NCPA - National Center for Policy Analysis

Restrictions On Retirement Investments Hurt Canadians

May 20, 1999

The potential retirement income of Canadians who invest in tax- deferred registered retirement savings plans (RRSP) or registered pension plans (RPP) -- similar to 401(k) plans in the United States -- is being reduced by government restrictions, concludes a new report from the Fraser Institute.

In particular, the "Foreign Property Rule" restricts the amount of foreign assets held in such accounts to 20 percent of the book value of the portfolio. Foreign content that exceeds this 20 percent limit results in a one percent penalty tax.

  • Experts estimate that a person aged 35, earning C$40,000 a year with an average savings rate and average risk tolerance will lose C$30,460 in wealth due to this restriction.
  • With a higher level of risk tolerance and a higher savings rate this loss jumps up to $152,301.
  • The estimated losses range from $1,158 for someone starting to save late in life to $510,306 for someone starting earlier.

Experts also note that this rule limits diversification, which is important to reduce the overall risk of a portfolio.

Tax-deferred saving plans have become increasingly popular with Canadians. Approximately 77 percent of eligible Canadians, or about 8 million, use some form of private savings. The number of RRSP contributors has increased by over 253 percent between 1979 and 1996, representing an annual average increase of 7.7 percent -- while the number of tax filers increased at an annual average rate of only 2.2 percent.

The value of RRSP contributions has increased in real dollar terms by 8.6 percent per year on average. And in 1995, 82.1 percent of all RRSP contributors earned less than C$60,000 per year and represented 63.0 percent of the total value of all RRSP contributions.

Source: Jason Clemens, Fazil Milhar and Johanna L. Francis, "The 20 Percent Foreign Property Rule," Critical Issues Bulletin, May 1999, Fraser Institute, 4th Floor, 1770 Burrard Street, Vancouver, BC V6J 3G7, Canada, (604) 688-0221.


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