Rollback, indexing and the next instalment
In case you missed it, last October marked a long-awaited historic event: Marty McFly’s cinematic visit to the future on October 21, 2015 in the second instalment of the 1980s’ Back to the Future trilogy.
We introduced our kids to this movie franchise over the course of three weekends recently, and it was time well spent. Apart from the amusement, there was also a fair bit of confusion as they tried to work through what came first, what changed and what remained the same.
It’s not unlike how many people may have felt about the future of the tax-free savings account (TFSA) following that other significant event last October – the Liberal party victory in the federal election.
In the beginning
The TFSA was introduced by the Conservatives in the 2008 Federal Budget. Beginning in in 2009, it provided each Canadian resident over the age of 18 with $5,000 of annual tax-sheltered investment room.
To keep up with inflation, an indexing formula was established to enable the annual room to rise by $500 increments every few years. The first such increase occurred in 2013 when the allotment became $5,500.
A bump in the road
In the 2011 election campaign, the Conservatives included a promise to double the annual TFSA contribution limit. The promise was made contingent on the party having a full term in office and reaching a balanced budget. They won a majority, so the only remaining requirement was to balance the books.
With the intervening 2013 increase to $5,500 based on the formula, there was potential for the room to be increased to as much as $11,000. As it turned out, the Conservative government tabled a balanced budget in March 2015 that included an increase in annual TFSA room to $10,000, retroactive to the beginning of 2015.
Part and parcel with the increase, indexing was removed, setting $10,000 as the fixed figure for all years from 2015 on. For interest, if the annual index factor were to have been a consistent 2% in future (see the table for the actual past figures), it would have taken close to 30 years to build up to $10,000 – roughly the same span of time Marty McFly jumped ahead in his time-travelling DeLorean.
Back to the future
It would be a bit overreaching to cast TFSA room as a pivotal issue in the 2015 election campaign, but it likely swayed some voters and certainly was prominently discussed. While the Conservatives had proceeded to enact the increase prior to the election call, the Liberal party stated its intention to rollback the provision.
With the Liberal majority victory this past October, attention turned to what the “rollback” might mean. If it was returned to $5,500 retroactive to the beginning of 2015, that would have forced those who had used the excess room to extract the extra they had deposited. And how would any investment growth (or decline) be treated? On the other hand, would those who had not yet taken advantage of the excess room lose that opportunity?
The answer was a practical one. The indexing formula was simply reinstated for 2016, returning the annual room to $5,500. The 2015 allotment of $10,000 was allowed to stand for the purpose of any carryforward, but it was ignored in applying the index formula. This assured that there was no prejudice to those who had not used the room in 2015 and no administrative headaches for those who had.
And for those lamenting the loss of the $10,000 amount, if that same 2% indexing assumption applies, the bump to $6,000 should happen in 2018.
Annual TFSA room
