The origin of species: RRSPs

On a very macro level, there is something going on here with our unethical Finance Minister Jim Flaherty that seems to be lost on people, namely the original intent behind the creation of RRSPs. The concepts of leveling the playing field and tax fairness are very germaine to this simple but revealing story.

The concept of RRSPs was introduced 50 years ago this year by Liberal Finance Minister Walter Harris with the express purpose of allowing average Canadians without pensions to replicate some of the advantages conferred on individuals who were members of defined benefit employer sponsored pension plans.

When you think of it, it really wasn’t much of a reach for government to do this, because all it entailed was allowing people to take a limited amount of their pretax earnings and put it in an investment account where it would earn a return and be taxed at a later date. It’s not as if the government was losing taxes by waiting, since the money in the account (across all such accounts) would, by economic definition, earn a return higher than the government’s cost of capital (over time). As such a dollar of taxes that has been deferred from today to a future point in time has a value today of at least a dollar. The simple reason for this, as Jim Flaherty could tell you if he had taken Finance 101, is that, again by definition, the government has the lowest cost of capital in any economy, therefore meaning that the returns across all RRSPs will, over time, always exceed the government’s cost of borrowing (or discount rate).

So what does Flaherty do on the 50th anniversary of the RRSP? He celebrates by double taxing it. By doing so he has stripped away any incentive associated with saving via RRSP. He further unlevels the playing field by not doing the same thing for pesnion funds, thereby, going against the original intent of Walter Harris and 50 years of ongoing precedent.

It gets worse.

Flaherty then performs his good/bad analysis of income trusts versus corporations by ARBITRARILY and without any economic or financial rationale, totally excluding the taxes paid by income trusts in RRSPs. Nada. Zip.

It gets worse.

Its bad enough that Flaherty doesn’t acknowledge these taxes people are paying, especially when you realize that 38% of all income trusts are held in RRSPs. He then goes on to create policies that are regressive to these very people who are saving for retirement using the only vehicle available to them.

It gets worse.

He then has the gall to call this abomination of inequity, the Tax Fairness Plan

It gets worse.

Having created this inequity, and having taken away an essential investment choice for those without pensions, and having evaporated $35 billion of their life savings, Flaherty has the unmitigated gall to tell people that the quid pro quo is income splitting. Close but no cigar, as Flaherty’s income splitting is actually only pension splitting and it just so happens that this measure doesn’t apply to RRSP income, just to pension funds, like his. Again more inequity, more tax unfairness, more unleveling of the playing field

Golden Anniversary

So on the 50th anniversary of RRSPs, Flaherty has rendered this one retirement savings vehicle virtually useless. By not acknowledging the massive taxes paid by RRSPs, the government is implicitly saying, WE DO NOT BELIEVE IN RRSPs. I think the government is covetous of all the money tied up in RRSPs, which I believe is around half a trillion dollars or more. This is like a reservoir of taxes that the government wants to get its greedy paws on. They consider it “money in the bank”, which it clearly is. Flaherty’s goal is to rob this bank.

Evolution of the species.

In the world of Darwin, species only survive by improving and evolving over time. Flaherty is acting against these forward moving principles and regressing the concept of RRSPs. Who elected him to do that? What mandate did Harper have to do that? 70% of Canadians don’t have pensions and rely on their RRSPs. Harper is undermining these peoples' futures. He was elected by some 36% of Canadians. To screw 70%? Time to make him extinct.