A few items in the financial news caught my attention recently and I wanted to share my thoughts on the topics of TFSA contribution limits, Canadian household debt, and provincial tax rates. Here goes:
1. TFSA annual contribution limit to increase to $10,000.
The original TFSA rules in the Tax Act specify that the annual contribution limits will be determined by indexing the original $5,000 to inflation and rounding to the nearest $500. That’s how we got $5,500 in 2013. If annual inflation continues at 1.5% it will take until 2019 before the limit increases to $6,000.
However, in 2012 the government made an election promise to increase the limit to $10,000 once the federal budget is balanced. The budget is pretty close to being balanced – and it is an election year – so it seems there may be an increase forthcoming.
A new think tank – the Broadbent Institute – is opposed to this increase for these reasons:
- It will only benefit wealthier Canadians.
- Future governments will lose tax revenue (in 40-50 years) to the tune of $15.5 billion annually.
- There will be less money in the future to pay for national programs.
They suggest a lifetime limit, or cap, on the program.
Consider this quote from the Institute.
“…a single person with an annual contribution of $5,500 could accumulate…$1.34 million over a lifetime at an annual rate of 5%.”
Comments like this seem to indicate that the entire amount is tax-free, but the original contributions are made with after-tax money. It is the growth that is tax-free.
Let’s take a look at this potential growth. According to a BMO report:
- About 48% of Canadians have opened a TFSA.
- Most use it for emergency savings or short-to medium-term goals rather than long-term retirement.
- 80% of the funds are in cash (high interest savings) or GICs.
- The average account size is $6,708.
And, considering the poor choices many investors in mutual funds and stocks make, they may actually lose 30 – 40% or more of their investment.
Related: A sensible RRSP vs. TFSA comparison
Will there be a loss of tax revenue? Tax rules on investments and investment growth have changed numerous times in the last few decades. No doubt there will be many more changes in the future.
My opinion is that the TFSA is a valuable program suitable for all incomes, and, since it’s still new, there’s room for a lot of tweaks to be made in due course.
2. Canadian household debt ratio hits new record high
In a recurring mantra of how Canadians are continuing with their free-spending ways, this Financial Post article says we have hit a new record high of 163.3%, or, our debts are equal to $1.633 for every dollar of our disposable income.
BMO economist Doug Porter suggests that this debt-craze is partly fuelled by the Bank of Canada’s recent interest rate cut. We just can’t help spending too much money that we don’t have.
I do realize that there are some people who:
- Are not able to manage their debt load.
- Can overextend themselves with large mortgages and loans.
- Use credit cards freely to support their lifestyles
And, do banks design new products to encourage even more borrowing? – Absolutely.
These types of articles mention nothing about increasing net worth and, for most people their current debt is manageable. In fact, TD economist Diana Petramala says that credit card delinquency rates are at record low levels.
So why is the debt ratio so high? The credit market includes all types of debt – mortgages, consumer loans (including car loans) as well as credit cards.
Most borrowing is not designed to be paid off in one year. How many people take out a mortgage in the amount of their one year after-tax income?
3. How much income tax will you pay for 2014?
This CBC News article compares tax rates across Canada. Provincial tax rates and brackets vary across the country.
I’ll admit that as a Calgarian I thought Alberta had the lowest provincial tax rate, Newfoundland the highest, and Ontario and B.C. were up in the higher levels. Boy, was I wrong. How does your province compare?