When Walter Harris rose in the House of Commons on March 14, 1957, the Liberal finance minister could not have known that the budget speech he was about to read would be one of the last gasps of the Louis St. Laurent government.
The Liberals would be swept aside within months by John Diefenbaker and the Conservatives, but a program introduced in that budget, the registered retirement savings plan or RRSP, would live on.
In his speech, Harris pointed out that employees who were fortunate enough to work for companies that contributed to pension plans didn’t have to pay tax on those contributions until they were withdrawn after retirement.
“It is now proposed to introduce a general policy of allowing tax postponement on limited amounts of earned income set aside for retirement by any taxpayer, whether an employee or not,” he declared.
He later added he was worried about the effect RRSPs would have on tax revenues, predicting widespread use could cost the government as much as $40 million per year.
He needn’t have worried. Records are unclear for 1957, but the Canada Revenue Agency says taxpayers deducted only $19 million for RRSP contributions in 1958, versus $259 million deducted through company pension plans.
But RRSPs have grown in the 60 years since their introduction.
Statistics Canada reported just under six million people or about 23 per cent of tax filers contributed a total of some $38.6 billion to RRSPs in 2014.
“When it was first introduced, from 1957 up to 1968, it was very, very restrictive,” said Curtis Davis, director of tax and estate planning at Mackenzie Investments in Toronto.
“It was the responsibility of the taxpayer to track their own limit and make contributions. And if you didn’t use it, you lost it. There was no carry-forward at that time.”
Canadian workers were allowed initially to contribute up to 10 per cent of the previous year’s income to a maximum of $2,500, with that limit reduced by contributions made through an employer pension plan. The 2017 limit is 18 per cent of the previous year’s income to a maximum of about $26,000.
People were allowed to carry forward seven years worth of unused RRSP room starting in 1990. All carry-forward limits were removed in 1996.
RRSPs were part of a post-war wave of initiatives designed to build the Canadian social safety net, says Elizabeth Shilton, a senior fellow at the Centre for Law in the Contemporary Workplace at Queen’s University in Kingston, Ont., who has written about the history of Canadian pension plans.
“There was a lot of international pressure post-war for developed countries to build their welfare states … so (RRSPs) would have been viewed as a privatized form or a minimally interventionist form of providing that safety net,” said Stilton.
“Tax incentives rather than public pensions at that point.”
Old Age Security was introduced in 1952 and the Canada Pension Plan and Quebec Pension Plan came into being in 1966.
Stilton said that while a majority of people did not have access to employer pension plans, RRSPs took a long time to catch on and, while contributions have increased over the years, “it’s never been a huge success.”
“Programs that are built on tax deductions as an incentive, like the RRSP, are only of value to people who pay taxes, and they are of more value to people who pay taxes at a higher rate,” she said.
Davis said RRSPs now compete with the tax-free savings account or TFSA introduced in 2009, which is attractive to investors because it is a much more flexible way to grow investments.