As of last week, things were looking much brighter for Canadians seeking financial independence. After all, when the new federal budget was released, near-retirees and entrepreneurs across the country won what I call the “findependence trifecta.”
The lowering of mandatory withdrawals from Registered Retirement Income Funds (RRIFs) will go a long way to alleviating seniors’ fear of outliving their money. And young would-be entrepreneurs and older corporate refugees aiming to create “encore careers” should welcome the cuts to tax rates for small business.
But most welcome of all was the near-doubling of annual Tax-free Savings Account contribution room from $5,500 to $10,000. That helps everyone from young people saving for a first home or car to affluent elders who have maxed out on RRSP room.
Even better: You don’t have to wait to take advantage of the new rules. At press time the Canada Revenue Agency had just given the go-ahead to top up your TFSA by the extra $4,500 specified in the budget. So if you thought you had already maxed out 2015’s $5,500 contribution earlier this year, you can now go ahead and throw an extra $4,500 in your TFSA to take you up to the new limit.
Note that the new budget has not actually been passed yet, which led to a bit of initial confusion. When I first made inquiries at my friendly local financial institution (RBC Direct Investing) to see if I could make the extra $4,500 contribution, I was dissuaded from this course. Their customer service rep told me I could make the transaction online but it would be at my own risk until the proposal is formally enshrined in legislation later this summer.
Curious what other folks were doing, I immediately checked in with pensions expert Sheryl Smolkin of the Retirement Redux website. She said she and her husband had already made a $4,500 additional TFSA contribution, damn the torpedoes. I think that’s a smart move—both financially and politically.
Even though the election is still months away, it’s already clear that supersized TFSAs are shaping up to be a major issue for voters. The NDP appears bent on opposing the TFSA expansion and Liberal leader Justin Trudeau has vowed to reverse the legislation if he wins power.
Given that, I think we should all follow Sheryl’s lead and contribute the $4,500 now. Can you imagine the furor if the nearly 11 million Canadians who already have TFSAs go ahead and max out the new limit, only to be confronted with punitive retroactive penalties by the CRA after the Liberals reverse it? In that spirit, I contributed the extra $4,500 to my personal TFSA last week, and did the same for my wife.
Remember, after all, that the original name for TFSAs was “Tax-PREPAID” Savings Plans. The opposition parties don’t need to get voters riled up over the cash-strapped government being deprived of tax revenues for their wealth redistribution schemes. Ottawa gets its tax hit right up front with TFSAs, and will get a second whack as older investors transfer investments from taxable accounts to TFSAs. Then they get a third whack when the money is spent and consumption taxes kick in. Enough is enough!
Of course, even if you don’t fear CRA reprisals, coming up with $4,500 at tax time is another issue. If you’re getting a tax refund, that might be your TFSA contribution right there. If you have to pay additional tax, that’s another matter. But keep in mind you don’t have to fund TFSAs with brand new money. If you have non-registered investments you can “transfer them in kind” into your TFSA.
This may entail tax consequences for securities that have appreciated over time. Ironically, not crystallizing capital gains indefinitely has served as a sort of tax shelter of its own, but when you transfer securities into TFSAs (or indeed RRSPs) it’s deemed a disposition for tax purposes, and you’ll have to pay tax on any capital gains. Ideally, you find stocks close to their original purchase price, or find pairs of securities where losses in one offset gains in the other.
The CRA’s rules here are complex so you may want to double-check with a tax professional. A security with a gain will be viewed a “deemed disposition” as it’s transferred in, meaning you’ll be liable for capital gains tax. But the CRA won’t automatically credit a losing security transferred in as a loss so if you want to harvest the loss, you’ll need to sell it first, book the loss, then transfer-in-kind the resulting cash. If you want the same security in the TFSA, you’ll need to wait at least 30 days before repurchasing it in order to avoid the superficial loss rules, or buy a similar security (many ETFs serve an almost-identical asset class) or buy an entirely different new security.
The great thing is that although you’ll take a tax hit initially, in the future the transferred securities will generate dividend and interest income that’s totally tax-free for the rest of your life.
As hundreds of thousands of near-retirees and seniors start converting non-registered savings to fund these supersized TFSAs, that will be a fantastic source of revenue for Ottawa. Every time you trigger a capital gain to move securities from taxable accounts to TFSAs, the cash register will ring for federal coffers.
Justin Trudeau may claim “only the rich” have $10,000 lying around to fund TFSAs but seniors have much more than that in RRSPs, RRIFs and taxable accounts. They will move those funds into TFSAs just as soon as they are permitted to do so. So consider this the green light to make your extra $4,500 contribution today.