Doubling down on TFSAs

The Government of Canada has not yet backed away from its plans to increase the Tax Free Savings Account contribution limit to $10,000-$11,000 from the current $5,500, and that has caused a bit of a stir. The foregone tax revenue will cost the federal and provincial governments billions of dollars a year, we are told, and the change will primarily benefit the wealthy.

… And me. I’m not what most people would call wealthy, but I had the good fortune of being laid off from my job a few years ago. The severance payment allowed me to max out my RRSP and TFSA for the first time, and although it was a one-time windfall, it pushed me around a financial corner that has allowed me to continue to max out my TFSA each year. The increase in the TFSA limit would be a good thing for me. I would take advantage of it.

I tell you this only to add context to my argument that I don’t think the limit should go up – or at least not doubled.

Income taxes are the primary tool for collecting tax revenue. Income *should* be taxed, including investment income, to the extent necessary to allow the government to provide the services that it needs to provide. Any exceptions to this should serve a specific purpose.

TFSAs do serve a specific purpose. They allow people to save in a tax free manner with a shorter potential time frame than an RRSP. It can be used as an emergency fund, or to save for a car or a house down payment or a honeymoon. It is especially useful for lower income people who want to set aside money for retirement but would get a minimal refund from an RRSP, or for modest income earners who’s RRSP income in retirement would be taxed at or above what their current tax rate is. The TFSA was a great idea, and serves many people well as an effective savings tool.

The question is: would almost doubling the limit continue to serve that purpose?

Finance Minister Joe Oliver stated that millions of Canadians use TFSAs, and the “vast majority” are low and middle income earners. This is probably true, as the vast majority of income tax payers are low and middle income earners. However, it has been reported that most TFSA owners do not contribute to the limit. Of those who do, how many are low and middle income earners? This would be useful information to have in a debate about increasing the limit by $5500.

A study conducted for BMO last year showed that TFSA holders planned to contribute an average of $3,625 — almost $2,000 less than the limit. Keep in mind too, that many people may not contribute as much as they planned. But even if they do, an increase in the limit will not cause someone to contribute more if they can’t even reach the current ceiling.

The point is: most people cannot afford to squirrel away $10,000+ a year in a TFSA. Those that can are likely using the fund to shelter dividend and capital gains income from investments that would otherwise be taxable. There is nothing wrong with sheltering your income using any legal means available to you, but it needs to be asked: why are we allowing this additional income to be sheltered? What are we trying to accomplish, and does increasing the limit serve that purpose? Until the federal government can answer those questions without diversionary rhetoric, we should delay the increases — even if it costs me a few extra bucks at tax time.

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2 thoughts on “Doubling down on TFSAs

  1. I am pretty worried what the Parliamentary Budget Officer said about how bad federal and provincial finances will be as a result of this. The future will quite painful and while the savings might be awesome, it won’t help if the Canadian market and dollar collapses due deficits.

    • Ya, the cumulative nature of it is troublesome. I suppose it’s possible for a future government to freeze or reduce the annual contribution limit, or maybe cap total contributions at $100,000 or something, though that may be difficult to do politically.

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