For a budget sprinkled with warnings of a weakening economy and “global financial turmoil,” Finance Minister Jim Flaherty offered up a fitting headline item this year: a Tax-Free Savings Account.  

The account, which Flaherty called the “single most important personal savings vehicle since the introduction of the RRSP,” will allow Canadians to save as much as $5,000 a year and have it completely sheltered from taxes on investment income and capital gains. The money could also be withdrawn at any time, tax-free. 

The new saving account may not rank with the generous tax breaks and GST cut of Flaherty’s past economic statements, but in this relatively cautious budget it is nonetheless a welcome piece of policy--think-tanks and economists have been urging the government create a savings vehicle like this for some time.

The Tax Free Savings Account, which will be introduced next year, is intended to act like a supplement to an RRSP. There are no tax savings off the top (contributions won’t be deductible from income taxes, like they are for an RRSP). But nor will savings be taxed when they are withdrawn. And income generated by the account during its life will also be free from taxes.   Economists have long argued that taxes on investment income act as a disincentive to saving. This new policy, say finance officials, will help erase that and tip the balance away from a system “biased towards consumption.” 

Much like an RRSP, money in a TFSA can be put into a variety of investments: from mutual funds and stocks, to government and corporate bonds.   But rather than being designed for retirement, money can be pulled out without penalty at any time and for any reason-, making it appealing for anyone who might be thinking of, say, buying a car, renovating a home, starting a business, or even taking vacation. Unused contribution space can be carried forward and any withdrawals can be put back into the TFSA at a later take. As the government is billing it, the account is “an RRSP for everything else in your life.” 

The TFSA is likely to be especially attractive for middle income families who are in a lower tax bracket-—the biggest benefits would come later when their savings have accumulated and no taxes need to be paid when it’s withdrawn. According to the government , a $200 monthly contribution for twenty years (with a rate of return of 5.5 per cent), would see tax savings of over $11,000 compared to the same amount of money put into an unregistered account.

The new policy was widely praised by economists and business groups. Even critics struggled to find a major flaw in the policy.  If there's any concern, it's whether the TSFA will provide much relief for the lowest income earners. Many Canadians, says NDP leader Jack Layton, are too indebted these days and have nothing to save in the first place to take advantage of the TFSA. "In the sense of being a targeted approach, it's not going to help those people," he said outside the House of Commons after the budget announcement.

It’s little surprise the TFSA is an item being heavily promoted in the budget. It’s one of the few new items that will have an appreciable affect on family finances in the immediate future. Perhaps just as importantly, it’s a measure that will cost the government relatively little in terms of lost revenue—in the first year, it will cost just $5 million and $50 million the following year. A win for investors and a minor concession for the government. Perfect for what Flaherty has called a “prudent” budget.

Print Article    Send to a Friend    Write a letter to the editor

Digg this Stumble It!   Post to del.icio.us Seed Newsvine   Share on Facebook Technorati links