Proceedings of the Standing Senate Committee on
National Finance
Issue 24 - Evidence - December 7, 2010
OTTAWA, Tuesday, December 7, 2010
The Standing Senate Committee on National Finance met this day at 9:30 a.m. to examine the subject-matter of Bill C-47, A second Act to implement certain provisions of the budget tabled in Parliament on March 4, 2010 and other measures.
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: Honourable senators, this morning we continue to examine the subject-matter of Bill C-47, A second Act to implement certain provisions of the budget tabled in Parliament on March 4, 2010 and other measures.
[English]
This committee has heard from 17 government officials explaining different portions and provisions of the bill. This morning, as is our normal process with respect to government bills, after hearing what the government hopes to achieve, we then like to talk to the private sector and those who are impacted by the legislation, to understand consequences and perhaps discover unintended consequences of the legislation.
I am pleased to welcome this morning Ms. Tina Di Vito, Director, Retirement Strategies; and Mr. David Sharone, Product Manager, Registered Plans and Solutions. Both witnesses are from the Bank of Montreal Financial Group, and each has come on short notice to help us deal with this bill, and for that we thank them.
Tina Di Vito, Director, Retirement Strategies, BMO Financial Group: I would like to take this opportunity to thank you for all you have done in your role as Co-Chair of the Canada-China Legislative Association. The association, led by Senator Day and Mr. Daryl Kramp, MP, visited our new Beijing headquarters on the day that BMO announced it had become the first Canadian bank to obtain approval to prepare formally for incorporation of its wholly owned subsidiary bank.
I am pleased to say that BMO officially opened its incorporated subsidiary, BMO ChinaCo, this past October, in a ceremony attended by Minister Chuck Strahl. We very much appreciate the efforts of the association and the Government of Canada in helping us reach this milestone.
Today, on behalf of BMO Financial Group, I am pleased to present our views on the elements of Bill C-47 related to the Registered Disability Savings Plan and the Canada Disability Savings Act.
David Sharone, BMO's manager of registered products and our foremost expert on financial products that benefit disabled Canadians, joins me today.
In the 2007 Budget, Minister Flaherty took the important step of introducing the Registered Disability Savings Plan, or RDSP. Canadians with disabilities can face extraordinary expenses and may be limited in their ability to earn enough income to support themselves. With the RDSP, Canada is leading the world in showing how smart policy can help provide financial security and independence for people with disabilities. All Canadians should be proud of this fantastic initiative.
At BMO, we strongly supported the introduction of the RDSP, and it did not take us long to get on board. In late 2008, we became the first bank to offer the new product to Canadians. We knew that the RDSP would be a terrific savings vehicle that would provide both parents and contributors with peace of mind.
As is often the case with new financial products, there are always opportunities to improve upon what has already been created. In February, just before Budget 2010 was introduced, I took the opportunity to write an article in Policy Options magazine, where I made a number of suggestions on how to enhance Canada's personal retirement savings. One suggestion I made was to allow balances in RRSPs and RRIFs to rollover, tax free, into an RDSP. I argued that allowing individuals to bequeath their RRSP and RRIF accounts to an RDSP would allow one more way to help people with disabilities live more independent lives with financial security. A short time later, in Budget 2010, the finance minister proposed allowing a deceased individual's RRSP or RRIF proceeds to be transferred, on a tax- deferred basis, to the RDSP, which is one of the proposals we are examining today in Bill C-47.
We strongly support Minister Flaherty's effort to make a great program even better, and I am pleased today to reiterate our support for this measure. The proposal is a fantastic measure that will benefit all Canadians with disabilities. The impact on federal coffers will be small, but the benefit will be huge, allowing more people with disabilities to live more comfortable and independent lives.
The budget also proposed a change to the Canada Disability Savings Act that would allow for the opportunity to carry forward unused grants and bonds. Again, we at BMO are in support of this change, and we will explain this further.
We have noted, though, that there has been a slow take-up of RDSPs by Canadians. This is understandable, given that it is a new product and Canadians are slowly becoming more aware of its features and benefits. We feel that the carry forward rules are an excellent provision that will help those who open an RDSP in later years as they become more familiar with this plan.
I will give you an example. Let us assume that in 2011 we come across someone who has qualified for the Disability Tax Credit in previous years but was unaware of the benefits of the RDSP. If they open an RDSP in 2011, given the provisions we are discussing today in Bill C-47, they will now be entitled to grants and bonds from 2008, 2009 and 2010. This is true even for Canadians who might be over the age of 49 in 2011 and would no longer qualify for any additional bonds or grants.
At BMO we have been pleased to support these measures to establish and improve upon the RDSP, and we look forward to working with the government and other parliamentarians to continue this important work of providing financial security and independence for Canadians with disabilities.
For the many Canadians interested in Registered Disability Savings Plans, we always encourage them to come into one of our over 900 branches across the country to have a conversation about the available options and benefits of an RDSP. When it comes to RDSPs and any other financial product or service, BMO is there for our customers to ensure the products are aligned to the customers' needs and understanding. We are there to help Canadians understand and to guide them and help them make money make sense.
At this point, before we go any further, we would be happy to entertain any questions from the committee. If you would like, we could also go into more detail around the RDSP rules, if would you like to start with that.
The Chair: I think that would be helpful. This is an area we are not normally working in and we have the experts before us.
Ms. Di Vito: As I mentioned, we were one of the first banks to offer this, and we are thrilled to be part of offering RDSPs to Canadians.
As an organization, BMO Financial Group was the first to offer RDSPs to Canadians and we have worked closely with Canadians over the last few years to help them understand this product and its benefits.
David A. Sharone, Product Manager, Registered Plans and Solutions, BMO Financial Group: This month marks the second anniversary of Registered Disability Savings Plans, which were launched in December 2008. We all know RRSPs because they are over 50 years old. RDSPs are very new. BMO was the first to launch them in 2008. Since then, other banks and other smaller financial institutions have launched Registered Disability Savings Plans.
The plan is for the long-term financial security for individuals with a disability. It can be an adult Canadian saving for him or herself, someone saving for them, or a parent saving for a child. This plan is for any Canadian who is under the age of 60 years. There are generous grants and bonds by the Canadian government for those who under the age of 50 years. One of the proposed changes in Bill C-47 is the carry forward of grant and bond, going 10 years.
The way the rules are today, in 2010, an individual who qualifies for the grants or bonds and the plan would have to be age 49 this year, or younger, and have the Disability Tax Credit. If they miss this year, then they missed 2010. If they missed 2008 because they did not hear about RDSPs, or they missed 2009 or this year, then they will be eligible in 2011. This provision will allow for those Canadians who do not open up a plan until next year to be able to get grants and bonds going back to 2008, as long as they were age eligible — that is, under age 49 in those years — and they were eligible for the Disability Tax Credit.
Ms. Di Vito: It is important for the committee to understand the impact of that change. As this is a new plan that is only a few years old, all of our roles and responsibilities are now centred on educating the Canadian population as to what this plan is about and the benefits involved. That is the fact that there are grants and bonds available for low- income Canadians.
The Chair: Could you explain the difference?
Ms. Di Vito: The important thing is that if you do not know that this account is available, and you are not aware of that extra government money that is available for you or for your child, then the fact that we have this rollover provision allows individuals, let us say next year or in future years, to go back and claim the grants and bonds that they would otherwise be entitled to.
Mr. Sharone: I mentioned that they are generous grants and bonds. That is true. The incentives are wonderful in the RDSP. Up to $3,500 a year in grant can be paid to an individual; $70,000 in a lifetime. To get to the $70,000 it would take 20 years of receiving the maximum grant of $3,500 a year. That can be achieved by contributing just $1,500 into the RDSP. Today's threshold for that is an income of around $82,000. If a family had incomes below $82,000, with a contribution of $1,500 into the plan, then the government will pay $3,500 in grant money. For incomes higher than that $82,000 threshold, then it is a $1,000 a year grant on $1,000 in contributions. More money can go in, but the government grant will be either $3,500 on a $1,500 contribution or $1,000 on a $1,000 contribution for higher income families.
There is also a bond component. The Canada Disability Savings Bond will pay up to $1,000 a year in bond, $20,000 in a lifetime. Again, that is 20 years at $1,000 a year. The bond is paid automatically, regardless of whether or not contributions were made.
The grant requires a contribution by the client; the bond does not. That is great for low-income families who may not have money to make the contribution. Just by having the RDSP open, they will receive up to $1,000 a year in bond. That is for low-income families under $21,000.
The income is based on the income of parents when the beneficiary, or the person with the disability, is a minor. When the beneficiary becomes an adult at age 18 years, his or her income is used. That is critical. In many cases, for a child where mom and dad are both working, may not qualify for the bond or they will get a higher portion. However, once that person who has a severe disability reaches age 18 years, and his or her income obviously falls below $20,000 a year, he or she is entitled to receive a bond automatically and up to $3,500 in grant. That amount is $70,000 in grant; $20,000 in bond.
The Chair: Both of them can be received?
Mr. Sharone: Yes, and that is per beneficiary. A person with a disability can only have one RDSP. Unlike other registered plans where you can have multiple registered plans in multiple institutions, an individual can only have one RDSP. That is a bit of background.
The Chair: That is very helpful.
Ms. Di Vito: As you can see, this is why we are so excited about the carry-forward provision. To repeat, this is a brand new account. RRSPs have been around over 50 years and Canadians are still trying to understand them. As you can imagine with RDSPs, there are still many questions and many people are not aware of them. The carry-forward provision would enable someone who realizes that there was an amount here that they could have claimed to be able to claim back some of that amount.
The Chair: The legislation that we are looking at contains an ability to transfer from someone else's RRSP, for example, when someone dies, that person's RRSP can be transferred into this Registered Disability Savings Plan.
Ms. Di Vito: Yes.
The Chair: In addition to that, there is now the ability in the legislation as well to go back and pick up those other years that you might have missed?
Ms. Di Vito: That is correct. That is contained in Part 5 of this legislation right now.
Senator Ringuette: Thank you for being here today. Bill C-47, which is a second budget bill, has two issues that provide retroactivity. The first was with regard to the Income Tax Act that was presented to us, a case that was in litigation. The measures in this act provide for retroactivity to remove the litigation situation. This issue of the registered disability also provides for retroactivity on the issue of disability.
This is very interesting because this is a government bill. At least this committee knows that at least two issues provide retroactivity for this government legislation. We had another bill that was denied by a group of people because there was an issue of retroactivity for a disability issue in the private sector.
It is kind of amusing to see that there are two different philosophies, depending on whether it is a government bill or a private member's bill, concerning retroactivity and disability.
However, this is a relatively new program. As you said, BMO was the first one to put it out on the market. You say that it is new, but you also say that there has been a slow take-up. In a given year, let us say this year, what has been the take-up?
Ms. Di Vito: The very first year that the RDSP was introduced, there was a significant amount of interest in individuals who had been keeping an eye on the legislation and heard that this was becoming available and were quite anxious to open the accounts.
Since 2008 and early 2009, the numbers have dropped off. Mr. Sharone can shed some light on the numbers of accounts that have been opened.
Senator Ringuette: Mr. Sharone, will you be giving us the numbers for your institution or for the entire sector?
Mr. Sharone: Industry wide, yes. We launched RDSPs on December 22. I remember the day well. It was the Monday before Christmas. Typically at that time of year, our call centre might answer about 500 calls a day nation- wide from clients inquiring about investments. In December 2008, after the announcement by the Minister of Finance, the Honourable Jim Flaherty, and the Minister of Human Resources and Skills Development, the Honourable Diane Finley, that RDSPs were available, our call centre received close to 2,000 a day. There was a huge influx of inquiries by Canadians who had been hearing about RDSPs for a couple of years because it was mentioned initially in Budget 2007.
We opened many accounts, and for the first few months we were the only bank offering RDSPs. BMO clients and non-BMO clients alike, came to us. During the first year we saw a great deal of interest in RDSPs. Those numbers trailed off a little in the second and third years, but there has been consistent interest. Approximately 41,000 Canadians have opened Registered Disability Savings Plans.
Ms. Di Vito: Those are industry numbers.
Senator Ringuette: That is since 2007.
Mr. Sharone: It has been since December 2008 when we launched the program, which was close to 24 months ago. Approximately $130 million in grant and $55 million in bond have been paid out to date in two years.
Concerning the retroactivity you mentioned, last Friday, December 3, I attended an event in Toronto for the United Nations International Day for People with Disabilities. Bank of Montreal was the key sponsor of that event, which I attended for the second year. We were there to talk about not only the Registered Disability Savings Plan but also to celebrate what that day means to Canadians. While I was there, I met a lady who asked why BMO was there. I mentioned that we were a sponsor, and I talked to her about Registered Disability Savings Plans. Obviously, she qualified, given her physical disability, but she had never heard of RDSPs. I told her a bit more about the plan and asked her age. She said that she turned 49 earlier this year. The way the rules are today and have been since 2008, this would have been the only year that she would be entitled to receive $1,000 in bond and $3,500 in grant, assuming her income was below $81,000. By telling her about this proposed change in Bill C-47 with the carry forward, she now knows that she can open up plan either now or early next year and be entitled to receive the bond from 2008, 2009 and 2010 — the three years that she was eligible — and the grant as well. She is eligible to receive up to $3,000 in bond and $10,500 in grant.
Senator Ringuette: If my memory serves me, when we reviewed the budget bill, we were told by Treasury Board and the Department of Finance that this program was initially for parents of disabled children so they could be assured in the future of some basic income.
Today, I am hearing that it could be applied elsewhere as well. For example, if I had an RRSP and at age 60 I developed a disease that disabled me, I would be able to retroactively transfer my RRSPs to a Registered Disability Savings Plan and receive the bonds and grants.
Ms. Di Vito: No. Allow us to explain the RRSP and RRIF rollover to RDSP. The provision in Bill C-47 allows a parent or grandparent who supports an individual who qualifies for the Disability Tax Credit to name the RDSP of the disabled individual as the beneficiary of the RRIF or the RRSP. If the mom or dad of a disabled child has an RRSP, he or she can name the RDSP as the beneficiary. If mom or dad dies, that money will go from the RRSP tax deferred into the child's RDSP.
Senator Ringuette: Exactly.
Ms. Di Vito: There must be the death of a person who was supporting the disabled. The disabled individual can be any age. It does not have to be an 18-year-old child; a child is a child.
Senator Ringuette: I understand. Mr. Sharone, from your earlier statement, I have the impression that a 49-year-old person could contribute to a RDSP for himself or herself.
Mr. Sharone: RDSPs are for individuals with a disability, a child or an adult.
Senator Ringuette: They can make a contribution.
Mr. Sharone: Absolutely.
Ms. Di Vito: For themselves.
Mr. Sharone: Anyone can contribute to an RDSP, whether the individual, the parents, friends or family member. Anyone can contribute to an RDSP. In the case I was speaking of about the lady I met last Friday, the plan is for her to be secure financially down the road. For the parents of a young child, it is for them to be financially secure. We often talk about RDSPs as being ``the peace-of-mind plan'' to give parents and grandparents the peace of mind in knowing that when they pass on, their child or grandchild will be secure financially with a plan.
Senator Ringuette: Returning to your example of the 49-year-old, currently disabled person, she can make contributions for herself.
Mr. Sharone: Sure.
Senator Ringuette: Is that for this fiscal year and retroactively for three years. Let us say that she became disabled in the last year. What are the possibilities for her?
Mr. Sharone: In that example, to be eligible for past grant and bond to 2008, they have to be age eligible, which is 49 years or less in that year; they have to be eligible for the Disability Tax Credit; and they have to be a resident of Canada.
Senator Ringuette: If she had a regular RRSP, what would the rollover status be?
Mr. Sharone: That does not apply in this case.
Senator Ringuette: A rollover could not apply to that person.
Mr. Sharone: No.
Senator Murray: Ever.
Mr. Sharone: No.
Ms. Di Vito: Upon that woman's death, should she have an RRSP or RRIF and there is another disabled person she would like to benefit, she could leave her RRSP or RRIF to that person.
Senator Murray: What if the person is not a child or grandchild?
Ms. Di Vito: It must be a child or grandchild who was dependent on the deceased under the Income Tax Act.
The Chair: That is after this subject matter is passed.
Ms. Di Vito: Correct.
Senator Murray: It is refreshing to have people appear to support a measure in the budget. As an independent senator I say that it gives great pleasure to my friends across the way, but it does that to me too.
The Chair: I agree wholeheartedly, and to be able to explain it is even better.
Senator Ringuette: Yes, exactly and in real terms. I agree with the retroactivity provision in Bill C-47. I simply wish there was a consistent policy in respect of retroactivity and the disabled.
Senator Murray: What would be the difference between what you call retroactivity and the ability to pay into one's RRSP unused contribution room from last year or the year before?
Ms. Di Vito: Senator Murray, you are absolutely correct. Even the Tax Free Savings Account, another relatively new plan, allows a carry forward of unused room.
When we looked at the legislation, we did not look at it from the perspective of it being retroactive or that we were proposing to change legislation that was drafted inappropriately. We took the position that it was to emphasize the fact that there is carry-forward provision if you were not aware or perhaps did not have the income. Many people think you need income to get the bond, but all you have to do is open the account and be entitled to the Canada bond. Many Canadians do not know that.
I saw it as an opportunity to not punish individuals for their lack of information or knowledge on a very new account and withhold a grant or bond that the government would otherwise want to pay to this individual because of his or her eligibility entitlements. We do look at it differently. Rather that it being retroactive, we are looking at it from a carry-forward perspective, and truly, the legislation is written in that vein as well.
The Chair: That had been one of your recommendations, as I understand.
Ms. Di Vito: Yes.
The Chair: Mr. Sharone, you gave some figures, and I heard $55 million over the last two years this program has been in place. The government purse has put in $55 million?
Mr. Sharone: Yes, it is close to $55 million in the Canada Disability Savings Bond. That is the bond portion. On the grant side, it is closer to $130 million.
The Chair: Over two years.
Mr. Sharone: Yes, over 24 months.
The Chair: Have you seen any government projections? You are saying this is just getting under way. Is there any sort of steady-state cost this is likely to go to?
Mr. Sharone: I do not know the numbers exactly, but, in talking with contacts at HRSDC, they have informed me this is ahead of the game. At the two-year mark, we are ahead of where they thought they would be.
Senator Murray: Is there foregone revenue also?
The Chair: Credit?
Ms. Di Vito: There is no income tax deduction, if that is what you are referring to, in respect of making contributions. However, one could argue that investments within the plan, because they are in a registered account, do not attract any income tax on the earnings.
The Chair: Until they are taken out, of course, the same as an RRSP. When you take it out, it becomes part of your income.
Ms. Di Vito: That requires further explanation.
Mr. Sharone: When money does come out of plan, the earnings in the grants and bonds are taxable. When the actual contributions made come out, up to $200,000 per beneficiary in private contributions, they are not taxable.
The Chair: That is already tax-paid money when it goes in.
Senator Murray: I should know this, but I will ask you because it is important. I take it that, in order to open a RDSP for someone, the person in respect of whom the account is opened has to be eligible for or have invoked the Disability Tax Credit.
Ms. Di Vito: Yes.
Senator Murray: What makes a person eligible for the Disability Tax Credit?
Ms. Di Vito: It is part of income tax legislation and has been part of the rules for many years. The Disability Tax Credit is based on your income. The disability is based on such criteria, and there is a great deal of case law around what does qualify and what does not quality.
Mr. Sharone: It is a Canada Revenue Agency, program, and there is a form to be completed, the T-2201. The person would take a form to his or her medical practitioners. A doctor or therapist or a number of different practitioners could complete the form. The disabilities range from physical to intellectual, but it is quite a range. There are steps to go through with the completing of the form that help determines whether the person qualifies for the DTC, Disability Tax Credit.
The Chair: Is there a range of disability that comes into play?
Mr. Sharone: A series of questions talk about hearing, vision, mobility, and ability to care for themselves. It is quite a range of questions.
The Chair: This is one of the thresholds to be able to get into the program. You must qualify as having a Disability Tax Credit.
Mr. Sharone: Yes. The individual has to be under age 60, a Canadian resident with a social insurance number and have the Disability Tax Credit. If you have all of that, that individual is eligible for the registered disability savings plan as a beneficiary.
The Chair: If you qualify for a Disability Tax Credit, other than the bond or the grant, then that does not give you any other deduction from otherwise payable income tax.
Mr. Sharone: The Disability Tax Credit itself, yes, but the DTC is required for the RDSP, and the RDSP contributions do not reduce your income like an RRSP would.
Ms. Di Vito: It is more closely aligned to an RESP, a Registered Education Savings Plan. In fact, they are almost parallel from a tax perspective. Contributions go into the account. There is no deduction. The growth, the grants and bonds earned in the Registered Education Savings Plan, are tax deferred until the student pulls the money out, and then it is taxable.
Senator Murray: Could you have both if you had a disabled child?
Ms. Di Vito: Yes. The difference, and it should be noted, is that the Registered Education Savings Plan is clearly for education, so payments out of that plan can only go to fund an education, whereas the registered disability account is income to the individual.
The Chair: In the bill that we are dealing with, Bill C-47, there are provisions, which you may not be up to speed on, and neither are we. If the RESP is not all used for educational purposes and the money goes back and tax is payable on that, there is a provision in here for sharing that with the provinces where the person lived who did not use up at the RESP.
Ms. Di Vito: Correct. The contributions always return back to the contributor without any tax because there was no tax deduction or benefit when the contribution went in. It is the growth in the account that is left over and not needed to fund education that would be subject to that tax, because the bonds and grants go back to the government as well.
The Chair: That is helpful. We will run a parallel with the RESP.
Senator Marshall: Thank you very much for being here this morning. In the past, in some of my former positions, I have been involved with providing services to people with disabilities, and one big concern of family members and parents was the provision for their children after they were gone. I can see that this program would be very well received.
With the retroactivity rule that is coming in with this budget, when you apply it retroactively, do you have to keep track of which year it would be most beneficial to apply a contribution in order to maximize the amount of grant you would get? Is that an issue? Who keeps track of that?
Mr. Sharone: That is a great question. As a financial institution, we are happy that we do not have to keep track of it and that the government will. For example, let us say next year a plan is opened and a beneficiary was eligible to receive grants and bonds in previous years. If they contribute $1500, they would get the $3500 grant, assuming they are in that bracket. If they contribute more than $1500, they will get additional grant from a previous year. The government will look at the most advantageous previous year that would have received the grant, and it will apply that extra contribution for that year. The way it is today, if you contributed $2,000 or $5,000 or $10,000, you would still get $3500. Starting next year, if you contribute in addition to $1500, you will get grant for 2011 and that additional contribution over $1500 will attract grant from previous years automatically.
Senator Marshall: Would CRA keep track of this? From what you are saying, every plan must have its own separate account.
Mr. Sharone: Every individual has his or her own plan. It is shared information between CRA and HRSDC, the income, of course, coming from CRA and HRSDC responsible for paying out the grants and bonds.
Senator Marshall: You indicated there was an article in Policy Options where you made suggestions about how the plan could be improved. You mentioned one suggestion had been accepted and you now see it in Bill C-47. What other suggestions did you make?
Ms. Di Vito: That Policy Options article looked at pensions in Canada and the state of retirement savings. The article looked at other issues, and I made a recommendation to increase the RRSP age. Currently, RRSPs can only continue until the end of the year the individual turns 71 and then those RRSPs must be converted into RRIFs. I made a recommendation that the age limit of 71 be increased or eliminated, to allow Canadians to take a more active approach in managing their finances during retirement. We are living longer and working longer. In our financial institution we have seen individuals, again because of RRSP carry forward, with carry forward room well into their 60s and 70s, as well as individuals who continue to work beyond age 65. This would align with the savings habits of Canadians.
Also, when we look at the demographics of this country, we are often confronted with the questions of where to save our money, how we should invest and save, and whether we should contribute to an RESP for education for our children or a Registered Retirement Savings Plan for ourselves.
There are so many demands on an individual's savings capability that we find that as Canadians get older that saving for their own retirement starts to take priority after their responsibilities of children and their education passes. We wanted to ensure that we aligned the registered savings with what is happening in Canada, with Canadians working longer and saving for their retirement.
Senator Marshall: The Registered Disability Savings Plan was started in 2008, so it is a relatively new program. We are improving it and going along a spectrum. Have you taken a position with regard to whether the contributions to the plan should be tax deductible? Currently they are not. Has that issue been raised?
Ms. Di Vito: The fact that the contributions are not tax deductible actually made it a little easier on the way out. Let me provide an example with an RRSP. Currently, RRSP contributions are tax deductible, but they are included in income when the money comes out of the account. Many Canadians are trying to determine when the most opportune time is to make that RRSP contribution. The question is always posed to us, as financial advisers: Should I make a contribution today? I am in a lower tax bracket. Do I take the deduction? What should I do? I do not know what the tax bracket will be during my retirement years.
It causes more of a dilemma, rather than just having people save for the fact that you need to save for your retirement years. By eliminating this aspect and using after-tax dollars, having the money come out as after-tax dollars, it simplifies the dilemma.
One thing we do want to note with Bill C-47 is that any RRSP or RRIF money that goes tax deferred into an RDSP upon the death of the RRSP or RRIF holder would now come out of the RDSP as taxable income. This has caused a few questions.
Senator Marshall: Who keeps track of the two streams?
Mr. Sharone: We have talked about the carry forward, which starts in January. This provision of rolling over RRIF money of a deceased person into a RDSP comes into effect July of next year. That allows for the institutions, the banks and the government, to align and adjust their systems accordingly. Today, for the contributions that go in and come out, there is no tax implication. We have to now track a rollover from a RRSP or RRIF as a different kind of contribution, as a rollover contribution; and that money, when it comes out, is taxable.
The Chair: Lots of interesting accounting will be needed.
As I understand it, when you take funds out of a registered disability program, you pay tax on the growth, not on the amount you put in. However, you will now be paying tax on any RRSP that is rolled into that as well, and the full amount of that, the growth plus the capital. Have I got that right?
Mr. Sharone: You are 100 per cent correct. A couple of things are worth noting when we talk about this provision of rolling over. It does count as contribution room. We talked about the $200,000 contribution room. A rollover of RRSP or RRIF money does count as part of the beneficiary's lifetime contribution of $200,000. We know it is taxable when it comes out of the plan.
It is also interesting to note that that rollover money will not attract grant. We know that contributions normally attract grants up to $3,500. The rollover will not attract grant; however, it counts as contribution room. In terms of the bond, they would be eligible for bond anyway, so they would have been receiving bond in each of those years.
Senator Marshall: If a taxpayer has named the Registered Disability Savings Plan as the beneficiary of their RRSP and they pass away and the money rolls in, it does not attract grants?
Mr. Sharone: Correct.
Ms. Di Vito: However, this does use up the room up to the $200,000. This is a new account. As you said, Senator Marshall, we are learning and the plan is evolving; it has only been around for two years. If the committee or the government has an opportunity to look at other elements of this plan that should be reviewed, that certainly is one area that we feel should be reviewed.
Senator Marshall: What did you say about the $200,000 lifetime cap? It goes into that, does it?
Mr. Sharone: Yes, the $200,000 lifetime contribution, whether it is private contributions or rollover.
Senator Murray: You want that reviewed?
Ms. Di Vito: The fact that any rollovers from RRSPs and RRIFs into the RDSP do not attract grants, where in fact they do use up contribution room.
Senator Murray: It sounds all right to me.
Ms. Di Vito: It uses up the maximum contribution room. We are anticipating that most people who will take on that rollover provision will be individuals who are lower income and would otherwise qualify for grants to the account.
Senator Murray: Why do you say that they would be lower-income individuals?
Ms. Di Vito: When we look at average RRSP and RRIF account sizes in Canada, they are modest, on average. Individuals who open RDSP accounts tend to be more middle-income Canadians rather than the ultra-high net worth Canadians, who have been using trusts, for example, to take care of their disabled children. We are anticipating that individuals who use this provision will be those Canadians who opened up the RDSP account to benefit their disabled child. These people are looking forward to getting the bonds or grants, and are probably not aware of the fact that the rollover from the RRSP or RRIF will not attract any grants while it is using up the contribution room.
The Chair: It sounds to me like there will be a lot of room for financial advisers to help people through this maze of rules.
Ms. Di Vito: I agree. This is a new product. I keep reiterating that RRSPs have been around for over 50 years and we are still educating Canadians on the benefits and uses. You can multiply that by 1,000 for the Registered Disability Savings Accounts. As evidenced with Mr. Sharone on Friday at an event for disabled individuals, an individual was not aware of the RDSP. It is our responsibility to educate Canadians on this important account.
Senator Peterson: For clarification, if you are 50 years old today and a disability is diagnosed, you are out of luck for the money?
Mr. Sharone: Right, because if this is their first year, at age 50, they were not eligible previously.
Senator Peterson: If you turn 49 in 2029, and have a disability, you could go back the 20 years; correct?
Mr. Sharone: You can go back 10 years, to 2008, because that was the first year. Although we are calling it a 10-year carry forward rule, it is really only to 2008 currently.
Senator Peterson: If you were diagnosed with the beginning of a disability, such as macular degeneration, where the doctor says you will lose your sight in 10 years, would you qualify for this program?
Ms. Di Vito: If you would qualify for the Disability Tax Credit in a particular year, you would potentially qualify, given your age and residency.
Senator Peterson: I am talking about the disability. What magnitude does it have to be? What if the disability is in its early stages? For example, I say: I have poor vision now. In 10 years, I will have no vision, so I want to be in the program.
Do I have to talk to CRA and fight it out with them?
Ms. Di Vito: That is right. You would have to have a medical doctor certify that your activities of daily living are markedly restricted. That is one thing the courts have been looking because the Disability Tax Credit is looked at on a year-by-year basis. Although you apply only once, it is looked at yearly. If your disability is eliminated in a future year, then you no longer qualify for the Disability Tax Credit.
The Chair: Senator Peterson knows he will have 100 per cent sight loss likely in eight to 10 years but he has 1 per cent loss now. Is he likely to qualify for a T-2201 form from the local doctor?
Mr. Sharone: If that doctor feels that, with the state of their disability today, they are eligible for the Disability Tax Credit, then as of this year they would be eligible. However, that medical practitioner must state that this year.
The Chair: Even with 1 per cent sight loss at this stage?
Mr. Sharone: Yes. That is between the patient and the doctor.
Senator Peterson: It must happen when you are about 25, then; 49 is no good.
Mr. Sharone: To flip that around, the Disability Tax Credit can be granted on either a temporary or a permanent basis. Permanent is for life. With RDSPs, one must be eligible for the DTC to be eligible for an RDSP. It is possible that today someone has the DTC and it is only granted for five or 10 years. In 10 years' time, if they are no longer deemed to have a disability, they would therefore no longer be eligible for the RDSP.
The Chair: What do they do then?
Mr. Sharone: In that case, any grant and bonds paid in the previous 10 years must be repaid back to the government. Any grants and bonds older than 10 years remain in the plan with all the contributions and earnings and are then paid to the beneficiary by the end of the following year. They are taxed on the growth in the grants and bonds.
The Chair: They got the grants and bonds at a time when they had a disability. Why would they have to pay them back when they are lucky enough to get rid of the disability?
Mr. Sharone: The feeling is that because this was for a long-term situation, now that they are no longer eligible or deemed for disability, the government feels that this money should go back to them.
The Chair: That may involve an amendment that we will have to look for one day.
Senator Ringuette: Essentially, you are saying that in that particular situation, where a person was then deemed not to be disabled, the plan would revert to a similar provision of the RRSP where the yearly contribution, plus the accrued interest or value of the deposit, could be transferred into a RRIF by the taxpayer, hopefully?
The Chair: No, you have to pay it back to the government. That is what they just said.
Ms. Di Vito: Yes.
Senator Ringuette: I understand that the portion of capital that they had not invested themselves would then have to be given back to the government. However, their registered disability plan would become equivalent to a RRSP. It could then be transferred into a RRIF for payment.
Mr. Sharone: The plan would be closed by the end of the following year. Any grants and bonds that are 10 years or older would go back to the government. Everything else in the plan is paid as an asset to the beneficiary. What is taxable is the growth in the grants and the bonds that are older than 10 years.
Senator Ringuette: Yes, and they can roll that into a RRSP?
Mr. Sharone: They can do whatever they wish.
Ms. Di Vito: If they have RRSP room, they can do that.
Mr. Sharone: Yes, an RRSP or whatever they like.
Senator Runciman: With respect to this legislation, there are also changes related to the Tax Free Savings Accounts. Have you looked at those? Do you have any observations to make at this time related to that? That is incorporated in this bill as well.
Ms. Di Vito: We did not look specifically at the Tax Free Savings Accounts but if there is a specific question that you would like to ask, we would attempt to answer it this morning.
Senator Runciman: There are a number of changes including with respect to ``any income attributable to deliberate overcontributions and prohibited investments subject to anti-avoidance rules''; and ``any income attributable to non- qualified investments taxable at regular income tax rates''; and ensuring ``that withdrawals of deliberate overcontributions, prohibited investments, non-qualified investments or amounts attributable to swap transactions, . . . would not create additional contribution room.'' Those are the essential changes.
Ms. Di Vito: I can comment on the over contribution, which has received the most press.
The rule as legislated originally for Tax Tree Savings Accounts was similar to the rule for RRSPs in terms of over contributions. Over contributions in excess of eligible RRSP contribution room — that is, anything above $2,000 — was subject to a 1 per cent per month penalty tax on the over contribution. We have had that rule for many years with RRSPs. It is a parallel rule for the Tax Free Savings Account. The big difference here is the fact that income or any kind of earnings on contributions in a Tax Free Savings Account are tax free. There was an added incentive on the part of some individuals to deliberately over contribute to the Tax Free Savings Account, pay the 12 per cent per annum penalty fee and then be on with it because, once the growth was applied, it could involve millions of dollars and, theoretically, some would definitely come out tax free.
With a RRSP that is not necessarily the case because any growth inside the registered plan, once removed, is taxable at the individual's marginal rate. There is even more of a disincentive to continue to do that with a RRSP.
With the Tax Free Savings Accounts, individuals were utilizing the rules as they were drafted and paying the 12 per cent penalty and moving on.
Senator Runciman: I was looking for your observation with respect to those changes. We are familiar with some of those details. I guess I am looking for your comment. Do you believe this is going in the right direction?
Ms. Di Vito: We do believe a clarification of the rules was necessary. The tax is basically now the value of the contribution and the growth. We believe it is in line.
Senator Runciman: The Senate Banking Committee recently made a recommendation of a $100,000 lifetime contribution, which is outside of the annual amount. Do you have any view on that?
Ms. Di Vito: When the Tax Free Savings Account was first introduced, many Canadians were quite happy with it because it provided another opportunity to earn investment income tax free. Those who were not as thrilled with it were those individuals who were a little older. I made the example and said that the Tax Free Savings Account is a fantastic opportunity for Canadians. Think of a typical 18 or 19 year old accumulating TFSA contribution room. By the time they retire, they potentially could have a significant account balance tax free. Individuals who are approaching retirement, however, would not have the opportunity to build up that sort of capital. This provision is now very welcome by those individuals who are older and have not been able to take 20 or 30 years of contributions and growth. A one-time lifetime contribution will benefit older Canadians who have accumulated some investment capital and will provide more of an opportunity during their retirement years to save through these types of accounts.
Senator Runciman: You mentioned earlier your recommendation and contribution of policy options about the cap on contributions at age 71 and either raising or eliminating it. Did you talk about the contribution ceiling as well?
Ms. Di Vito: We did. When we look at contribution ceilings of 18 per cent of earned income on a maximum amount each year, given the fact that Canadians would like, in some cases, to contribute extra amounts to their RRSPs, pension adjustments eliminate the opportunity to save for their future. We recommended an increase from 18 per cent back up to 20 per cent — and, at one point it was 20 per cent of earned income — or to make it a flat dollar amount, rather than being a percentage of income. That is another alternative.
Senator Runciman: Finance ministers will meet this week to discuss the Canada Pension Plan.
Ms. Di Vito: That is correct.
Senator Runciman: They will talk about raising contribution levels. Does your firm have a view with respect to whether that is the wise thing to do?
Ms. Di Vito: There were a couple of ideas on the table for the Canada Pension Plan, one of which is to create a supplementary voluntary pension plan. I was not a big fan of the idea because we have taken a look at personal savings. It is difficult to get Canadians, with all of the different competing demands on their dollar, to voluntarily save additionally through a plan such as CPP. The new provisions on the table involve increasing the year's maximum pensionable earnings limit — the YMPE limit — or increasing the contribution rates. Those ideas are more feasible from my perspective because when there is an employer/employee contribution, the chances are that Canadians will take advantage of it. Currently, the CCP is designed to represent for the year about 25 per cent of the average YMPE for the last five years. We looked at Canadians earning more than $47,000 and found that they are not able to contribute to the Canada Pension Plan as much as they potentially could contribute, given their income level. They are capped, as everyone else in Canada is capped.
Allowing them a little more opportunity to use the Canada Pension Plan, as their only pension plan in some cases, certainly should provide opportunity for them to save personally above what they are saving now.
Senator Runciman: That impacts your business negatively.
Ms. Di Vito: From my perspective, retirement savings are an important issue in this country. Getting individuals to save more adequately through a Canada Pension Plan provides peace of mind and other opportunities to use other spending money in terms of savings for RESPs and RDSPs. It provides additional opportunities for Canadians to save.
The Chair: I am making some assumptions that I would like you verify or correct. When an individual withdraws from a RDSP, there will be some taxable income from the growth of the plan. Are there provisions in the bill that say whether that will impact on an individual's eligibility for the Guaranteed Income Supplement or other programs that are income dependent?
Mr. Sharone: Prior to the launch of the Registered Disability Savings Plan, the federal government exempted RDSPs from negatively impacting any federal programs, such as the GIS. RDSPs are fully exempt, including contributions, growth, grants and bonds, such that later in life any money withdrawn from the plan will be exempt from negatively impacting other programs at the federal level; and most provinces followed suit. Most provinces have exempted fully RDSPs from negatively impacting the provincial support programs for individuals with disabilities.
The Chair: Do you want to name the provinces that have not followed suit yet?
Mr. Sharone: I believe that all provinces have followed suit, with the exception of partial exemptions in Quebec only. One of the Maritime provinces might not have all the exemptions, possibly P.E.I. It may be Quebec only but I am sorry, I do not know for certain.
The Chair: When you go back to your office, perhaps you could find the answer to that question and let the committee know through the clerk whether another province is included.
Mr. Sharone: Absolutely.
The Chair: That is an important provision.
Mr. Sharone: It is 100 per cent important. For example, the Ontario Disability Support Program is fully exempted from any negative impact. We will find out which provinces have the exemptions.
The Chair: Thank you. Honourable senators, are there follow-up questions to those that I have posed?
Senator Murray: It is great to get free advice.
The Chair: Thank you very much for your free advice; we appreciate it.
We appreciate your coming on short notice to provide us with the clear expertise that the Bank of Montreal Financial Group has in this area. Congratulations as well on the work you are doing internationally. I am sure you are advising some of your international colleagues on the various packages and programs, which other countries might decide to follow. We are working out the adjustments so that the program will be established by that time.
Ms. Di Vito: Thank you for allowing us to share our information and knowledge with you today. You are correct in suggesting that other countries might choose to follow suit. For example, China does not have the concept of retirement and does not have government-sponsored programs. In fact, a delegate from China was in our offices a couple of months ago. They were amazed by the RRSP and RRIF rules. We will be able to provide guidance as those emerging countries establish retirement savings plans for their citizens.
The Chair: We do a great deal of parliamentary diplomacy work internationally. Certainly, we can work together, as we have done in China, with any Canadian companies. The Bank of Montreal in China has done some very good work, which we appreciate.
Ms. Di Vito: Thank you; it has been our pleasure.
The Chair: We will suspend for two minutes, after which the committee will discuss future business.
(The committee continued in camera.)