Where will your RRSP go today?

February 10, 2000

RRSP season is here again and the frenzied pitch of television ads is on. Looking south with envy at a US stock market that continues to boom, many commentators are calling for the elimination of restrictions on foreign investment that are "robbing" Canadians. Pre-budget rumblings from the Finance Minister suggest that he is listening.

The limits in question relate to the percentage of RRSP contributions that can be invested in foreign markets, not whether Canadians are prevented from investing overseas at all. The current limit for foreign assets in an RRSP is 20%, although investors routinely brag that they can get up to 36% through "double dipping"--by investing the remaining 80% in mutual funds that themselves are 20% foreign invested.

In truth, Canadians can already invest as much of their money in foreign markets as they wish. Canadians invested $144 billion in global bond and stock markets in 1998, most of which went to the U.S. This is a massive sum that dwarfs the total amount of RRSP contributions made by all taxpayers, which, in 1996 (the last year for which we have data) amounted to $26.2 billion.

Canadians are clearly not missing out on the boom if they want to participate. The issue is whether RRSPs should be a tax shelter for foreign investment. That is, should the tax system encourage and subsidize speculative plays in what has been called "the global casino" more than it already does? There is good reason to believe that this would be just another perk for the well-off, paid for by everyone else, that would serve to drain capital from Canada.

Those with higher incomes benefit disproportionately from the RRSP tax deduction. The 12% of Canadians with incomes greater than $50,000 a year in 1996 accounted for 54% of the total value of RRSP contributions. Those making over $100,000 a year made up 1.7% of the total tax filers in 1996, but accounted for 16.1% of total RRSP contributions. And for the super-rich--the 0.3% that made over $250,000 a year--RRSP contributions amounted to 2.8% of the total.

RRSP money is qualitatively different from plain old portfolio investment. As Canadians know very well, putting money into an RRSP is a useful tax deduction. This provides a big savings incentive for many Canadians by reducing current-year taxes payable. 70% of those earning more than $50,000 in 1996 took advantage of this deduction, and were able to defer $14.2 billion from taxable income. Those making more than $100,000 were able to defer $4.2 billion.

Altogether, the RRSP deduction represents billions of dollars a year in lost revenues to federal and provincial governments. The total value of RRSP contributions in 1996 was equivalent to 27% of the total income tax revenues collected, money that could provide badly-needed funds for health care, education or social assistance.

For this amount of money, it is only reasonable that the government ensure that RRSP funds stay in the country as a pool of capital to benefit the Canadian economy. Increasing or eliminating the foreign content limit would undermine one of the fundamental aims of having RRSPs in the first place.

In this age of global capital markets, providing carrots to keep capital in Canada should not be condemned. Quite the opposite: the government should seriously consider lowering the foreign asset limit from its current 20%, or at a minimum, eliminating double-dipping. Preferential tax treatment should represent a reward only for behaviour that has a spin-off benefit to Canada.

Raising or abolishing foreign asset limits for RRSPs, so that high-income earners can use their tax breaks to speculate abroad, would be irresponsible. In the wake of financial crises in Asia, Russia and Latin America, RRSP policy should not reward the same behaviour that has caused so much volatility in the world. If the wealthy want to speculate, they are free to do so, but they should not expect the government to subsidize it.