Revenue Canada TFSA – $10k Limit

Revenue Canada TFSA – $10k Limit

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:cbc comment tfsa

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.

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4 comments

  1. Our friend Rrouge has it about right. The boost disproportionally benefits the rich. Those who weren’t motivated and/or couldn’t afford to save at a $5,500 limit aren’t likely to contribute a dime more just because the limit jumps to $10,000. Government revenues need to come from somewhere. This handout will be paid for with an increase elsewhere…more tax the poor and middle class can’t afford that ironically may actually stunt savings.

    I like the idea of the expanded CPP or Ontario’s ORPP to help secure retirement income for the masses. Comparing either to the TFSA, the forced savings makes sure saving actually happens (a-kin to the “pay yourself first” strategy), they are less of a hit to the public purse (i.e. funded by employees and employers) and they are more equitable (pay in, get out).

    With the baby boomers retiring and people living longer, our pension system needs an overhaul to sustain itself. The TFSA increase seems like a step backwards. The middle class squeezed further to top up government revenues to cover off that lost from TFSAs and funding social programs for low income earners who couldn’t (didn’t?) amass enough retirement savings during their working years.

    • While I generally agree with you, Pat, and don’t want to get into a political debate, I must point out that most of the taxes are paid by high-income earners. “Poor” or low-income earners do not pay much personal taxes to begin with thus your whole premise is flawed.

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