Potpourri: My Thoughts on TFSA Limits, Household Debt, and Income Tax

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.

Related: Why tax free savings accounts are still misunderstood

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.

My thoughts: 

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.

My thoughts:

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.

Related: Why our debt-to-income ratio is misleading

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.

My thoughts: 

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?

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  1. Tawcan on March 17, 2015 at 12:47 pm

    I think TFSA probably will need some more tweaking if the government increases the limit to $10,000. Looking around I don’t think every Canadian is taking advantage of TFSA so the government is probably not losing all that much tax revenues.

    Interesting about the tax rates, I didn’t realize that BC is so low.

  2. Barry @ Moneywehave on March 17, 2015 at 2:08 pm

    A lot of people can handle their debt loads but I imagine most people can not. Some people struggle with the concept of compound interest, I don’t think we can reasonably expect them to manage their debt levels.

  3. Gerry Hanson on March 17, 2015 at 6:03 pm

    My wife and I put the maximum $5,500 annually into our TFSA’s.

    We do our maximum RRSP’s of $15,000 a year as well but a balance between RRSP’s, TFSA’s is needed.

    We are counting on a 4% long term compound interest rate on our investments.

    Since interest rates on provincial, corporate zeros are not going up any time soon, I would say a $10,000 annual TFSA limit would definitely help us retire in with dignity.

    We would be very unlikely to depend on government programs, lower income support, income programs, benefits which would save much more for all governments in the long run.

  4. Andrew Clayden on March 18, 2015 at 5:54 am

    Although I do agree that TFSA’s theoretically provide incentive for people to save, adding funds to the CPP is a better way to do it. Only 48% of Canadians have opened a TFSA, whereas everybody who works will be contributing (along with their employers) to the CPP, meaning ALL of those workers will have something reasonably tangible to count on when they retire.
    $6,708 on average is a pretty paltry sum to have saved since the program started. I am reasonably confident those individuals with a TFSA would probably have saved that amount (on average) regardless of whether or not this program exists. Forced savings – it is the only way we are going to avert a pension disaster when all the free-spending baby-boomers, their kids, and their grandkids retire!

  5. Bill on March 18, 2015 at 7:12 am

    I recently read an article entitled “Tax season 2015: 10 ways to attract a CRA auditor’s attention” (http://www.cbc.ca/news/business/taxes/tax-season-2015-10-ways-to-attract-a-cra-auditor-s-attention-1.2969196?cmp=rss). This was number 10, and I must admit I was quite surprised. Never realized active trading could be considered a crime.

    10. “Having a large amount in a TFSA. Recent media reports say the CRA has been targeting holders of very large tax-free savings accounts (TFSAs) — those in the hundreds of thousands or even millions of dollars. The issue appears to be that some TFSA holders have been successful by being active traders within their TFSA, perhaps trading dozens of times a day. That appears to be a problem in the eyes of the CRA because taxpayers aren’t supposed to use their TFSAs to carry on a business — in this case, a trading business. “It seems clear that the CRA is intent on challenging those who have enjoyed significant growth within their TFSA,” warns tax law firm Thorsteinssons LLP. The tax department has reportedly been saying the gains in these cases should all be taxed. Look for this issue to head to court soon.”

  6. Stuart Greenley on March 18, 2015 at 5:50 pm

    I think the government will cap the TFSA at $50,000. They can’t afford to loose all that tax revenue.

    It also really shocks me on how Canadian handle debt or their lack of handling it. In my practice more and more people are entering retirement with debt.

  7. Jay Sanchez on March 18, 2015 at 7:55 pm

    If a TFSA cap is put in then anything less than $500,000 is not worth having any TFSA’s in the first place.

    I think a TFSA cap is not going to happen but I can see changes to many rules, regulations on TFSA’s such as once you withdraw it, you lose it like losing RRSP’s, TFSA’s will be included in calculating OAS, GIS, G.S.T, H.S.T. credit and other social benefits used by reducing them via net income per taxpayer or family net income.

    Another one is once if a spouse passes away, it can no longer be in a TFSA, not continuing being tax free. I can see them also putting a limit of how many years you can accumulate TFSA room, maybe 5, 6 years and that is it, it is lost for good.

    There are many ways they can increase tax revenue from a TFSA without capping it. I’m sure there are many ways they are already thinking of that I did not mention.

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