(November 25, 2004) The IDA is asking the federal government to reduce the capital gains tax rate for small businesses and to introduce modest personal income tax cuts for Canadians.

In its pre-budget submission, the brokerage industry association also calls for increased RRSP limits and the removal of proposed income trust restrictions for pension funds.

The IDA recommends that Ottawa lower the effective capital gains tax rate for investments in small companies (those with assets of $50 million or less) to 25% from 50%.

“Lower taxes on dividends will reduce the cost of capital for dividend-paying corporations and narrow the gap with U.S. rates,” said IDA president Joe Oliver in prepared remarks delivered today before the federal government’s standing committee on finance. “The lower rate will encourage reinvestment by existing shareholders and enhance market participation generally.”

The IDA is also suggesting that Ottawa cut personal income tax rates by 1% across the board and increase the threshold at which the top marginal rate begins, to $150,000 from $114,000. “These adjustments can be phased in over a four-year period so that the cost of the program remains within projected fiscal surpluses,” Oliver said.

Lower personal marginal tax rates would help small, knowledge-based companies to attract and retain highly-skilled professionals and make it more likely these companies will expand their operations in Canada, according to the IDA submission.

The IDA repeated its annual call for higher RRSP contribution limits, noting that even though Ottawa introduced a gradual increase in last year’s budget (topping out at $18,000 per year in 2006), that’s still well short of levels required to maintain adequate income support in retirement for many Canadians.

“We believe a more aggressive approach to raising limits is needed and recommend raising the RRSP contribution limit to $20,500 in the next budget, followed by annual increases until it reaches $27,000.”

On the contentious issue of limiting ownership of income trusts by pension funds, the IDA sides with most institutional investors, who have argued against imposing such restrictions.

“Restricting pension funds exposure to trusts will have adverse implications,” the IDA says. “Pension funds are generally sophisticated investors who can properly value securities and thereby bring added liquidity and discipline to the trust market.”

In a separate letter sent to federal finance minister Ralph Goodale last month, Oliver cites an IDA-commissioned study conducted by finance professor Paul Halpern of the University of Toronto’s Rotman School of Business.

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  • “Professor Halpern concludes that business income trusts are legitimate financial instruments that have a place in retail and institutional investors’ portfolios,” Oliver says in the letter to Goodale. “He [Halpern] argues that pension fund limits are ill advised — they will slow the growth of business trusts and will eliminate the benefits that institutional investors can bring to this market in terms of more efficient pricing and enhanced liquidity.”

    In the 2004 federal budget, Goodale proposed that a pension fund’s ownership of business trusts be limited to 1% of total assets and that a pension fund could not hold more than 5% of assets in any one trust.

    However, that proposal was quickly put on the back burner for further study in the wake of criticism from institutional investors.

    Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com

    (11/25/04)