Say goodbye to your $10,000 TFSA, but here’s why it’s not so bad

Posted on December 9, 2015 in Debates – FP/Personal Finance/TFSA
December 7, 2015.   Garry Marr

The protests were never going to work. The Liberals campaigned against a $10,000 annual tax-free savings account annual limit. Now, with Finance Minister Bill Morneau announcing Monday that the extra room is being taken away, it’s time to accept it, and move on.

Why it’s time for Canadians to forget about the $10,000 TFSA

Political parties should keep their campaign promises and the Liberal party told the electorate it would roll back the $10,000 annual limit because of criticism that at the higher level only the very rich were benefitting

Read more
But look on the bright side: most of the TFSA program brought in by the previous Tory government remains intact, including the $10,000 one-time limit we received in 2015, with no sign that the Liberals will attempt a retroactive clawback. Just think of this year as a bonus year for TFSAs, accounts that have proven to be popular with Canadians at all income levels.

A number of online petitions have sprung up in the past few months demanding the Liberals keep the annual contribution limit at $10,000, as opposed to reducing it, as Morneau is now doing, to $5,500.

Worries that changes to annual contribution limits would somehow be retroactive have been a concern for Canadians since the Liberals were elected. But others made a clear case that going back and demanding Canadians withdraw $4,500 from their 2015 contribution — the difference between $10,000 and $5,500 — would almost be impossible for the Canada Revenue Agency to track and would create a bureaucratic nightmare. The Liberals were smart enough to listen.

So instead the changes will be effective January 1, 2016, meaning your TFSA room will continue to grow under a Liberal government — just not as fast as it would have had the annual limit stayed at $10,000. To date, Canadians have been allowed to contribute $41,000 to their TFSA.

It’s worth noting that, with indexing for inflation, that annual limit will continue to grow in $500-increment chunks, and it won’t be long before you’re allowed to contribute $6,000 annually.

The Liberals’ argument, and that of others, has been that increasing the annual TFSA contribution limit was benefitting the wealthy more than middle and lower-income segments of the population.

But that was never really borne out by the evidence: The TFSA has proven to be popular with low-income Canadians who gain no real benefit from registered retirement savings plans, which are geared toward people with high marginal tax rates in their prime working years wanting to defer tax into the future, when they will have a lower marginal rate.

The Liberal government is also introducing an income tax cut for Canadians earning between $45,282 and $90,563, lowering the rate to 20.5 per cent from 22 per cent. That change is also to take effect in the New Year.

So, there are good reasons not to let Morneau’s announcement entirely ruin your holidays (at least if you try to avoid thinking too much about the federal deficit). And it’s important to note that Liberals are not making any changes to some of the more popular aspects of the TFSA, namely the fact that you can keep contributing the full limit your entire life, and the lack of any ceiling on how rich your account can grow. You may not consider that altogether remarkable, but in other countries, similar types of accounts have been capped.

TFSAs will also likely continue to be a cornerstone of financial planning, even if balances won’t be growing quite as quickly, because of rules on withdrawals and how they affect social benefits.

The Liberals had said during the campaign that they had no plans to count withdrawals when it comes to income testing for programs like Old Age Security or the Guaranteed Income Supplement. That doesn’t appear to have changed, either.

Is a $5,500 annual TFSA contribution as good as the $10,000 amount — which, incidentally, was not going to be indexed to inflation? Obviously not. But savers are still far better off than they were before the Tories gave us the TFSA in 2009, and it’s the most important elements of that legacy that live on.

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