If you were hoping that Finance Minister Jim Flaherty would announce
broad-based income splitting in his economic update on Thursday, then you must
be disappointed. But don't be too discouraged because buried within the new
strategy is a commitment to reducing taxes on savings.
Specifically, the Tory government promised to "reduce personal income taxes
on savings, including capital gains. This will support investment and economic
growth while enhancing the overall fairness and neutrality of the tax system. It
will also make our tax treatment of savings more competitive in relation to
other countries."
This vague wording may pave the way for new tax initiatives for interest,
dividends and capital gains, thus increasing the returns from savings.
The special mention of reducing capital gains tax is encouraging as it is
clearly referring to the Conservatives' campaign promise to eliminate the
capital gains tax for individuals on the sale of assets when the proceeds are
reinvested within six months."
This is sound tax policy. Many Canadians have substantial assets with accrued
capital gains locked-in for no other reason than to avoid paying tax on the
gains. If Canadians could free up all, or at least some, of those capital gains,
this would both stimulate the economy as well as encourage people to better
diversify their investment portfolios.
The question the government has been grappling with is how to implement such
a policy with minimal losses of tax revenues and minimal administrative
headaches.
In April, 2006, the C.D. Howe Institute recommended the introduction of a
"capital gains deferral account" (CGDA) wherein each Canadian could trade
securities within the account and avoid paying capital gains taxes until the
funds were ultimately withdrawn. The account would be subject to
(non-deductible) contribution limits.
While the C.D. Howe's proposal has been widely praised as a way to achieve
the government's objective at a fixed cost, others are concerned about the
potential administrative nightmare such an account may cause financial
institutions who are already burdened with the administration and paperwork
associated with existing savings vehicles, such as RRSPs, RRIFs and RESPs.
The Investment Funds Institute of Canada (IFIC), in its pre-budget submission
last month, suggested a simpler way to reduce taxes on capital gains would be to
either reintroduce a capital gains exemption with a lifetime limit of, say,
$100,000, or alternatively, to further reduce the capital gains inclusion rate
from 50%.
The federal economic statement also dropped a veiled reference to the
possible introduction of the Tax Pre-Paid Savings Plan (TPSP), a concept floated
by the previous Liberal government in 2003. As the government acknowledged on
Thursday: "Savings are subject to income tax twice: once when the income is
earned and again when the investment income is earned on the savings."
Under a TPSP, contributions would not be tax deductible nor would withdrawals
from the plan be taxable. Thus, savings would only be taxed once.
So, when can we expect income splitting? Mr. Flaherty was non-committal,
saying we should think of the idea as a "possibility" rather than a
"probability."