SUPPORTERS
Part 1
What the Marshall Savings Plan will achieve
Part 2
Policy Goals:
How the Marshall Plan, in its final form would work is a function of what policy purpose(s) it is intended to serve. In any of its various forms it will be a huge boon to the 75% of Canadians without pensions by placing them on a more equal footing with the 25% of Canadians with pensions.
It will also make it vastly more efficient for people to make contributions to a plan that has real benefits and efficiencies and will encourage people to become more responsible in providing for their retirement, and would likely go a long way to reducing the decline that we have witnessed in Canadians contributing to their RRSP each year.
The following are basic reccommended policy goals:
1) stop foreign and private entity takeovers by eliminating the artificial devaluation of trusts in the public market
2) move these trusts to an MSP: the distributions are now declared by the account holder each year and taken into income, the deferred taxes of yore (RRSP) become taxable (tax revenue) in the MSP payable to Revenue Canada.
3) Eliminate the discrimination that exists allows pension plans (including the govenment's own) to own trusts but denies this to individual Canadians, 75% of whom have no pension plan.
4) Capital gains inside of an MSP should be treated exactly like an RRSP
Implementation in Budget 2010:
The implementation of the Marshall Savings Plan is one of those rare decisions with no “trade-offs”, apart from perhaps the political inertia associated with not admitting to having made a mistake. However, creating a new plan provides the means to effect changes to the consequences of the governments actions, rather than explicitly recanting on the policy itself, thereby providing the essential element of “face saving” for the government in office. As such, adoption of the Marshall Plan becomes a simpler decision to make in light of the political realities of the day. Realities like protecting Canada’s tax base to deal with Canada’s present day budget deficit crisis, while at the same time preserving a form of profit sharing investment vehicle essential to the 75% of Canadians without pensions. This favorable outcome of pro-actively adopting the Marshall Savings Plan contrasted with the immense adverse outcome associated with the “do nothing” alternative and the moral hazard therein, creates the political dynamic whereby the Conservative government (to whom the Marshall Savings Plan was first submitted on January 15, 2010) of its own initiative will see the political benefit of incorporating this Plan in Budget 2010, and/or find themselves called upon to do so, by one or more of the three opposition parties, given the minority nature of today’s Canadian Parliament and the desire to achieve political advantage, and benefits for all Canadian taxpayers.
1) The Government’s 31.5% tax would still apply to income trusts in RRSPs (for face saving reasons only)
2) MSPs would not attract the 31.5% tax, since they are no deferred taxes arising from MSPs and therefore there is no tax leakage and therefore no policy jsutification for the 31.5% tax applying to income trusts inside MSPs.
3)Canadians would have 12 months to transfer income trusts from their RRSP to an MSP
4) The 38% of income trusts that are presently held in RRSPs and double taxed under the Government’s 31,5% tax is where the wheels fell off the car for the income trust market. The MSP has fixed these broken wheels. As such the entire market would regain its viability and vibrancy now that this huge “overhang” has been lifted. Without an MSP there is no way to get the 38% of trusts out of RRSPs/RIFs/LIFs without incurring huge capital gains.
Additional features of an MSP “extra":
The base Marshall Savings Plan will be revenue positive to the government by fully capturing the value of what was previously alleged to be tax leakage, as well as protecting the tax revenue that is at risk from the continued takeover of the remaining 169 income trusts, that is averted if the base Marshall Plan is implemented in Budget 2010. The amount of tax revenue that the Marshall Plan produces is $6 billion versus the “do nothing” alternative. Some of this found tax revenue should be used to extend the features of the Marshall Plan to make the Marshall Plan a larger policy vehicle than simply dealing with the income trust mess, but also create a true level playing field as between income trusts and common shares, in what is Canada’s single largest pool of investment capital in the country, namely the $600 billion in RRSPs.
It should come as no surprise to policy makers in Ottawa that Canadians at large made the decision to invest in income trusts in their RRSPs. This is because other types of investments, specifically common shares are ill suited to investment for an RRSP, for the simple fact that there is an adverse tax treatment of dividends and capital gains from a common share investment when held inside an RRSP. People at large, tend to do what the incentives and disincentives drive them to logically do. Owing common shares in an RRSP is a tax inefficient thing to do as the returns that take the form of dividends and capital gains get, unfairly transformed into income that is taxed as if it were interest income and taxable upon withdrawal at full rates of taxation. Income trusts, on the other hand, when held in an RRSP preserved their treatment as interest both entering and exiting an RRSP, and since these distributions are paid from a businesses pre tax earnings, there is a degree of tax incentive built in by Ottawa for Canadians to hold income trusts in their RRSPs.
The forced conversion of income trusts to corporations brought about by the governments income trust policy represents just the latest chapter of abuse that investors who took Stephen Harper at his word have experienced. They did what any trusting and rational person would do with their RRSP investments by owing income trusts. Prior to 2006 that was the optimal thing to do. Forcing conversion of trusts into dividend paying corporations will, come at a great cost to these income trust holders in terms of the absolute dividend rate paid versus the old trust distribution level, what that trading value of what that new security will be, BUT ALSO, these Canadians will be now holding an instrumentm namely common shares that is the LEAST optimal instrument to hold in an RRSP, through NO FAULT of their own.
For this reason alone, the Marshall Savings Plan should be designed in such a way that the dividend characteristics of dividends are preserved within an MSP in the way in which they are not preserved within an RRSP, as follows:
1) Having established a plan with the above noted attributes, which is nothing more than an RRSP that declares and pays taxes on all trust distribution received in a given year, it could also be made into a vehicle that makes the ownership of dividend paying common shares more efficient and therefore attractive. Dividends that are earned inside an RRSP lose their treatment as dividends when paid out. Now that the MSP declares taxes annually there is no reason why the MSP could not be made into a vehicle that preserves the dividend gross up tax treatment for dividends earned inside an MSP , on which taxes are remitted annually.
2) This would be a huge boon to the common share market as well as the income trust market and would create a true “level playing field” between these two competing models, however coming at it from the INVESTOR side of the equation, by making it attractive for the $600 billion in RRSPs (now MSPs) to be invested in common shares with dividends rather than simply income trusts.
3) The MSP could also provide a contained means to create fair treatment between those with pensions who are eligible for “pension income splitting for seniors” and those Canadians who are without “pension income” to split, by including annual dividends/distributions from MSPs as part of the definition of “pension income”.
