Stop pretending the TFSA expansion won’t be felt until 2080

The TFSA expansion means that by 2025 almost no one under 40 will pay tax on investment income. We should at least debate whether that’s bad or good.

Minister of Finance Joe Oliver delivers the federal budget in the House of Common on Parliament Hill in Ottawa on Tuesday, April 21, 2015. (Adrian Wyld/CP)

Minister of Finance Joe Oliver delivers the federal budget in the House of Common on Parliament Hill in Ottawa on Tuesday, April 21, 2015. (Adrian Wyld/CP)

The expansion of Tax-Free Savings Account room in the federal budget has generated a lot of attention—including a quip from Finance Minister Joe Oliver that tax policy problems won’t arise until 2080 and should not be the concern of today’s taxpayers.

Myself, I will be a spry 108 years old in 2080, but beyond my age I don’t know much else about the challenges the world will face in that distant year. I have a better grasp of what the world will look like in 2025, so let’s just ask a simpler question: How will the TFSA landscape affect taxation over the next 10 years? If 2080 is outside the planning range for our government, I hope it is at least admissible to consider what will happen between now and 2025.

The most important feature of TFSAs is that room accumulates through time, starting at age 18. The annual limit started at $5,000 in 2009, moved to $5,500 in 2013, and the budget has now moved the limit to $10,000 from 2015 forward. This means that 10 years from now in 2025, every Canadian who is age 34 or older will have full possible contribution room of $141,000. For a couple, that would be $282,000.

How many Canadians in their 30s have $282,000 of assets that are currently subject to tax? I don’t have easy access to the most recent data, but as of the 2005 Survey of Financial Security, fewer than one per cent of families aged 30-40 have more taxable assets than they could fit in a TFSA, given those limits. (A complete analysis along those lines was published in 2012.) So, what this suggests to me is that very few people in the future will have any need to pay much tax on investment income—TFSAs will provide almost total coverage of assets.

This means that within 10 years, our tax system will become one in which almost no one under 40 pays any tax on investment income. This is, to my mind, the main issue that the TFSA change brings forward. It’s not whether some people might be constrained by the current $5,500 limit. Of course there are some heavy savers (especially many of today’s seniors who have a lifetime of assets saved up) who could contribute more right now. But, in my view, we need to view the TFSA increase not as a one-year policy change, but as something that accumulates through time. From that vantage point, the consequences for the tax system are fairly radical.

Careful readers will note I didn’t say whether exempting most investment income from taxation would be bad or good. Some economists are very keen on moving toward a system that taxes consumption instead of all income. By removing the bias against saving, more efficiency and economic growth may result, and exempting investment income is viewed as a path to get to that goal. On the other hand, other economists are worried about who benefits from such a reform, since most investment income is currently taxed in the hands of high earners.

I think that is a great debate to have—but the debate must begin by acknowledging the facts about the expansion of TFSA limits. In my view, the facts suggest that a $10,000 per year TFSA limit will move us quite far along the path of eliminating the taxation of investment income within 10 years. We should have a great debate about whether exempting investment income from taxation is bad or good for the economy, but we should not pretend that nothing will change until 2080.

(My disclosure statement is here.)


Stop pretending the TFSA expansion won’t be felt until 2080

  1. Here come the rich elites again, attacking the only savings program, the TFSA, that actually works for the working poor and middle class.

    Where is the criticism of that tax exempt status of the principal residence, capital gains which are the product of pure speculation, and benefit primarily the upper middle class and rich? I don’t see Liberals or NDP or their consultants in academia calling for a cap on a meritless capital gains.

    What about the professional incorporating in order to pay the low small business tax rate instead of the personal income tax rate. Why don’t the Liberals and the NDP and their consultants in academia call for a reform of that>

    What about tax-advantaged investing through whole life insurance, which primarily benefits the upper middle class and rich?

    What about RRSP’s? Which allow the upper middle class and wealthy to defer taxes and pay a lower tax rate in the future?

    No. They attack the only savings plan that works for the working poor and the middle class? Sure it benefitst he wealthy too. But why attack the only one that works for less rich people. Limit the others.

    • I agree completely. The worst part is that you then have snake oil salesmen like Mulcair and Trudeau pretending that somehow the poor would be better off (via magic) if the “rich” (being anybody who saves any money in a year at all) had to pay more taxes. It’s absurd. Higher taxes have never helped the truly impoverished in our society. And as you state, this is the only plan that has the ability to really grow over time for people with low incomes who also save (it’s possible).

    • the only savings plan that works for the working poor and the middle class

      What a load of crap. I’ve asked you to explain this statement before, but you dodged it. I’m betting you will this time too.

      If you don’t have much to save, the TFSA does next to nothing for you. Raising the ceiling likewise does nothing for you, if you weren’t reaching the previous ceiling. This is therefore about helping the better-off among us. And it will mean those of us with less financial flexibility (i.e. lower earners, single parents, etc) will end up bearing the greater share of the tax burden.

      • Thw working poor and the middle class really only have post tax money available for savings and investment. That is why the TFSA works for them.

        Real estate speculation in a home requires leveraging up, and that capital gains to be tax free. RRSP’s and whole life require excess income (not required for the immediate requirements of life) that can be deferred which only the upper middle class and the wealthy have.

        This excess income then is allowed to grow tax free, and then tax paid at a lower tax rate in the future.

        The working poor and the middle class can’t take advantage of this, because they don’t have excess income not immediately required.

        Keep the TFSA’s and if one has to pay for it, take away some of the costly tax advantages only available to the upper middle class and wealthy.

        • I’m not convinced. I am not upper middle class, but I have a RRSP. Not as big as I’d like, but it’s there. What I don’t have is enough free cash for both a RRSP and a TFSA. Or at least, for a TSFA that contains much; I do have one, but the balance is embarrassing.

          And I suspect that’s true of a lot of the middle to lower income people who have these. We aren’t coming anywhere near our cap. So raising it means nothing to us – only to the wealthy.

          In other words, while the CPC will try hard to sell it as a boon to the everyman and -woman, it really only benefits the well-off. Same as with their income-splitting and any number of their tax credits (where you actually need to have money to spend to begin with, in order to earn the credit).

          This TFSA announcement, like many other things in the budget, make for good sound bites for the campaign trail. But for many of us, there’s nothing there that we can actually take advantage of. And Harper is counting on us not realizing that until tax time next year.

        • Oh, forgot…

          The working poor and the middle class can’t take advantage of this, because they don’t have excess income not immediately required.

          Equally as true of TFSAs as RRSPs. If using TFSAs for short-term savings, you’re keeping it liquid and probably not getting much return on it anyway. If saving for retirement, RRSPs make far better sense, as you get immediate tax relief (that you can roll back into the RRSP, if you like).

          About the only people in the lower tax brackets that I can see being able to take advantage of this increase are young people living at home rent-free while saving for a down payment on their first home.

          • As we are reminded daily, Canadians have a personal debt problem due to spending on items we cannot afford but want…our daily Starbucks Latte; our big screen TV’s; our expensive cars that we lease because we can’t afford to buy them; our daily lunch out. We are not saving money for retirement because we want instant gratification. From the stats I read, the people who are taking advantage of these TFSA’s are making $60K. They aren’t high income earners. They are savers. If they save enough money, they won’t qualify for old age pension. Think of the tax money that will save the Govt. of Canada.

    • $10,00???
      C’mon! Why not raise it to $100,000 and give the poor a real fighting chance to get ahead.

  2. So by 2025, all investment income could be tax free. Before deciding that this is going to be a terrible and expensive gift to taxpayers at the expense of federal revenues, my question would be what would that amount to as a percentage of federal revenues in 2025 as compared to 2014? If it’s a very low percent then the benefits of helping people saving for their retirement may very well exceed the cost of revenue loss. Besides the government will recoup some (most?) of the losses via other taxes and fees once the money is removed from the TFSA and spent.

  3. I am not sure I agree with this. There is a significant difference between savings and investment. Even the little guy can start one of these savings plans Even when I had money it was not investing but gambling. And my father told me the difference is that when you invest be prepared to lose, not win and only risk that. RRSPs can be invested (and can lose) and you pay big when you take it out. I did because I couldn’t afford to keep it. . As a so-called little guy with dotage) an income far less than probably anyone else on this thread, I can afford to start one and add a bit now and then. Only the rich guys can plow in the limit and if they are an investor they are probably not too interested in tax-free savings as opposed to the bigger returns of a successful investment. I don’t think the commentator has a point as the stats show that half those with this plan are small income earners, are they not?

    • Yes, the stats I read said they earn $60K.

  4. Hands down I would prefer to have the OAS back to 65 and pay the piddling tax on any interest I may be earning.

    Who complains the most about paying tax? Rich seniors are number one. Low income seniors don’t complain as vocally as the rich do.

    Who is paying for the shortfall in revenues? How much money will Canada have to borrow? Which generation is going to have to make up the difference? How will the next generations pay?

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