Currently, the design of income-tested benefits, principally the GIS, makes RRSPs an ineffective savings mechanism for lower-income Canadians. The net effect of this is that while several billions of dollars of federal tax subsidies are invested in the retirement savings of Canadians. At retirement those tax subsidies are largely confiscated from those seniors with an income low enough to be eligible for the GIS.

Those who face significant income-tested benefits at retirement are well advised to avoid savings in an RRSP. The main culprits, income-tested benefits which made retirement savings futile are as follows:

 

 

 

 

 

 

Once one accepts that the status quo is one where many Canadians are unknowingly saving in a fashion which is not wise, there are two remedies.

 

 

One option for policy change is to create a new savings vehicle which would work much like the RESPs. Contributions would not be deductible from income tax but withdrawals would be tax-free.

 

An alternative to TPSP style savings vehicles would be to protect investment income from taxation without creating a special fund.

 

The Clawback which makes RRSPs an ineffective savings vehicle, also makes CPP a compulsory savings which has many advantages (forced savings, disability insurance, portability) but an unwise investment purely from the perspective of return on investment.

 

Educating the consumer would appear to be the least attractive of these options. First, it is not easy to identify those who should avoid having an RRSP at retirement. As well, circumstances can change, so that, an individual who would not appear to be heading for GIS can all of a sudden become GIS destined. Education  requires that complicated information needs to be understood by consumers. There is little chance that this information will be fully understood by most of those who need this information.

GIS exclusion is the easiest and simplest mechanism to implement for consumers requiring little administrative changes.

 

 

 

An on-line financial calculator has been developed to guide consumer choices. Please note that the calculator can only be a guide as the research has demonstrated that the interaction of income tested benefits and the tax system has many variables and continuous changes to determinations which cannot be fully integrated in a financial calculator. The calculator can be found at: