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Tax benefits from RRSP also favour the rich

Dale Jackson
Pay Day
Canada Revenue Agency/CP

A recent study by the Canadian Centre for Policy Alternatives says 86 per cent of Canadian families would get absolutely no benefit from a proposed Conservative government income splitting plan.

It argues allowing higher-income family members to transfer part of their income to family members in lower tax brackets will only benefit a few wealthy families. At the same time, they say the nearly $5 billion in lost government revenue annually resulting from the plan will be compensated by the many.

While it’s a fact of life that tax breaks favour those who pay the most in taxes, if the CCPA is looking for a tax plan that benefits the rich they don’t need to go any further than the cherished registered retirement savings plan.

Here’s what they would find: According to Statistics Canada the average Canadian annual pre-tax income is about $40,000. For the sake of argument, let’s say that average person scrimped and saved, and contributed $10,000 to his RRSP. Using tax tables provided by the Canada Revenue Agency, if he lived in Ontario he would roughly be in a 20 per cent tax bracket. That means he would avoid paying $2,000 in taxes.

Now, let’s say his rich uncle who made $140,000 also contributed $10,000. In Ontario he would roughly be in 39 per cent tax bracket – reaping a tax savings of $3,900.

That’s not the only advantage the rich uncle has over his poor nephew. If the uncle plays it smart and limits his overall contributions until he retires he can restrict the amount of money he withdraws from his RRSP to a lower tax bracket. The nephew, on the other hand, will likely withdraw his savings in retirement at the same contribution rate.

TFSA: the great equalizer

The tax free savings account, on the other hand, is more democratic – to a point. Any gains on investment returns in a TFSA are not taxed regardless of your income.

However, in the future it will become more of a benefit to the rich as the contribution limit keeps rising. When it was introduced six years ago the limit was $5,000 but each year that limit is increased by the Federal government. Right now Canadians are allowed to have as much as $31,000 total in their TFSAs.

As the contribution limit grows, TFSAs will be a bigger drain on government coffers and those who can afford to put the most in their TFSAs will benefit the most.

When RRSPs and TFSAs are not enough

There are investment tax perks outside of the RRSP and TFSA. Gains on equities like stocks are only taxed at 50 per cent. If you lose money on some equities you can offset those losses against other gains.

Dividends from eligible Canadian companies are also subject to a tax credit.

But with so many RRSPs and TFSAs being underutilized you really have to wonder who really needs additional tax perks and why is a Federal government that claims to be committed to balancing the budget so eager to please them by allowing income splitting.

The maximum RRSP deduction for the 2013 tax year is $23,820 plus any unused contribution space from previous years. Add that to the $5,500 annual TFSA contribution limit and that’s close to $30,000 a year in tax perks.

A recent Sun Life Financial/Ipsos Reid poll found only 36 per cent of eligible Canadians even make contributions to their RRSPs. Another recent Bank of Montreal survey found the average RRSP contribution last year was only $4,670.

Recent statistics on TFSAs are hard to come by but the Federal government recently estimated only half of eligible Canadians even have a TFSA.

It seems that rich uncle has Ottawa’s ear.