Seniors hit jackpot with budget 2015

Now that the federal government has balanced its books, Stephen Harper’s Conservatives have kept their promise to double the annual TFSA contribution limit from their original $5,000 to $10,000. They also came through with the expected reduction of minimum annual withdrawals of Registered Retirement Income Funds (RRIFs) for seniors. RRIF withdrawal rates will be reduced from the previous 7.38% to 5.28% under a new formula, and apply to seniors between the ages of 71 and 94. After age 95, you’re on your own: it’s still 20% per year. And thirdly, in a boon for small enterprises, startups and would-be entrepreneurs of all ages, tax rates for small businesses will fall to 9% in 2019 from the current 11%. I have to agree with Rob Carrick of the Globe & Mail, seniors are the “runaway winners” with this budget. Apart from the desired TFSA boost (a massive $20,000 for couples) and RRIFs that will last longer, they also got a surprise new tax credit worth up to $1,500 to make their homes more accessible. Of course, all this could be reversed if this pre-election budget doesn’t return the Conservatives to power this fall. But if the name of the game is to pander to voters like seniors and aging Baby Boomers, this budget could well do the trick for Harper and Finance Minister Joe Oliver. It certainly will if Bay Street (Oliver’s former stomping grounds) has anything to say about it. Think about it: those already retired will enjoy not only the previously enacted pension-splitting provision, but if they’re living on RRIF income they now have less reason to fear outliving their money. Ottawa says the lower withdrawal rate will preserve close to 50% more capital by age 90 when it’s all added up. And by that time, the new super-sized TFSAs will be disgorging completely tax-free income that won’t affect their OAS benefits (or, for the elderly poor, GIS benefits). I’d have been content personally with just the TFSA doubling. True, you could quibble that $10,000 is only an 82% increase on the existing $5,500 (as Garry Marr calculated in his TFSA piece for the Financial Post), but I can guarantee you that nobody on Bay Street is going to fret about that. It’s a doubling of the original $5,000 and that’s good enough for me. Plus, as Carrick notes, this is all effective now, in 2015, so if you contributed what you thought was the maximum in January, you may have to come up with a bit more for your TFSA stash. A little less to spend now, but much more tomorrow: isn’t that what prudent financial planning is all about? Savers have been punished for far too long and this gives them a fighting chance. There is, however one tiny fly in the TFSA ointment, pointed out by Larry MacDonald for MoneySense: going forward, TFSA limits will no longer be indexed to inflation. No big deal right now because there’s hardly any inflation but some day that small detail may come back to haunt us.

Long before then, however, the just-about-doubled TFSA room will be welcomed by seniors. That’s because the extra room will constitute the only real tax shelter they’ll be able to enjoy once their RRSPs wind up in their early 70s, usually to become taxable RRIFs. Unlike RRSPs, they’ll be able to keep contributing to their TFSAs right to the end of their lives. Tax planning will consist largely of moving money out of RRSPs and RRIFs (paying a one-time tax hit as they do so) and from non-registered investments (also taking a one-time hit) and into TFSAs, probably early in January every year. This will also be a boon for estate planning. Also, and as we’ve said all along, the extra TFSA room will help young Canadians just starting out, as well as less wealthy seniors and those approaching retirement. With the price of houses almost out of reach for young people in Vancouver and Toronto, parents will be able to contribute on their offsprings’ behalf to top up their TFSAs—not for use for retirement but to accumulate down payments for first homes. Remember, while the TFSA is a marvellous instrument for those who can keep investing for the long term and never touch capital, TFSAs are also there to help fund shorter-term savings goals, including buying new automobiles, furniture and appliances to go in those new homes. This should also help the economy and therefore the Canadian stock market, which in turn will help TFSAs invested in domestic stocks. If the TSX isn’t up big time tomorrow, I’ll be surprised, probably led by the big banks (all beneficiaries of higher TFSA room). Apart from already-retired seniors and Boomers on the cusp of retirement, the cuts to tax rates on small businesses will also benefit those launching their own businesses—whether young tech-savvy entrepreneurs unable to break into their first corporate jobs or aging Boomers who have left salaried employment but aren’t quite ready to pack it in. Many “Boomerpreneurs” are seeking so-called encore careers and more favourable tax rates on small businesses should go a long way to helping. There are plenty of other smaller personal finance measures that have been ably covered by the above-named financial journalists and other media, such as extended compassionate care and simplified rules for non-registered accounts holding under $250,000 in foreign property. For now though, I’m pretty happy with what I’m calling the “Findependence trifecta.” MoneySense editor-at-large Jonathan Chevreau runs the Financial Independence Hub and can be reached at [email protected].

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.