conservative government passed rent control. To make sure real estate developers were not discouraged by the law, Premier Davis promised rent control would only apply to old units. The story ends with Davis changing his mind and saying, what the heck, let’s slap rent-control onto those new units as well.

Here is how government will get its grubbies on your RRSP coin. A few years from now Paul Martin, or whoever is the reigning pickpocket in Parliament, will declare that due to some crisis which government could not foresee, those Canadians who have not invested in RRSPs risk a miserable retirement. To help them out he will levy a special surtax on RRSPs and transfer that surtax to poor Canadians (which will by then probably mean most of us).

The Quebec government pulled a stunt like this a year ago when it forced people with private drug insurance plans to fork over $250 million a year to pay for people who did not have private plans. Martin has already tested our resolve to resist taxes and our ability to guess what is coming. Last year he launched a plan to nearly double the worker’s CPP contribution by the year 2003. What this means is that some of those taxes you thought you had avoided with the help of the RRSP will come back to haunt you in your CPP contributions.

Martin should be encouraged by the results of his test. So far, the resistance of taxpayers has been mollusk-like. Maybe those who would have complained have already moved their money to the Bahamas, or have headed to the US.

Or, it could be that many Canadians have been lulled into believing that RRSPs are holy ground that no government would desecrate. If that is what they believe, then their financial advisors should recommend prayer as part of a sound retirement package.

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Last Modified: Thursday, June 10, 1999.