Tag: TFSA

Evolving the TFSA – How about a RRIF transfer credit?

In his tenure as federal Finance Minister, Jim Flaherty oversaw one of the most challenging economies in living memory. He initiated reforms and introduced innovations that will have longstanding impact on Canadian society.

While in my opinion he did not actively court controversy, by the nature of his role opinions about his policies were often divided.  Still, he was clearly not shy about expressing his personal views, at times irrespective of his political allegiance.  Case in point, just before tabling his last Budget, he broke ranks with the Conservative party stance on the touted Family Tax Cut, suggesting that this past election promise may no longer be appropriate, at least not in its current form.

Promise to double TFSA room

The other key election promise from the 2011 election campaign was about doubling TFSA room. Both of these tax goodies were premised on the Conservatives obtaining a full term in office and reaching a balanced budget.  With a majority in power and a surplus projected after this year, the moment of truth will come in next year’s budget, to be delivered by Mr. Flaherty’s successor, Joe Oliver.

Introduced in 2008 (for first use in 2009), the tax-free savings account was greeted with strong consumer take-up from the start.  Thus, the promise to provide more of a good thing made for good electioneering.  Whether it makes for good economic and social policy is another matter.

On its face and indeed by its name, the TFSA is a threat to tax revenue.  To the extent that it alleviates cost elsewhere in government and/or stimulates later economic activity though, it may very well be net revenue positive over the long term.

But how does it look at the individual taxpayer level?

Profile of TFSA holders

In the Tax and Expenditures Report 2012, the Department of Finance produced a statistical report on the TFSA over its first three years.

Total contributions to TFSAs (in $ billions) from 2009 to 2011 rose from $19B to $25B to $30B, with average contribution per TFSA holder fairly consistently being a bit shy of $4,000.  Of course averages can be deceiving – On average, LeBron James and I are over 6 feet tall … but I’m not about to try out for the NBA.

Given the annual limit of $5,000 (as it was then, now $5,500), it doesn’t take a quantum leap in logic to see that the average is driven in large part by those who are capable of contributing the maximum. Conversely, the legislated maximum is effectively irrelevant to those with less disposable income, who are instead bounded by their limited financial means.  In support, the report notes that participation by those with incomes under $20,000 was about 20%, compared to 58% usage by $200,000+ income earners.

Presumably the TFSA is not intended to merely be a tax giveaway.

Much as it is appreciated by those of us in more stable financial circumstances, does it really make sense to simply double the room?  Those with the capacity will contribute more – some all the way up to the new maximum – and those of lesser means will contribute the same as they are now.  The average will increase, but toward what end?

A RRIF to TFSA option

Part of the rationale for introduction of TFSAs was that the RRSP-RRIF savings regime was not effectively serving the needs of lower income earners.  This should not be misunderstood as meaning poverty level alone.

Even those earning the average industrial wage (for reference the CPP YPME of $52,500 in 2014), deductible contributions to RRSPs may come out in retirement at the same or higher effective marginal tax rates once the clawback/loss of tax credits (for example the age credit) and social supports are factored in.  Consider as well, the loss of tax-sheltering room through the forced withdrawal of RRSP-RRIF funds upon reaching age 71.

In those respects, the 2012 report emphasizes some encouraging observations.  Seniors are using TFSAs in somewhat higher numbers than the general population, and the subset of Guaranteed Income Supplement (GIS) recipients are highlighted as contributing 3% more than low income individuals generally. Both aspects trend positively in those first few years, and hopefully are continuing.

Thus, without denying the doubling of TFSA room to the masses in the next budget, perhaps that announcement can be accompanied with a policy change that encourages more efficient savings for seniors specifically.  It could be as simple as allowing additional TFSA room based on the after-tax value RRIF withdrawals (with appropriate age thresholds and upper income limits), maybe even with some concessions for associated clawbacks.  Effectively implemented, this could be a tax neutral procedure.

While such an approach does not create more savings, it does create more TFSA room.  And even if that larger room is not ultimately used, those affected seniors will be encouraged to migrate existing savings over to a vehicle that can be more tax-efficient in their circumstances.  I believe that would serve a useful purpose, beyond the simple arithmetic of doubling TFSA room.

I wonder if Mr. Flaherty would approve?

Your quinquennial retirement check-in: A five-year tax retrospective

No, “quinquennial” is not part of my everyday vocabulary.  It is however a handy milestone for evaluating retirement planning progress, if not on an immediate personal basis then at least in terms of changes in the tax landscape.  

By its nature, the retirement/tax system evolves incrementally, principally in step with the annual federal budget process.  To those of us involved day-to-day in the financial advisory field, at times such change may seem to flow as slow as molasses in January.  By contrast, the general population might only contemplate these matters periodically – often only when prompted by their advisors – so developments may appear more momentous once brought to their attention.   

However, over the most recent five-year stretch, it could be argued that the sum of these developments is nothing short of astounding, whether planning your own retirement or advising others.  With that in mind, consider how the following items will affect retirement planning conversations today compared to a mere quinquennium ago.  

2008 – Pension income splitting

Technically a little outside the timeframe, pension income splitting was announced in the Halloween 2006 Economic Statement and introduced in the 2007 Budget.  The first opportunity to elect to split up to 50% of such income with a spouse would have been in filing one’s 2007 tax return in/by April 2008.  

In addition to the obvious potential to push income to a lower bracket spouse, the maneuver could help preserve the pensioner’s age credit, fend off OAS clawback and assist in making fuller use of the spouse’s pension credit.

2009 – Tax-free Savings Account

Introduced in the 2008 Budget, Canadian residents over the age of 18 received their first $5,000 annual allotment of TFSA room on January 1, 2009.  

The structure allows for contribution of after-tax funds, with any subsequent growth and withdrawals being tax-free.  In addition, there is a dollar-for-dollar credit on those annual withdrawals that increases contribution room the next January 1st.  Apart from being a welcome gift for those with excess cash to invest, the TFSA offers lower bracket individuals a more viable alternative or complement to the traditional RRSP structure.

The indexing formula boosted the annual dollar limit to $5,500 beginning in 2013.

2010 – Canada Pension Plan

While it is patently obvious that this is not a new program, the 2009 triennial review proposed significant changes to the CPP.  These changes were legislatively approved in 2010.

With the elimination of the work cessation test, it became administratively simpler to commence a retirement pension, and all future pensions will be marginally improved as the low earnings drop-out increases from 7 to 8 years.  However, the decision as to when to commence that pension has become more complicated with new mandatory premium payments for working beneficiaries (voluntary after 65), an increased monthly early take-up penalty from 0.5% to 0.6%, and an increased monthly deferral premium from 0.5% to 0.7%. 

2011 – Registered Disability Savings Plan

The RDSP was actually introduced in the 2008 Budget, but took 2 or 3 years of tweaking before those in the target population could fully avail themselves of the program.

A key benefit is the access to matching Grant and free Bond support money.  The 2010 Budget made provision for carryforward of unused Grant and Bond entitlements.  Perhaps the most important modification occurred in the 2011 Budget with the relaxation of stringent rules that up to then would have forced mass repayment of Grant and Bond money at inopportune times.  

The RDSP is now coordinated in many ways with the beneficiary aspects of RRSPs, RRIFs and RESPs, making for much more flexible planning options for individuals and families with disability planning needs.

2012 – Old Age Security

The 2012 Federal Budget will probably be most remembered for raising the OAS qualification age from 65 to 67.  Those born prior to April 1958 will remain eligible at 65, with those born after January 1962 having to wait all the way to 67.  The rest of us will be somewhere in between, with the phase-in period ranging from April 2023 to January 2029.  

As well, as of July 2013 an eligible individual may defer OAS pension for up to five years, in exchange for a 0.6% increase in the pension amount per month deferred.

2013 – Pooled Registered Pension Plan

As we head into the next quinquennium, the PRPP warrants mention before signing off.  

Discussed since 2010, the program is aimed at encouraging workplace savings where no current pension arrangement is in place.  The federal tax amendments out of the 2012 Budget are now passed, but there is yet to be any concrete action from the provinces.  As the program design dovetails contribution room with RRSPs, ever more opportunities and trade-offs may lie ahead, further feeding those retirement planning conversations.

The future of TFSA room – Musings after the November 2012 Economic Statement

Finance Minister Jim Flaherty’s November 2012 Economic Statement had some unfortunate but not entirely unexpected news.  

The global economy and consequently the Canadian economy continue to face headwinds, such that the return to a federal budget surplus may not happen until 2016-17. That’s a year later than the last projection in the 2011 Economic Statement, which in turn is one year later than what was touted in the 2011 election campaign.  

Doubling TFSA room in 20__?

If this last projection indeed holds true, it would be disappointing for those anticipating the pending enhancement to the tax-free savings account.  Recall that in the 2011 election campaign the Conservative party promised to double the annual allotment of TFSA contribution room, but only after achieving a budget surplus. With this session of Parliament due to expire in 2015, it remains to be seen whether that balanced budget can be posted in time.

Providing some comfort in that regard just days after Mr. Flaherty’s comments, Prime Minister Harper reiterated the government’s intention to balance the budget before the next federal election.  As Mr. Harper emphasized, the projections are still very close to that target.  

So whether you are politically cynical that this may be politicking or just a ‘glass half-full’ optimist about the fortunes of the economy, the signs continue to point in the right direction.  And that’s not to say that the promise could not be fulfilled if the Conservatives come back to power.  

TFSA indexing in the meanwhile

Let’s not despair too soon anyway.  The TFSA indexing formula continues to operate irrespective of any would-be changes.  From its first year of availability in 2009 through to 2012, the annual dollar limit has been $5,000.  

Below the surface however, the base reference figure has been annually bumped by the federal indexing factor.  By my calculations, it stood at $5,243 in 2012, requiring a mere 0.1% change in the consumer price index this year in order to break the $5,250 threshold.  With the release of the Payroll Deduction Tables from the Canada Revenue Agency in early November, we have confirmation that the factor for 2013 will be a full 2%, bringing the base to about $5,348, and meaning the new TFSA dollar limit in 2013 will be $5,500.  

It has taken five years to reach this first increase, during which the base has increased an average of about 1.4% annually.  Based on the forward-looking average growth outlook of 2.3% in this Economic Statement, the automatic increase to $6,000 room will occur four years out in 2017.  Even without the doubling then, more TFSA lies on the horizon.

And the income splitting promise

Of course the additional TFSA room does not create more cash in taxpayers’ hands.  It is the other big promise from the 2011 election that could do that – the Family Tax Cut.  That’s the one that will allow up to $50,000 to be shifted to a spouse for annual income recognition.

As a household with a single wage earner and children under 18, our family could benefit if and when that comes about.  I say that we “could” benefit because the children will all be in full-time school in a couple of years, and we could be back to a dual income situation by then.  Still, we will likely derive tax savings to some extent, which may very well be earmarked for our TFSAs.