RRSP turns 60, but it isn’t retiring soon

Tax shelter still a great tool for the right people

The registered retirement savings plan is turning 60 this year. As the RRSP approaches the typical retirement age, participation has been declining and it has some people wondering if it might be time to retire the RRSP.

The tax shelter was first introduced in 1957 by Louis St. Laurent’s Liberal government primarily to assist those without a pension plan to save for retirement. At that time, the only governmentsponsored retirement program was the Old Age Security (OAS), which replaced the Old Age Pension five years earlier in 1952. The Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) were not introduced until 1966.

The RRSP was not very popular in the early days. Statistics Canada’s earliest data is from 1968 when about 2 per cent of taxpayers contributed to an RRSP. The maximum contribution amount at that time was 10 per cent of the previous year’s income, subject to a $2,500 maximum. This compares to 18 per cent of income up to $26,010 for the 2017 tax year.

RRSP participation rose steadily for the next 30 years, by about 1 per cent annually, peaking at 30 per cent in 1997. Since then, the percentage of taxpayers contributing to an RRSP has declined to about 23 per cent currently. This is curious given the percentage of workers in company pension plans has also declined over that period.

Foreign content limits were a significant investment impediment historically for the RRSP. Foreign investments were limited to 10 per cent of an RRSP value initially, then changed to 10 per cent of book value (cost) in 1971 and eventually to 20 per cent in 1994. As RRSP participation fell around the turn of the millennium, the limit was raised to 30 per cent in 2001 and eventually dropped in 2005.

Mutual fund managers in the 1990s used synthetic foreign funds that invested in futures and forward contracts to skirt foreign content limits, but as stock trading became cheaper and more prevalent, the limits forced some investors to look beyond their RRSP for foreign stock investing.

Part of the reason for the decline in RRSP contributions is that the baby boomer cohort, the oldest of whom were born in 1947, have been retiring over the past 10-15 years. More recently, the 2009 introduction of the taxfree savings account (TFSA) has meant competition for the RRSP.

Furthermore, as corporate tax rates have declined and more Canadians have become business owners, some corporate savers have opted for holding companies for their retirement savings over a traditional RRSP.

Finally, real estate has been an attractive investment opportunity for Canadians in recent years. While you can use your RRSP to invest indirectly in real estate, you cannot hold title to a rental property in your retirement accounts.

As of 2014, the average Canadian taxpayer had about $39,628 of RRSP room available. RRSP room did not carry forward initially. This policy change was made in 1990.

As I see it, the RRSP has actually become an even more powerful tax and investment tool over the years. Enhancements include the introduction of the Home Buyers Plan (HBP) in 1992, to assist in the purchase of an eligible home; the introduction of the Lifelong Learning Plan (LLP) in 1999 to help fund post-secondary education; the 2007 change to delay mandatory withdrawals from an RRSP account from age 69 to 71; and the 2007 introduction of pension income splitting, to allow those over the age of 65 to split up to 50 per cent of their RRIF withdrawals with their spouse on their tax returns.

As top marginal tax rates have risen in recent years to well over 50 per cent in many provinces — specifically, in Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia and PEI — the RRSP is one of the most straightforward tax shelters for high-income employees.

But even middle-class taxpayers can benefit, as long as they have enough time to reap the benefits of tax deferral and a similar or preferably lower forecast tax bracket in retirement.

Low-income Canadians have the least to benefit from an RRSP, as contributions may save little tax now and may result in higher tax in retirement. Sometimes, the “taxation” comes in the form of reduced means-tested government benefits. A TFSA can be a good tool for this group.

So should the RRSP call it quits and retire, as it celebrates its 60th birthday? Not in my opinion. It can be a great tool for the right person, but as more options become available, it just means there are more candidates vying for Canadian retirement dollars.