The budget tabled by the Liberal government last week proposed an increase to capital gains taxes that has caused much consternation in the medical community.
On Tuesday, the Canadian Medical Association released a statement saying doctors “rely on their professional corporations as a means of saving for retirement since most do not have access to employer retirement plans.” The association urged the government to reconsider its proposed capital gains tax adjustment.
While medical corporations will indeed be subject to increased capital gains taxes, the complaint around retirement is a symptom of a different disease: Registered Retirement Savings Plan contribution limits are far too low.
First some background. RRSP contributions are capped at 18 per cent of income, up to an annual maximum. In 2023, the annual maximum was $171,000 of income, meaning a maximum contribution of $30,780.
While the income cap has been adjusted upwards with inflation, the percentage has not. It has remained at 18 per cent since 1991, nearly 33 years ago.
Needless to say, much has changed since then.
The RRSP limit was established to create an equivalency between saving for one’s own retirement and accruing benefits in a defined benefit pension plan. In 1991, the government estimated that you’d need to save 18 per cent per year over a 35-year career if you wanted retirement income equal to 70 per cent of working income.
This calculation was arguably flawed when it was first implemented. The think tank C.D. Howe Institute has said it understated even then the amount of saving required to achieve equivalency with a defined benefit pension.
Three decades later, it is now well out of sync with the needs of Canadians.
Getting back to our example of doctors: in general, doctors complete an undergraduate degree in three to five years, followed by four years of medical school and a residency program that takes two to five years. This schedule means doctors are generally into their 30s and perhaps 40s when they start earning potentially substantial income from their medical practices.
A desire to “catch up” on retirement savings after many lean student years is entirely reasonable. But many quickly hit the relatively low RRSP contribution limit and then quite reasonably turn to saving in a professional corporation.
Creating a professional corporation increases the complexity of a doctor’s financial life and comes with corporate, accountant and other fees.
Doctors — and all Canadians earning income from different sources — should not have to rely on financial structuring mechanics to secure a comfortable retirement. Not when the RRSP already exists to serve that purpose. The RRSP contribution limit just needs to be adjusted upward.
A higher RRSP limit could also help doctors and Canadians of all walks of life to save for other scenarios during their working years. The Canadian Medical Association noted, for example, that doctors do not receive parental benefits. If Canadians were able to save more within a RRSP during their working years, they could withdraw from it if they took a break during their career, for a parental leave or any other number of reasons.
In short, higher RRSP limits could provide a mechanism to smooth out income, not just between working and retirement years, but between regular and leaner working years. This smoothing would ensure that the tax a person pays better reflects a person’s average income over time and would avoid unduly penalizing individuals with lumpy income.
This idea is not new. For many years, the C.D. Howe Institute has been advocating for an increase in the RRSP contribution rate from 18 to 30 per cent. They most recently re-iterated this call in their 2024 shadow budget.
I would go one step further. The government should raise the cap on earnings from the current $171,000. An increased cap would have no effect on most people, but would benefit professionals such as doctors who defer income earning years at the start of their careers.
It is possible to reduce complexity, increase flexibility and provide for a better retirement system for all Canadians.
That is a disease worth treating.
Brilliant! After 40 years of maximizing RRSP contributions with spousal splitting, I was finally able to retire from family practice at age 72. We survive solely on RRIFs and CPP.
The idea of increasing RRSP limits is log overdue.