Its generally accepted that persons in the lower tax brackets are better off contributing to TFSAs instead of RRSPs. But couldall tax brackets be better off avoiding RRSPs? Ive lately come across comments in discussion forums, blogsetc. thatsuggest as much.
RRSPs should be avoided by everybody, the comments say, because taxes seem to always go up – soby the time one gets to retirement, their tax rate will be higher than the rate at which they made RRSP contributions. Heres a sampling of the comments, from 3 different persons:
1. I wouldn’t sock away thousands a year in RRSPs like some people are doing…you save some income tax now, but when you retire, and start using your contributions, you will be paying more in income tax (I’ve never heard of the government lowering their taxes).
2. RRSPs are a form of gambling. You roll the dice that your tax rate in retirement will be lower than when youre working…. But how can income taxes in Canada possibly stay at current levels, now that our national debt has erupted and the deficit made structural?
3. If taxes are going to go higher and higher over the next 10-20 years, then why should we put money in an RRSP just so that it will be taxed under those higher rates when we convert to a RRIF? Wouldnt we be better off paying todays taxes and investing outside the RSP?
Could their fears be substantiated by future events? After all, the pattern over previous decades has been for tax burdens to rise.
According to the Fraser Institutes Canadian Consumer Tax Index, the total average tax bill of the Canadian family has climbed from 33.5 per cent of income in 1961 to 41.7% in 2009 (if the large deficits in government finances during 2009 are assumed to represent deferred taxes, then the tax burden in 2009 is closer to 44% of income).
As the capacity for raising taxes on employment income nears exhaustion, new sources of tax revenue could be targeted, notably the billions of dollars held in RRSPs (which many think are the savings of the well-to-do). It might be assumed the voting power of retirees would render retirements benefits sacred cows no politician would dare touch — but it has been contemplated before.
In the early 1990s when Canada was dealing with a fiscal crisis, the federal government considered a number of measures to bring its budget deficit and debt under control. Two trial balloons floated involved imposing a capital tax on RRSPs and a capital levy on institutions administering RRSPs, as Hansard shows(search on trial balloon).