Finance Minister Jim Flaherty has come to the rescue of the poor and disabled.

He has vowed to open doors at the Tax Court of Canada after a judge, a Toronto lawyer and a Toronto Starcolumnist decried a bizarre barrier that blocked those most in need.

The court is prevented from hearing from those who owe no taxes, but want to appeal for the right to have a Registered Disability Savings Plan and qualify for government grants.

“I just wanted you to know we are going to fix this, and it is as a result of your article,” Flaherty said Tuesday in a telephone interview.

He was referring to a story about Chief Justice Gerald Rip writing recently he regretted not being eligible to hear a Montreal man’s appeal for the right to an RDSP. The man was too poor to owe tax and benefit from the disability tax credit. So he had no right to appeal to the court.

The Tax Court of Canada is a preferred venue for appealing Canada Revenue Agency rulings involving federal taxes of less than $12,000 a year. A taxpayer, a friend or accountant may appear before the court, saving the cost of a lawyer.

“We created the RDSP, and it’s really important to me,” said Flaherty, who has a mentally challenged son and, like other politicians, had long heard parents of the disabled pleading for options to help prepare for their old age.

“The fact that someone has taxable income or not should not stand in the way of establishing their right to the disability tax credit (and RDSP),” he said.

Flaherty had also pledged action when appearing earlier Tuesday before the Finance Committee of the House of Commons. Liberal MP and accountant Massimo Pacetti had asked about the inability of his constituent Giovanni Tozzi to appeal to the tax court.

Tozzi owed no tax in 2008 when RDSPs first became available. He applied for the disability tax credit in 2009 with the support of his doctor. But his application was denied, and Justice Rip ruled he could not hear his appeal.

Flaherty said he expected he would have to propose a change to the Income Tax Act in his next budget in the spring to ensure the right of Tozzi and others to appeal to the court.

Pacetti said Vincent Biello, the friend who appeared for Tozzi in tax court, was glad to hear of Flaherty’s pledge, but he hoped any change would be made retroactive to help Tozzi. He said Biello declined to speak with the Toronto Star before consulting Tozzi.

Toronto lawyer David Sherman, who contacted federal officials and the newspaper after reading Justice Rip’s ruling, said he would urge Flaherty to broaden access to the tax court for other appeals. For example, he mentioned the right to appeal a CRA refusal to waive interest and penalties on taxes owed.

An RDSP allows Canadians to set aside money for individuals who are under the age 60 and eligible for the disability tax credit. Tax on investment income is deferred; the government may match contributions and provide outright grants, called bonds, if the family has a modest income.

The 2010 federal budget proposed to carry forward entitlement to grants and bonds for up to 10 years, and allow the registered retirement savings of a parent or grandparent to be rolled into an RDSP.

Flaherty was in Japan and unavailable to comment before the column about Tozzi’s case appeared in theToronto Star.

< http://www.moneyville.ca/article/895760–flaherty-pledges-to-open-tax-court-to-disabled >

Ontario’s idea of a modest increase in Canada Pension Plan benefits would help solve the Samaritan’s Dilemma.

It would lift workers on the road to retirement, without encouraging as many to depend on taxpayer handouts over the next half-century.

“We must build on the strengths of the CPP through a modest expansion of benefits,” Ontario Finance Minister Dwight Duncan writes in the introduction to a consultation paper on the retirement income system he released last week.

“The CPP is secure, efficient, portable and fiscally sustainable but there will be increasing pressure on it as the population ages.”

He and federal Finance Minister Jim Flaherty did not specify what they meant by modest when they each proposed such an expansion of the CPP at a meeting on Prince Edward Island in June.

But now, in advance of the next meeting of finance ministers Dec. 20, Duncan has outlined three possible variations of an enhanced CPP. None proposes to increase the percentage of average earnings replaced in retirement to more than 35 per cent.

The most ambitious of the three proposals would also increase the cap on the income subject to CPP contributions to about $70,800, or 1.5 times higher than the limit of $47,200 for 2010.

Calculations of CPP pensions are strangely complicated, however. The benefit is based on average career earnings, the maximum income contribution limit, the age of retirement, and the ability to exclude from the calculation of average earnings a certain number of years between age 18 and 65.

So, without explanation, the paper suggests that raising both the income cap and the percentage replacement rate could result in an effective income replacement rate of 38 per cent for a woman who earned an average of $47,200 a year, in 2010 dollars. This would seem to imply a maximum pension for the woman in the example of $18,000 instead of about $11,200 in 2010.

It would seem the maximum pension for someone with a much higher income would be about $22,000.

Duncan invites Ontario residents to respond to the proposal by answering a number of questions, such as: “Do you prefer an increase to the replacement rate, an increase in the earnings ceiling, or both?

But a lot is left unstated in the paper. For example, economist Jonathan Kesselman at Simon Fraser University in British Columbia, writes in another paper arguing for an expansion of the CPP that 35 per cent replacement is a critical threshold.

“If the CPP benefit rate were increased from its current 25 per cent of average insured earnings to even as little as 35 per cent, the Samaritan’s Dilemma would be eliminated,” he writes in his paper http://webcache.googleusercontent.com/search?q=cache:j_VvaPUXNeUJ:policyschool.ucalgary.ca/files/publicpolicy/Kesselman%2520CPP%2520online.pdf+kesselman+Big+CPP&cd=10&hl=en&ct=clnk&gl=caExpanding Canada Pension Plan Retirement Benefits: Assessing Big CPP Proposals.

END

He points out that requiring workers and their employers to contribute more to CPP would make for fewer low-income workers, and workers with income not so low, qualifying for the tax-free Guaranteed Income Supplement (GIS) to the Old Age Pension.

Both of these pensions are a significant cost item in the federal budget, and the cost is projected to soar as the Baby Boom generation starts to pass the age of 65.

GIS benefits are phased out as income, excluding Old Age Security, increases. But the federal government has opened itself up to paying benefits to higher income earners through the implementation of Tax-Free Savings Accounts.

Withdrawals from TFSAs are not taxable, and will not reduce eligibility for GIS.

So this reality may help to explain why Flaherty joined Duncan in trying to persuade other provinces to throw their support behind an expanded CPP.

There would likely be more support for an expanded CPP if today’s young workers could see some tax savings sooner. But like CPP pensions, potential tax savings will only grow gradually over the next few decades.

< http://www.thestar.com/business/personalfinance/article/888881–daw-tax-savings-on-bigger-cpp-far-off >

A gap in recent legislation appears to have turned the people’s court for unhappy taxpayers into a court without access to the poor and disabled.

“It’s not right,” says lawyer David Sherman, editor of the Practitioner’s Income Tax Act, echoing the sentiments Tax Court of Canada judge Gerald Rip expresses in a new ruling.

“Nobody intended this to happen,” Sherman suspects.

As soon as the court released Rip’s ruling this week, he dashed off a note to a senior tax policy official. Then we conveyed his concerns to an aide to Finance Minister Jim Flaherty.

We suspect the issue would be near and dear to Flaherty’s heart, but he and his aide were unavailable Friday afternoon. They were on the other side of the world for meetings.

It relates to the Registered Disability Savings Plan, the new tax-deferred savings plan he introduced so that family and friends may contribute to protect a disabled person in retirement.

“Annette (Robertson) and the minister are at Asia-Pacific Economic Co-operation in Japan, and likely both asleep,” said Chisholm Pothier, Flaherty’s director of communications. “So getting input from the minister on this (before your deadline) is likely impossible.”

For a person to be eligible to make or receive contributions to an RDSP, that person must be sufficiently disabled to qualify in the tax year for a disability tax credit. That requires the support of a doctor, and the agreement of the Canada Revenue Agency.

Doctors and the CRA have turned away folks who qualify for Canada Pension Plan disability pensions. But courts have overruled the CRA’s tough stance in several published case.

Giovanni Tozzi of Montreal tried to bring his appeal before the Tax Court of Canada. But Judge Rip ruled with regret he is powerless to interfere in a situation where the taxpayer is assessed as owing no taxes.

Tozzi owed no tax in 2008 when RDSPs became available. He applied in early 2009 for the disability tax credit, before the tax filing deadline. But his application was denied by CRA.

Rip does not provide details of Tozzi’s situation in his ruling. But, as Sherman notes, it would be common for someone with a low income, someone receiving tax-free welfare benefits and someone receiving a tax-free disability income to have no tax payable, or what’s called a nil assessment.

Tozzi was represented by an agent named Vincent Biello, not a lawyer. The Tax Court of Canada is quite informal. You may write a letter to ask to be heard, and have a friend or accountant represent you.

“Mr. Tozzi’s agent, Mr. Biello, who very well represented Mr. Tozzi, also argued that the inability to appeal from a nil assessment ought not to apply to appeals from assessments. . . where the issue relates to eligibility for RDSPs,” Rip wrote.

It would seems that no one thought of that ahead of Flaherty introducing RDSPs, effectively erecting a barrier or removing elevators to block the poor from the Tax Court of Canada.

“This Court unfortunately has no lawful jurisdiction to order the Minister (of Revenue) to recognize Mr. Tozzi’s disability, if the Court should find he is disabled, for purposes of the disability savings plan,” Rip wrote.

Tozzi, and any other low-income person denied the disability tax credit, could only get around this gap in the law by hiring a lawyer and appealing to the much more formal, and complicated, Federal Court of Canada.

“It is simply not right for the Crown (the government) to act behind a nil assessment to prevent Mr. Tozzi from applying for a disability savings plan,” Rip writes.

Sherman agrees, and so do we.

Perhaps a lawyer will step forward to take Tozzi’s case at no charge. Perhaps Flaherty, a lawyer, will commit to correct things when he returns.

< http://www.thestar.com/business/personalfinance/article/886750–daw-law-blocks-disabled-from-people-s-tax-court >

The federal government and Canada’s largest province are calling for changes to the national pension plan to address what some call a crisis in the country’s retirement income system.

In advance of what could be a historic meeting next Monday in Prince Edward Island of federal and provincial finance ministers, Ottawa and Ontario signaled Thursday they will attempt to persuade their colleagues to adopt significant changes to the Canada Pension Plan.

“I believe that we should consider a modest, phased-in and fully funded enhancement to defined benefits under the Canada Pension Plan in order to increase savings adequacy in the future,” federal Finance Minister James Flaherty says in a letter to Ontario’s Finance Minister Dwight Duncan Thursday.

The Flaherty letter was released late in the day after Duncan made public a letter he had earlier sent to his provincial and federal counterparts calling for similar enhancements to the CPP.

The actions represent the most important development in more than a year of discussions and high-level study of pensions.

The search for solutions was touched off by widespread recognition that nearly a third of all Canadian families lack any pension savings, but until now, it appeared that Ottawa and the provinces were content to put the issue on the back burner until the economy recovered fully.

Flaherty had previously taken a hands-off approach to the CPP.

Ontario is calling for an increase in Canada Pension Benefits, plus new private-sector pension options, to deal with a looming shortfall in retirement income.

“We believe there is an opportunity to improve Canada Pension, modestly, working together,” Dunc an said in a telephone interview. “We have not landed on price numbers at this point, but we think that is the natural vehicle for delivering enhanced public pension.”

Any change to the CPP and the Quebec Pension Plan would require support of a two-thirds of the provinces and two-thirds of the population.

Duncan said it would be better to raise CPP contributions and benefits gradually than start one or more supplementary pension plans, as a panel of experts proposed earlier to British Columbia and Alberta.

The Canadian Labour Congress, representing unions with about 3 million members, has been calling for a doubling of CPP benefits for nearly three decades.

But the Canadian Federation of Independent Business said Thursday that 71 per cent of its members are opposed to the CLC proposal, predicting it would be “a major job killer.”

“Economists worldwide recognize that payroll taxes are a drag on job growth and economic development,” said CFIB president Catherine Swift.

The average CPP benefit is now only about $6,000, and the maximum only about $11,000, to be adjusted each year in line with rising prices. Employers and employees contribute a total of 9.9 per cent of pay, on earnings between $3,500 and $47,200 a year.

Duncan said the CLC is looking for too much to double benefits, but Ontario would support modest increases in benefits and contributions, phased in gradually.

“There is a clear advantage of a pan-Canadian response,” he said in an interview. “The system works well. It has served us well. All of the framework is in place. It is extremely well managed.”

Any increase in benefits would be paid from contributions and investment returns over a person’s working career, unlike the existing CPP that now pays benefits from contributions made the same year. The existing reserve fund managed by the Canada Pension Plan Investment Board will be used to defray a portion of costs as the baby boom retires.

Duncan said Ontario also favours giving new options for companies and individuals to join large-scale private pension plans that would provide a more cost-efficient way to save more for retirement than individual savings plans.

He did not signal Ontario’s views on how to secure benefits of existing company pension plans, such as with an insurance plan or preferred standing in a bankruptcy.

The province is still calculating the cost and potential consequences of raising employer contributions to put its Pension Benefits Guarantee Fund on a sound footing.

Flaherty also said he favours doing more to encourage retirement savings by individuals, including changing current rules to help self-employed Canadians put aside more money for retirement. He said he would also like to see innovations to allow banks and insurance companies to off better pension arrangements for employers and employees.

But even if these changes are brought in, Flaherty says he is “concerned that some Canadians may not save enough for their retirement.” That’s why he would like to see an expansion of the CPP, Flaherty wrote to Duncan.

Keith Ambachtsheer, director of the Rotman International Centre for Pension Management, said in an earlier interview it would be a major step forward for finance ministers to agree something needs to be done for young workers without a pension plan.

A report commissioned by the federal government concluded Canadians are not headed for a major income shortfall in retirement, but critics have argued the report used unrealistic assumptions and did not deal with the impact of current economic trends and the decline in pension plan membership.

Economists at TD Bank Financial Group warned Thursday that more middle-income workers will see their living standards drop in retirement as time goes by.

They predict workers born in the 1980s will have more difficulty getting a pension plan than those born in the 1940s due to a combination of factors.

Economic growth is likely to be slower, interest rates lower, while annual increases in the value of homes and stock prices could be modest.

Meanwhile, the young generation is graduating with more student debt, saving less than their parents and grandparents, taking on more debt. Fewer will have a company pension plan.

So the economists estimate 25 per cent of the middle band of wage earners born in the 1980s will see their standard of living decline if they have no pension plan, compared with 15 per cent for those born in 1940s.

A much higher percentage of the upper 40 per cent of income earners will see a decline of living standards, and a much lower percentage of the bottom 40 per cent of income earners thanks to government pensions.

The economists defined a decline in income standards as having less than 70 per cent of pre-retirement earnings, the level of income a good pension plans aim to provide after 35 years of service. They made their estimates using a Statistics Canada computer model and database called LifePaths.

< http://www.thestar.com/business/article/822075–ottawa-and-ontario-call-for-higher-cpp-benefits >

Jim Flaherty has stated the first principle for any national initiative to help Canadians increase their retirement income should be: Do no harm.

Harm could mean different things to voters of different ages and incomes, to sellers of mutual funds and annuities and to folks with and without pension plans.

So we asked for an explanation from the 60-year-old federal finance minister from Whitby, who has been in a pension plan for only four years. (Earlier in life he helped shut down the pension plan for representatives to the Ontario legislature, and worked as a lawyer before that.)

“Some of the proposals … sound good on paper but what they would involve, for example, (is) a major generational shift of risk,” he said during a brief session with reporters last week.

“We would have younger workers paying a lot more for benefits that they would not see for 35 and 40 years but others would see them sooner.

“I think we have to be conscious that we don’t put a burden onto (young workers) that benefits those of us who are older. That’s important.

“I want (younger workers) to have confidence in the system. I also want the system to be there for them when they’re older.

Flaherty’s concern about further burdening young workers is fully justified. It is mainly from their pockets that the baby boomers like him will receive up to $19,776 a year worth of government pensions from age 65 ($34,218 for couples), according to research by Keith Ambachtsheer, director of the Rotman International Centre for Pension Management.

The maximum figure for the single senior with no other savings (about $3,000 more than the average single senior) is paid from government pension plans for which next to nothing has been set aside in advance.

At the moment the reserve fund of the Canada Pension Plan amounts to roughly $7,000 per pensioner and worker. There is nothing held in reserve to pay Old Age Security or Guaranteed Income Supplement.

So the younger generation will hand to the older generation the equivalent of a one-time transfer of nearly $300,000, which is about how much money a person would need to guarantee $20,000 of inflation-protected income from age 65 by buying a life annuity.

While those younger workers are paying for seniors’ pensions, many seniors will be counting on them to pay top dollar for their homes, pay their medical expenses, and pay higher taxes on the same amount of annual income.

Those younger workers might also wish to raise children, and save something extra for their own retirement because government pensions do not afford much of a lifestyle.

As modest as government pensions may seem today, they will see even less impressive 40 years from now. Old Age Security now only rises with consumer prices, not with wages the way CPP benefits do up to the point of first pension payment.

A self-employed person earning $47,200 a year will contribute $4,326.30 this year to CPP, minus about 20 per cent after a tax credit.

To also save the equivalent of $300,000 in today’s dollars, he or she would have to set aside an extra $4,844 a year between ages 30 and 65.

That assumes the self-employed worker could earn an average investment return 3 percentage points higher than annual increase in consumer prices.

The worker save in a registered retirement savings plan and get a 31 per cent tax refund, or contribute that much less to a tax-free savings account.

But, as one economist pointed out at a pension conference last week, having too many contribute to the TFSA could raise claims for the Guaranteed Income Supplement.

If the economist was right, future generations could be harmed by the increased cost of GIS payments if workers are not offered a new pension plan to boost their income in retirement.

jdaw@thestar.ca

< http://www.thestar.com/business/personalfinance/article/807491–flaherty-right-to-worry-about-burden-on-young-workers >.