Yahoo Finance Don’t let expected TFSA change stop you from putting money in, experts say
The incoming Liberal government of Prime Minister-designate Justin Trudeau has a very long to-do list but tax planners and financial advisers will be looking especially at when and how he plans to fulfill a promise to cut the maximum contribution level for tax-free savings accounts (TFSAs).
Stephen Harper’s Conservative government launched the TFSA program in 2009 as a simpler alternative to existing registered retirement savings plans (RRSPs).
Canadians could put money into these accounts – anything from conventional bank savings to mutual funds or other investments – and, unlike RRSPs, never pay tax on the earned income.
And while there would be no tax deduction for contributions like RRSPs provide, TFSA-holders could withdraw money tax-free and replace it later without penalty. Unused contribution room also could be carried forward to future years.
In its final budget this year, the Tory government raised the annual limit for contributions to $10,000 from $5,500. That move crystallized some criticism that had already been building about the TFSA program.
So who loses out?
The left-leaning Broadbent Institute issued a report last February arguing the TFSA program largely benefits people who are already well off and have available cash they can shelter from taxes. It does nothing to improve the financial security of lower-income Canadians, said the report, written by Jonathan Rhys Kesselman, who co-authored a 2001 paper that formed the basis for the Tories’ TFSA program.
And unlike RRSPs, whose proceeds are taxable on withdrawal (presumably at a lower level paid by retirees), TFSA investment income is permanently shielded from taxation. The institute said that means as the TFSA accounts grow, Ottawa stands to forego more and more in tax revenue that will affect programs and services in the future. In a separate report, the Parliamentary Budget Office estimated the foregone revenue would run into billions over the life of the program.
The Liberals have largely bought into this argument and Trudeau promised that if elected, he would roll back the contribution limit to $5,500 as part of the party’s platform to focus on tax breaks for the middle class.
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But when and how this will be done is not clear yet. Globe and Mail financial reporter Rob Carrick wrote this week he’s been getting emails from people concerned about whether Ottawa might cut the limit for 2015 retroactively, after people had already contributed their maximum, or perhaps find a way to claw it back next year through lower limits.
Reducing limit retroactively almost impossible, says expert
A retroactive reduction would be nearly impossible Jamie Golombek, managing director for tax and estate planning for CIBC, told Yahoo Canada.
“I certainly have heard nothing like that,” he said in an interview. “It’s legally possible, theoretically possible. I think it would be unlikely.
“It would create a mass confusion for the Canadian public as well as for both the CRA [Canada Revenue Agency] and any administrator who is administering a TFSA plan on behalf of clients.”
A more likely scenario, he said, is that assuming Trudeau recalls Parliament before its traditional winter break, the new government will announce the TFSA limit will return to $5,500 as of Jan. 1, 2016.
All it would take is an announcement by the finance minister or a small piece of enabling legislation that could go quickly through Parliament, said Finn Poschmann, president of the Atlantic Provinces Economic Council, who as a C.D. Howe Institute research fellow co-wrote the 2001 research paper that led to the creation of TFSAs.
That way the government could serve notice it was reducing the allowable contribution in time for the next tax year even if it does not formally make the rule change until January. Tax law in Canada requires only that the government announce its intentions ahead of a rule change and taxpayers would be required to take notice, Poschmann said.
Poschmann agrees the new government wouldn’t even consider retroactively cutting the contribution limit.
“Retroactive changes to tax rules, they cause real problems for people to comply with and they cause some, to put it mildly, moral distaste among voters to have a government change the rules retroactively,” he said.
Golombek said any retroactive change would anger thousands of Canadians who’ve embraced TFSAs.
Poschmann noted that since its inception six years ago, 11 million people have opened tax-free accounts. Many moved money from existing taxable investments but younger people were also attracted by the TFSA’s simplicity and flexible withdrawal policy.
“It’s taken off in a way that I could not possibly have imagined,” he said. ““Their flexibility has made the take-up just absolutely huge, much more dominant than when similar and more complex plans were introduced in the U.K. and the U.S. in decades passed.”
Other potential changes to TFSA program
But the Liberals may still yet make changes beyond reducing the annual contribution limit.
“I think that over the longer term – whether it’s in a 2016 federal budget in February or March, whether it’s later on in a 2017 budget – I would not be surprised if they perhaps … introduce some kind of lifetime contribution limit to the TFSA,” said Golombek.
There’s some truth to the contention that TFSAs are more likely to be used by those with the financial means, said Poschmann.
“The fact that some people take advantage of it more than others isn’t a reason to deny it to them or anyone else,” he said. “If you look at the data you see people from all age groups and all income levels making meaningful contributions to TFSAs.”
Restricting contributions, whether annually, over a lifetime or both, means some Canadians will have a smaller kitty when they are ready to retire, said Poschmann, who supported the Tories’ decision to raise the contribution limit.
“I have a vision of Canada a few decades down the road where just about everyone is sitting on a decent pile of savings and is in a much stronger financial position than we were in the past,” he said. “Because of that long-term vision I was absolutely fine with the 2015 expansion.”
Lower-income Canadians who can’t afford to build a TFSA are more likely to benefit from other proposed measures, such as boosting contributions to the Canada and Quebec pension plans.
There have been no rumblings about TFSA changes so far from the new masters of Ottawa.
“We follow this all day,” Golombek said. “All there is [is] wide speculation among tax practitioners but there’s been nothing from the government, silence.”
Meanwhile, the experts advise, there’s no reason to keep Canadians who have TFSAs from contributing the maximum $10,000 if they can and if it fits their plans.
“My advice, by the way, is put it in today. Why not?” said Golombek. “You have nothing to lose. If you have the money and it’s the right decision for you, then put in the money.”
“I actually don’t believe that there’s a rush at all, because I think that even if he does change the law and it goes to $5,500 for 2016, I think the limit for 2015 will remain at $10,000 because there’s an unlimited carry-forward, you could in January put in $10,000 for last year.”
