It seems that nearly every segment of the population has received some form of COVID-19 government assistance. There’s the Canada Emergency Response Benefit, which provides $2,000 monthly to individuals who have stopped working because of reasons related to COVID-19. Businesses and not-for-profits may be eligible for the Canada Emergency Business Account, which provides interest-free loans of up to $40,000 (with 25 per cent potentially forgivable), along with two, separate wage subsidy programs. Students will soon receive the Canada Emergency Student Benefit, which is generally $1,250 per month for four months. But so far, the only relief offered to investors, which only applies to some, is a 25 per cent reduction in the minimum required RRIF withdrawal for 2020.
To further assist investors in a time of economic downturn, two proposals have been floated in recent weeks. The first would allow Canadians to tap into their RRSPs, tax free, to help meet current cashflow needs and the second would permit investors who may have experienced capital losses in their non-registered investment portfolios to more easily crystallize those losses and apply them against all sources of income. Let’s take a closer look at each proposal.
Tax-free RRSP withdrawals
In an opinion piece published in these pages last month, the C.D. Howe’s Alexandre Laurin, and Nick Pantaleo, executive in residence at the University of Waterloo’s School of Accounting and Finance, proposed the idea of tax-free RRSP withdrawals, calling it the Financial Relief Plan (FRP).
The FRP would be modelled after the existing Home Buyers’ Plan (HBP) and Lifelong Learning Plan (LLP), which both effectively allow tax-free borrowings from your RRSP, provided the required annual repayments are made on time. The HBP is designed to support the purchase of a home, allowing first-time home buyers (and their spouse or partner) to withdraw up to $35,000 tax-free, to be repaid over 15 years. The LLP is meant to support enrolment in an educational program, allowing students (and their spouse or partner) to withdraw up to $10,000, tax-free from their RRSP, to be repaid over 10 years.
No tax is payable on the RRSP withdrawals under the two plans and, if funds are repaid on time (or before), there are no further tax consequences to the participants, other than the loss of tax-deferred income/growth on the amounts withdrawn. A failure to repay the annual required amount, however, results in the unpaid amount being included in income in that tax year.
In making the case for the FRP, the authors argue that since many households already have “an ample source of financial wealth at hand” (i.e. inside their RRSPs), allowing Canadians to temporarily withdraw funds from their RRSPs, tax-free, would provide “an immediate and cheap source of financial assistance.”
The proposed plan has a couple of benefits. First, amounts could be withdrawn from your RRSP without the normal government withholding taxes. Under the normal rules, when you withdraw funds from an RRSP, your financial institution withholds tax. The withholding rate depends on your residency and the amount you withdraw. For Canadian residents, the rates range from 10 per cent on amounts up to $5,000 to 30 per cent on amounts over $15,000. (Quebec rates are higher for withdrawals under $15,000).
But perhaps the most important benefit is that, unlike a normal, taxable RRSP withdrawal, withdrawals under the HBP and LLP schemes do not lead to a loss of contribution room, so participants would not be penalized by temporary withdrawing funds from their RRSP, other than through the loss of the tax-deferred growth, as discussed above.
While many design factors are possible, the authors suggest the FRP could be available for the next six months, withdrawals could be limited to $20,000, and repayments could extend over a maximum of 10 years.
In the end, the government will collect its taxes on the RRSP withdrawal, either when Canadians fail to repay what they are supposed to annually or, after they have repaid the amounts, when they eventually withdraw their money for retirement. Given our low interest rates, the authors argue, “the cost to the government of what amounts simply to a delay in tax payments would be negligible.”
Tax treatment of capital losses
Last week, the Investment Industry Association of Canada (“IIAC”) wrote to Finance Minister Bill Morneau recommending that the government relax the rules surrounding the tax treatment of capital losses. The COVID-19 crisis has “reduced the incomes and accumulated savings of ordinary, hard-working Canadians from widespread business lockdowns, the collapse of financial markets and much lower interest rates.” IIAC goes on to say that the interim tax measures being proposed “would restore confidence for a better life and an optimistic future for middle class Canadians and their families.”
IIAC is proposing two specific changes to the capital loss rules. First, it’s asking for the suspension of the superficial loss rule for 2020. A superficial loss occurs if property is sold at a loss and is repurchased within 30 days of a sale by you or an “affiliated person,” which includes your spouse (or common-law partner), a corporation controlled by you or your spouse, or a trust of which you or your spouse are a majority-interest beneficiary (such as your RRSP, RRIF or TFSA). Under the current rules, your capital loss will be denied and, in a non-registered account, added to the adjusted cost base (ACB) or tax cost of the repurchased security. That means any benefit of the “crystallized” capital loss will only be available when the repurchased security is ultimately sold.
IIAC is requesting that the federal government suspend the superficial loss provision for 2020 to allow Canadians to sell a security at a loss in a non-registered account, benefit from the capital loss, and then repurchase the identical security in a registered account, allowing investors to reposition assets and rebuild their retirement savings plans.
Secondly, IIAC is asking the federal government to allow a portion of net capital losses incurred in 2020 to be used to offset any type of personal income, rather than just capital gains. Under the current rules, capital losses realized in the current year can only be used against current capital gains, with any leftover net losses available to be carried back or up to three years or carried forward indefinitely. IIAC suggested limiting this measure to $100,000 in total net capital losses and to 50 per cent of personal taxable income for the current calendar year, with any net capital losses subject to the carryback or carryforward rules.
As IIAC concludes: “These proposed tax measures would cushion retirement savings, bolster investor confidence, and provide underlying stability to share prices.”