‘My greatest fear’

It’s been over 12 years since Ottawa did a 360 and taxed income trusts. It was a shock. Actually, a betrayal. In the election campaign a year earlier the Harperites promised the sweet tax treatment of income flowing from these vehicles would never be changed. Then, boom, the hammer fell.

Hardest hit were those investors who had the most money stuffed into high-paying trusts – wrinklies, many of whom needed the retirement income. It was a disaster, but the government didn’t care. Stephen Harper just wanted to plug a tax loophole.

So, some people worry. If the feds could shut down a popular tax-saving vehicle overnight without opposition, couldn’t RRSPs or TFSAs be raided in the future?

Here’s a comment in that vein from yesterday’s riveting blog:

I have a large amount of money saved in RRSP and TFSA and I am hoping to use both of these in retirement which may be 5 – 10 years away. However, I have this fear. Fear of government. I fear that there will be governments in the future that are much like the current government, but even more desperate for revenue to feed their debt. People like us and ones on this blog will be the minority. As such the promises made by past governments will be broken,…and no votes lost. They will systematically remove our savings, ”for the good of the majority”. They will find a way to twist it as a good ethical decision, as it is what they have to do…
that is my greatest fear….

Is this valid? By having ‘registered’ investments like RRSPs, TFSAs, RDSPs and RESPs – which are 100% visible to governments at all times – are citizens setting themselves up for some kind of future confiscation through taxation? After all, as reported here, the middle class is sleepwalking towards a cliff. The savings rate has plunged to less than 1%, household debt is off that charts and governments have repeatedly proven they’ll curry votes by taking from the ‘rich’ and redistributing wealth. Look at the T2 administration’s first major act – gutting TFSA contribution levels, saying they benefited only the wealthy, while slapping on a new tax bracket for high income-earners. Is it not obvious where we’re headed, comrades?

Yes, it is. But there are good reasons to believe that never in this lifetime will Ottawa ever reverse course and tax RRSPs or TFSAs. The first is simple: with low savings and huge debt the last thing Canada needs is more people depending on the government for income. Already old age payments are crippling federal finances – about $40 billion now, expected to balloon past $100 billion by 2030. The country needs future retirees to be financially independent, so taxing the RRSPs of those who have prepared is just bad public policy.

Second, it would be political suicide.

There are about 14 million households in Canada, and two-thirds of them have a TFSA, an RRSP or both to which a contribution is being made, according to StatsCan. The tax-free account, in particular, has been widely embraced by people – even though most use it as a glorified savings account for discretionary spending (fail). This jives with a growing meme among people – especially younger workers – that there’s no point investing through an RRSP since the money coming out of the plan is taxed. A CIBC poll last year confirmed that, in contrast, almost 70% of people prefer the TFSA because withdrawals are completely tax-free.

So, TFSAs are off the table for political reasons, and also because contributions are made with dollars that have already been taxed. In theory they won’t be taxed again.

RRSPs, as you know, are different beasts. Contributions come from pre-tax dollars. When you put cash in, you get your taxes back. The money grows free of tax over the years, then you return tax to the government upon withdrawal. So if Ottawa decided to tax outstanding RRSP balances, it would just be collecting its cut early. That might not be too much of a stretch for a future government, especially one formed by a political party that starts with ‘N’ and ends with ‘P.’

But wait. RRSPs are actually trusts. And they’re protected under the federal Bankruptcy and Insolvency Act, which is a pretty good precedent for arguing that these accounts are untouchable by anyone. In fact when someone hits the bottom of the financial barrel, the courts or CRA might garnishee their income, Hoover off their bank account and investment assets, seize their TFSA and even their kid’s RESP, but the RRSP is inviolate. This is why lots of entrepreneurs (high-risk takers) choose to keep their personal wealth inside one, and why trustees in bankruptcy tell clients to do the same. So long as cash has not been moved into an RRSP within a year of bankruptcy, it’s safe.

And while going broke is an unequal risk to being taxed more by a hungry government, you can see why attacking RRSPs would be unlikely in the extreme. A far more reasonable threat would be a gutting of RRSP contribution limits, particularly for high-income earners who can now salt away a hefty $26,000 a year, slashing their tax at the same time. After all, if T2 could do it to TFSAs without much of a public whimper, well…

Conclusion: the more you stuff into an RRSP at this time, the better. They are tax-shifting vehicles, whether you use them to fund retirement or not. They’re creditor-proof. The provide tax-free growth. They let you chop current income tax. And the sweet, sweet advantage they provide to 1%ers may not last. You have nine days.