The Liberal changes to TFSA contributions were actually historic

In rolling back TFSA contribution limits, the Liberals broke a nearly six decade trend



The new government wanted to make its first policy move in the House substantive and symbolic, but it also managed to make it historic. On Monday, the government gave notice that it will introduce a motion (a Ways and Means motion, to be precise) to cut the second federal income tax rate (applied to taxable income between $45,283 and $90,563) and create a new tax bracket applied to taxable incomes of $200,000 or more.

It’s true that this is the first time since 2001 that the basic architecture of federal tax rates has been renovated in a big way. It’s also true that if your taxable income is $45,000 or less, then this tax cut isn’t for you. Finally, yes, it’s true that a person with a taxable income of $120,000 stands to save more ($783) on their federal tax bill than a person with a taxable income of $80,000 ($582).

No, no, that’s not the historic part in my view. Look, 2001 wasn’t that long ago and I’ve written loads before about tax credits and public programs that benefit the better-off.

I’m talking about Clause 9 of the government’s motion that scales back the annual contribution room available to adults who open a Tax-Free Savings Account (TFSA) from the current $10,000 limit introduced for 2015 to the $5,500 annual limit that had done just fine before an election loomed on the horizon. Don’t forget, unused contribution room rolls over each year and there is still no lifetime cap on contributions. This means that between exemptions for home equity, lifetime capital gains rules and the TFSA, it won’t be long before most households in Canada are able to shelter virtually all of their assets from income taxation.

Back before the election, federal officials were at pains to explain that the increase in the TFSA room was well, really, really necessary, because, you see, over a quarter-million low-income Canadians (making less than $20,000 a year) had managed to max out their TFSA room under the $5,500 limit. ”Don’t you understand that these low-income people are just trying to put away some savings? Why do you hate people who are just… frugal?” With the national household savings rate stumbling along at about four per cent these days, shouldn’t we reward those who were saving roughly half of their modest annual incomes?

Well, no, and here’s why: From what I can see, the phenomenon that was offered as”‘the problem” to be fixed is likely temporary.

Looking at data from the 2012 Survey of Financial Security (Statistics Canada) when the TFSA was four years old (offering $20,000 of accumulated room for every adult in Canada) is instructive here:

– Singles and families aged 65 and older are far more likely to own a TFSA than their working-age counterparts (38-47 per cent versus 25-34 per cent respectively).

– Median TFSA balances amongst all working-age singles (under age 65) were just $5,000 (or 25 per cent of that limit) but median balances for singles aged 65+ were $15,000 (75 per cent of the limit). That’s the median, meaning that half of single seniors had TFSA balances between 76 per cent and 100 per cent of their allowable limit.

– Among couples and families, the age-related gap in median TFSA balances persists: $10,000 at the median for working-age households and $20,000 for those aged 65 or older.

– Within the working age population, there are also important age-related differences. Median TFSA values for couples or families aged 35-44 suggest median deposits of about $1,000 per year. But closer to retirement (age 55-64), household TFSA balances suggest median deposits of a little more than $3,500 per year, still well below the old $5,500 limit.

Those older households are, in the vast majority of cases, unlikely to be saving “new” money. Instead, they may well be shifting assets from one source—maybe perhaps proceeds from the sale of a family house that is now too large for their needs; or maybe this is coming from taxable RRIF income that is being recycled into a different and non-taxable registered savings account. Recall that the TFSA doesn’t offer a deduction for (most) deposits, doesn’t create new tax liability on withdrawals and is exempt for the purpose of working out the key income-tested senior’s benefit, the Guaranteed Income Supplement (GIS). Seniors with $20,000 in total personal income have too much income to receive the GIS now, but they may worry about exhausting their savings and needing the GIS later on. In these cases, shifting assets into a TFSA just makes good financial sense.

But that’s not what the TFSA was supposed to be for.

When it was introduced in 2008, the late Jim Flaherty cheerfully called the TFSA “an RRSP for everything else in your life.” His budget communications documents that year offered examples of people saving for all kinds of short- and medium-term uses like vacations and “rainy days.” The literature dating back to at least a 1987 study by the Economic Council of Canada (of which, Liberals, please give thought to reviving that creature to complement the work of a beefed-up Parliamentary Budget Officer) saw tax-prepaid savings as a way to stimulate more saving and investment by giving households choices when RRSP incentives fail. The literature doesn’t seem to have anticipated asset-shifting uses among the already-retired.

Unless the TFSA undergoes more dramatic changes like a lifetime limit, future generations of seniors are unlikely to worry much about annual caps limiting their ability to shift assets around to gain the best tax and benefit treatment. A person aged 55 today will have nearly $100,000 in TFSA room by age 65. And while today’s seniors with low income but some savings may feel cheated by an accident of policy timing, there are many other ways to address some of their concerns—flexibility on RRIF withdrawals for example.

But I still haven’t given you the punchline, have I?

The TFSA is just one among five separate tax-preferred and registered savings instruments in Canada. The first was the RRSP, introduced in 1957. When Kenneth Carter recommended scaling back RRSP limits in his 1966 report on Canadian tax reform, he was summarily ignored. Instead, we have, through relentless incremental policy choices, grown a tax and transfer system that is schizophrenic in its treatment of savings—rewarding people who already have money for saving it but often penalizing small savers. In the last 58 years, there have been exactly zero reductions to annual contribution room to any of these instruments—that is, until now.

By scaling back annual TFSA limits, the new government can keep the flexibility that tax pre-paid accounts offer without encouraging as much asset-shifting among the already comfortable. Promoting economic growth is the stated motive behind this renovation to the income tax brackets. If the government is serious about making that growth inclusive, then removing regressive incentives is a good start at breaking a 58-year trend.  But it’s just a start.





The Liberal changes to TFSA contributions were actually historic

  1. Six decades of promoting savings and capital accumulation by reducing the tax burden, gone in a Liberal spending flash. No progressivity going forward, just higher taxes for most and minor relief for a few chosen ones.

    Having an HR guy as Finance Minister is already showing its weaknesses, given that Morneau had his hand in the platform, too.

    Wait until the Liberals change the marching orders for the CPPIB and forces public pension money to be invested in sinkhole infrastructure spending. The national savings will droop precipitously.

    It will be nice when those in charge of the Ministry actualkly answer questions in the House of Commons — where they have to be honest with their words — rather than platitudes. Instead, they mothily flock to the foyer microphones to spew PR-written tripe from the campaign trail, not a word of it binding.

    The attempts of this government, already, to make the House of Commons less relevant, are notable. Trudeau wants to attend only on the few designated days a month he deigns to answer questions. If his “answers” are what we saw on Monday, they will be smug, short and empty, full of rhetoric and short on facts. Rather, the Prime Minister should attend QP as often as possible and answer questions put to him, as Harper, Martin, Chretien and Mulroney did.

    • Don’t hold your breath Dan…….

      Trudeau isn’t a Harper, Cretien, or a Mulroney. He needs to see the notes written for him before he is allowed to speak in public.

      Harper was the brightest of the bunch….but he was also the most socially inept for the most part. he couldn’t be the regular politician…he wouldn’t lie, or say things to make people feel good.

      • Harper wouldn’t lie? Trying your hand at standup now, I see…

        • Keith,

          Even Harper’s poltical opponents admitted he wasn’t a liar. most media have said the same thing.

          • Heh.
            I like how jameshalifax invents some fictitious ‘opponents’ to try and make the claim of Harper’s honesty sound credible.
            Very creative, jameshalifax!
            *gold star*

          • Heh.
            Nice invention of some fictitious ‘opponents’ to try and make the claim of Harper’s honesty sound credible.
            Very creative, jameshalifax!
            *gold star*

    • By all means – let’s go back to answers that consist entirely of reading from scripts written by PMO flacks without any consideration of what was asked.

  2. Rather than scaling back the contribution limit, I would have preferred to see a lifetime limit, possibly coupled with an *increase* in the contribution limit. That would have addressed the OAS clawback issue (not mentioned in the article), and the issue of those that are “cheated by an accident of policy timing” (a more expansive group than those mentioned in the article).

    • JIM R……

      Wait until you see the hole Trudeau V.2 creates after his run as PM is over. He will make his father look like scrooge by comparison.

      You can say goodbye to your CPP (unless you already collect it) as scooping up benefits is the only way to cover the costs of Liberal Big Government.

      • Yeah ,,, another CPC flack reading from a script which has nothing to do with the discussion; Paul Calandra isn’t as good a public speaking coach as you think.

        • The heads of the Bank of Canada have been lamenting about high household debt in Canada for years. Now the government of the day is discouraging Canadians from saving for their retirement even though those with too much income in retirement have their old age pension clawed back by the government therefore saving the taxpayers a considerable amount of money. Discouraging people from saving for a rainy day and retirement is foolish because people with no money end up needing to live at the mercy of the taxpayer, rather than providing dollars to the tax rolls.

        • Boy cant you even make a valid comment, rather than attacking someones opinion. Its the like of commentors like yourself that will close this open forum also as has happened with the Toronto Star. The bottom line is in 2 short months, the surplus is gone as claimed by the budgetary office only weeks ago and the dollar is the lowest its been since 2004. So how is Trudeau doing so far? Yes its easy to blame the previous government as it seems all liberal governments do, but right now Trudeau is in power and the economy in general is setting record lows.

  3. TSX is going to be down, down, down. So, the loonie.
    People will buy only stocks listed in double currency and when they sell them, oh boy, they will ask only for USD.
    Back to the other Trudeau loonie: 0.61 cents.

    • Yeah….but who cares about the economy when you have the chance of taking a selfie with Justin !!

      he’s just dreamy.

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