Harper’s flawed $10,000 TFSA promise

Increasing the TFSA limit to $10,000 would be a boon for the wealthy but likely unsustainable

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From the December 2014 issue of the magazine.

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(Illustration by Sebastien Thibault)

(Illustration by Sebastien Thibault)

It’s now a foregone conclusion that Prime Minister Stephen Harper will increase the annual contribution limit of the Tax-Free Savings Account (TFSA) next spring when the Tories balance the budget, likely boosting it to $10,000. It’s a political move—engineered to bolster his re-election bid—and at first glance it’s great news for wealthy Canadians looking to tax shelter more of their investment earnings. But some tax experts are worried that it’s too good—that the government is giving up so much revenue, the tax break might not be sustainable over the long haul.

University of Calgary School of Public Policy director Jack Mintz says there’s no doubt that increasing TFSA contribution limits will allow Canadians to shelter more dividends, interest and capital appreciation from taxes. “It’s a positive step towards encouraging people to save,” he says.

$108B

What the Canadian government projects OAS will cost taxpayers in 2030

But Malcolm Hamilton, a senior fellow at the C. D. Howe Institute, says raising the TFSA limit is a short-sighted election tactic that will lead to real problems 10 to 15 years from now, when the entire baby-boom generation will be collecting Old Age Security. By allowing people to shelter more investment earnings from tax, future governments will have less money to pay for national programs—such as drug plans, OAS, GST rebates, and long-term care. “If you have a surplus one year, you do a one-year spend,” says Hamilton. “You don’t make a change that could have a 20-year detrimental impact.”

Mintz agrees that less tax dollars in the future could be a problem, but suggests the short-fall could be made up by increasing the GST or by introducing other types of expenditure taxes and levies. “The more people are able to accumulate their own money for retirement, the less dependent they’ll be on government programs,” he notes.

Hamilton believes a more sustainable way to encourage Canadians to save would be to increase RRSP contribution limits. According to a 2010 policy paper from the C. D. Howe Institute, anyone who earned $50,000 or more would benefit from this increase, while increases to TFSA limits will benefit a much smaller percentage of Canadian savers.
 

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29 comments on “Harper’s flawed $10,000 TFSA promise

  1. What nobody is talking about is that if we don’t have somewhere to shelter or reduce some of our money from income taxes, currently, TFSA’s are the fairest for all Canadians so far because you don’t have to invest in Canadian shares and stocks, equities, to save income taxes, benefiting from the dividend tax credit and other income tax favored investments like REIT’s, common shares, preferred shares etc. then we will have no money left over.

    If you think that we are not going to see 16% to 18% H.S.T or G.S.T, higher gasoline taxes, newer taxes like carbon taxes, environmental taxes, health taxes, pension taxes and other increases in land transfer taxes, tobacco taxes, liquor taxes, surtaxes, infrastructure taxes on property taxes or sales taxes, newer levies and taxes on transactions like auto and home insurance, real estate commissions, lawyer fees etc. and who knows what else they can slap on us then you are sorrily mistaken.

    RRSP contributions is raised may look good in the short to medium term but when they start raising income taxes, we may see a 55% to 60% to those with large RRSP”s and a 37% to 43% for the moderate to middle class.

    Who are we kidding, TFSA’s are the only thing helping savers, investors with earning 3% to 4% at most from a low interest and dividend yield world we are in today stuck for 5 years now.

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  2. I creasing the tfsa to 10k is a good idea. It allows ordinary Canadians an opportunity to
    save tax free. It just isn’t for the rich because each individuals financial picture changes
    as time goes on. A lot more people should and will have the opportunity to take advantage
    of these accounts to save for their future.

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    • Rfpilfold, I agree with you completely and like the other person that commented in the first post above, they can always increase other taxes and as long as history shows us in all societies and governments, some more than others, where there is a will, there is a way. They will raise taxes and there are so many taxes they can increase and add new ones too.

      TFSA’s to $10,000 annually per adult person is really the most equal and fair tax free sheltering plan that ever will exist in Canada. Let us just hope that others that disagree don’t get rid of it. Money in our hands, the taxpayer, consumer, investor, depositor etc. is a benefit to the whole economy and society.

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    • It’s laughable that you use the term “ordinary Canadians”. Nothing can be further from the truth. Raising the limit is a sop to the wealthy and as far as I am concerned, at the very least, a life time cap of $100,000 should be introduced.

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      • Even if they keep the TFSA at $5500 + inflation, there should not be a limit of $100k. $100000, are you kidding? That’s a joke. “Ordinary” Canadians with family incomes of $70-80k have to make choices. No debt, renting and investing in financial assets is a totally viable one. The average slob can work a $40000 job and invest $5000 a year into their future and should be able to do it for over 30 years. A $100000 cap only helps anyone with moderate financial discipline who works for only 20 years (20x$5k) and dies 10 years later, taking out $22k/year tax free until death. Since we’ll be working a lot longer than that and don’t die so quick any more, a (much) larger cap or simply larger tax-free contribution limit makes sense. Last time I checked, the cost of health care (or taxes) isn’t going up anytime soon.

        If the contribution limit is raised, hey, I’ll happily take advantage of paying my moderate income taxes now, dumping the rest into TFSA and 3 kids’ RESPs while I’m young and stupid rather than paying ridiculously high income taxes later (if I chose a tax-deferred RRSP) when I’m old and grumpy. There are other ways to “tax the rich” if that’s what you want without harming the shrinking “middle class”.

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  3. I agree with all of the other posters – the TFSA is the absolute best thing that has ever happened to Canadians who want to take control of their own retirement savings. There are too many situations when an RRSP just isn’t right for people, who end up drawing out in a higher tax bracket as an RRIF than the tax bracket they were in when contributing throughout their life. I wish there was better understanding among everyone in this country about the benefits to using your TFSA as a very long term investing vehicle for retirement. So many people see it mostly as an emergency savings fund, or use it to save for short to medium term goals (which can also be good), but nothing compared to tax-free compound growth over 40 years+. This is evident in the percentage of people who just have the money in their TFSA in a savings account. A better picture of the unbelievable value of this investing account might help drive the political support to make this higher contribution limit happen no matter what the consequences would have to be later.

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  4. My own experience doesn’t jibe with the 2010 policy paper from the C.D. Howe Institute. In 2008 as the market was tanking, I would have been required to withdraw a large chunk of my RRIF in 2009, which would have been taxable at full marginal rate, and leaving the RRIF with no hope of any decent subsequent recovery. I converted the RRIF to a Registered Annuity, and very glad I did.
    I believe the TFSA is a much better retirement savings vehicle than an RRSP for an individual of any age.
    Nobody every seems to mention that the US has had something similar to our TFSA since 1997 – they call it a Roth IRA.

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    • ROTH IRA is very similar, except you pay taxes on it TODAY! and then in the future it’s tax free.

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  5. Personally, I’d be a LOT happier with a larger annual TFSA limit than a larger RRSP.

    Why? Well, right now I’m employed and I make way more money than I’ll earn when I’m retired. So it’s easyer to pay the income tax now vs paying income tax when I’m retired and I’d be a lot more careful with the spending.

    As far as government loosing big on money? Umm, are you MoneySense guys sure about that? $1,000 in RRSP means I don’t pay tax on it and I also don’t pay tax on interest/income gains until I retire, $1,000 in TFSA means I don’t pay tax on interest/income gains, but I do pay tax on the principal of $1,000. So how is government loosing money? Seems to me that they get a better with the TFSA.

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    • Dani, you obviously have little understanding of the loss in tax revenues for the government, both federal and provincial. AS the article made clear, this TFSA will get out of control. The brakes should be put on it. I am not saying to eliminate it, just put a lifetime limit off $100,000 room. I believe it is at a limit of $31,000.

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      • Canuckguy, what if you deicded you need $50,000/year when you retire, and with your RRSP’s you will have that amount when you retire. Except one problem, the government when you retire raises the tax rate to 65% because of the baby boomers draining the health care system as well as OAS and CPP. You’re $50,000 is now worth a lot less and your now left with hard choices.

        A limit of 100,000 doesn’t make any sense. If Canadians are smart enough to use TFSA’s instead of RRSP’s why should they be punished by some arbitrary number.

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    • Dani, you are also the perfect example of someone who should be putting all or a significant amount of your long term savings in an RSP before a TFSA based on the limited info you’ve mentioned

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      • There is nothing wrong with putting savings into both TFSA and RRSPs

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        • I agree. Use of both TFSA and RRSP in whatever limits offered is and was the foundation of my retirement plan. Pension income splitting has given us the opportunity to balance our retirement income as a couple, topping up with equal RRSP withdrawals to minimize the tax hit. RRSP’s come out and slip in to max out our TSFA. Plan is to drain the RRSP’s before CPP and OAS kick in. Raising the annual contribution limit on TFSA will be another perk that will certainly be welcome in our situation.
          Not happy with the mileage it might get Harper in the next election, but I don’t vote for him anyhow so that’s a moot point.
          I have always wondered how long it might take for the government to see how much this will cost them in revenue down the road. Not a lot of forward thinkers in the political realm.

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    • Dani,

      If you are in a much higher tax bracket now compared to when you retire, the RRSP is most definitely the way to go over the TFSA. Deposit money into the RRSP but when you get your tax rebate, put that into the RRSP as well. When you go to retire, the money you put in PLUS the tax rebate both grew at the same rate. However you will owe less tax as you say you will be making less money. Hence the rebate that you put in will more than cover any tax you owe and you get to keep a bit more of it.

      With the TFSA, if you put money in, you are paying tax at your higher bracket and having it tax free at a lower bracket. That’s a worst-case scenario. With the RRSP, you are deferring your tax payment until later and you will be moving from a high bracket to a low one.

      Shawn

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  6. Thanks Harber for your initiative “Great news for the rich and disappointment for the poor”, so this will not make gain more population to elect you…

    The majority of Canadian don’t saving money from their salaries after the all the Tax Deduction already rooftop. Only the rich people will benefit from your scum idea and again you forgot about the poor families with kids.

    One advice, if you want to be fair to all Canadian increase the basic deduction instead…

    Rich people as politician don’t know how the poor are living……This is Canada is too bad….

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  7. I like the idea of raising the TFSA but think it should be done incremenally over a say a 5 year period The increase to $10000. only helps the well off to avoid taxes I for one have been selling enough of my non-reg stocks where I have a large capital gain or ACB [paying appropriate taxes now] to avoid future taxes down the road when i might need some extra income When you take out money from a RRSP/RRIF it is added to your income & becomes taxable [except the pension deduction] & could put you in a higher tax bracket It is extremely important to how how all these saving plan work

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  8. Raising the TFSA is a very good idea for Canadians to save and especially projecting for future and retired people. For people collecting on a RIFF it is certainly beneficial especially for the people that are forced to keep taking out much of their savings as it progresses to 20%. I believe that the scheduled factor for minimum withdraws are too high. Eventually any money in a RIFF will be taxed. Our taxes are too high anyway.

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  9. It’s amazing who the people are calling for TFSA’s to end. Basically greedy public bureacrats who have their pensions indexed and in tax havens in Luxemburg. Watch some upcoming Passionate eye reports. Canadians are taxed to death stay away from our retirement jerks!!!

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  10. RRSP’s??? they are disgusting and force older people to take out their savings from Banks when they get in their 70’s. Its like you are forcing them to die. RRSP’s were created by merciless tax men for government not the people.

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  11. Hard working Canadians deserve it!!!! PERIOD.

    I will be happy with $10k limit per year or even more.

    I shouldn’t be penalized making money and saving it for rainy day, buying a house, etc…

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  12. They will cap it, we can speculate how much but you can be assured this will get capped, my guess is a $100K maximum.

    You really think in 20 years people will be hitting a million dollar account balances – wealthy people – potentially earning $50 – 100K annually and paying no taxes in a society while some 18 year old girl working at Timmy’s for minimum wage pays taxes and is forced into poor value programs like EI and CPP?

    You are delusional.

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  13. I am single (no spouse) and have one adult child. I have RRSPs and I have maxed out the TFSAs. If I should decease tomorrow, my RRSP could not be rolled over (tax free) to anyone other than a spouse and as I don’t have one, it would treated as if I had cashed all RRSPs, resulting in a tax to the estate of I heard 40% or so. Whereas the TFSA would go to my beneficiary and not be taxed in this way. If this is correct, the ‘non-spouse’ beneficiaries of single parents are basically penalized. So for that reason my money goes to TFSA, not RRSPs.

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  14. Increasing the TFSA wont mean much if the Conservatives don’t get re-elected. The increase in TFSA wont take place until 2016. Guaranteed to be killed by any other political party.

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  15. At 81, I am very pleased with the TFSA, so I can get my money out of government control. My RRIF annual payment is fully taxed before I see it & I therefore get less, & pay more taxes. My net income is about $24,000. per year, so I am not “among the wealthy” & when my RRIF is gone I will have more income, less tax. To me the TFSA is a great asset for everyone. I am praying that the contribution amount will increase to $10,000. per year. I have worked hard to make my annual increase’s & have put in $31,000. which has grown to almost $37,000.
    If this had been around sooner, I would never have chosen a RRSP, because the resulting RRIF payments affect all other payments(OAS/GIS/ETC)if your gross pensions put you into a higher Tax bracket.

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  16. What nonsense this article calls it a boon for the wealthy. I am a teacher and consider myself middle class. However I can afford to save $10,000 a year for emergencies and retirement. I have stopped contributing to my RRSP and started to only contribute to my TFSA after the Calgary flood.

    Why did I make this change? Because after the flood I could not touch my RRSP without a huge tax penalty. Because my house was flooded the bank was extra careful in extending credit to me and I could not get any money for a month. Thanks to help from my father I was able to get a contracter started on my home as soon as it dried up but I just barely got the bank loan in time to keep the contractor working. Forget about insurance they only offered me half of my cost at first. My insurance company only made a decent offer after they realized I was no longer desperate for fast money because of my bank loan.

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  17. The name of this magazine is Money Sense?? Maybe you should consider changing it to NonSense! The young lady who wrote the article has obviously had a classic Canadian education, and is fully and completely inculcated by the left wing ramblings of her Teachers. It is NOT the Government’s money. It is money earned by Canadian Citizens and residents and the Government arbitrarily imposes a tax upon these “Taxpayers” and takes, by force, any amount the Government deems appropriate. To suggest otherwise, is simply an exercise in self delusion. Until the first World War, Canada didn’t even have a personal Income Tax but the Government has bastardized that into the many tentacled, agglomeration, foisted upon us today. Anything that enables the unshackling of any portion of that monstrosity, from the shoulders of oppressed Canadian Tax Slaves, is a good thing for all of us, not just the wealthy. Please try to learn something that not a single time was suggested to you during your education; Government is ALWAYS the problem, it is NEVER the answer!!

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    • I agree with you about taxes and how it is getting out of hand in Canada. The young lady who wrote this article works in the Canadian real estate industry.

      The reason why this is applicable and important is a primary residence when sold, transferred, gifted, inherited is capital gains tax free. There is no income taxes paid or due on Canadian primary residence real estate.

      The TFSA gives Canadians the opportunity to save, invest in another alternative or choice. They can buy a house that they can actually afford and don’t get caught up in too much debt buying that bigger house just because the big selling point by the Canadian real estate industry is it is income tax free!

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  18. If you follow the money. about 50% of every dollar spend ends up in the governments hands as tax. Through sales tax, gasoline tax, liquor tax, GST, corporate taxes etc. So allowing Canadians the ability to shelter some of their investments to increase their savings will ultimately end up with more in the hands of the governments anyway. athe TFSA will also help people to save and invest for not just retirement, but to also purchase homes, vehicles or start businesses, all which have a positive impact on the economy. This article overlooks these facts.

    Reply

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