In April 2015 the federal government announced it will be increasing the Revenue Canada TFSA contribution limit from $5,500 to $10,000. This was the Conservative government making good on an earlier promise in an election year.
The Good, The Bad…THE SAVINGS!
There’s much debate on whether the move hurts the budget by reducing government tax revenue, or whether it actually helps the economy by encouraging Canadians to save by decreasing the reliance on welfare type programs down the road. While browsing some comments on CBC.ca, one of my favourite past-times for some entertaining reading, I came across this:
While rrouge has more of a political agenda it seems, I’m focusing solely on the benefits to the individual via saving. For the wealthy population in Canada $10,000 of annual TFSA tax-sheltered investments is a relative drop in the ocean compared to their vast fortune they’ve already amassed. Sure, it may help them save more absolute tax dollars than the average Joe; however, those tax savings will mean a whole lot more, in relatively terms, to Joe’s budget.
Great News for the Younger Savers
It’s true high-income earners (not necessarily wealthy people as tax is generated on INCOME not WEALTH) that utilize their TFSAs stand to benefit the most in terms of paying less tax dollars, but this is great news for the younger generation (20-40) in the wealth accumulation phase. This age group has the longest investment time horizon remaining, which will allow their investments more years to grow.
If a newly graduate of age 25 dedicated to maxing out his TFSA each year starting in 2015, he would have well over $500,000 saved up by age 50, all of which would be tax free (assuming a 5% average annual return and contribution limit stays at $10,000/year). Compare that with a rich, Mr. Burns-type old fart at age 80, who likely only has 10 years max remaining that could save $146k.
On whether future generations will be worse off because of the loss in tax revenues – it’s tough to say. While some critics estimate the loss in tax dollars $15B by 2080 (a very arbitrary figure based on very fragile calculations), no one can argue that encouraging Canadians to save is a bad thing.by