Maybe, Canadians should think of 2015 as the year they were allowed to put some bonus money into their tax-free savings account.
It almost seems a given that the new Liberal government will move ahead with plans to roll back annual contribution limits to $5,500 from $10,000 but the likelihood of retroactively taking away that extra room seems far-fetched, say people in the financial industry.
Even unused contribution room probably won’t be taken away because it would create a complex tracking issue for the Canada Revenue Agency. As of 2015, Canadians have been allowed to contribute $41,000 to their TFSAs and that’s not likely to change but what is certain is that amount will only grow by $5,500 in 2016.
“It’s highly unlikely (they’ll make changes for 2015),” said Jamie Golombek. managing director of tax and estate planning with Canadian Imperial Bank of Commerce. “It would anger many people and would create massive confusion.”
But it’s not impossible for the Liberals to change contribution rules for 2015. They could declare $10,000 was an over contribution and force everyone take to take the extra $4,500 out by a certain date or face penalty, he says.
“You could say the $10,000 was allowed as of a certain date but it would be impossible to police that because there are no receipts issues for a TFSA contribution. To try and track the exact date a contribution was made is administratively impossible,” said Golombek. “Realistically, the only thing they can do is drop it for next year.”
He added the TFSA has proven very popular with low-income Canadians who gain no real benefit from registered retirement savings plans which are geared towards people with high marginal tax rates trying to defer tax into the future when they will have a lower marginal rate.
In truth, other than the annual limit, there is not much difference between the Liberals and the Tories on the TFSA.
In a survey for the Financial Post, the Liberals committed to having no cap on contributions or accumulations in the accounts and to not counting withdrawals when it comes to income testing for programs like Old Age Security or Guaranteed Income Supplement. Liberals have also committed to index annual contribution limits, so at some point in the near future the dollar amount should climb to $6,000 (it moves in $500 increments depending on inflation).
Finn Poschmann, president and chief executive of the Atlantic Provinces Economic Council and the co-author of a report in 2001 that called for a tax free savings vehicle, said “it would be a very painful exercise” to roll back TFSA limits in 2015.
He says he’s not overly concerned about the limit being reduced because Poschmann says the ultimate reason for the accounts was to get people saving money for their future.
The sustainability of the program is what’s important
“I’ve always been ambivalent about increasing the limit because if a lower contribution limit is what it takes to sustain the program that is just fine,” he said. “It’s a lasting legacy of the Harper government and (former finance minister) James Flaherty in particular. The sustainability of the program is what’s important.”
The big losers with the likely reduction in contribution limits could be seniors getting ready for retirement who wanted to max out their TFSA limit to shelter their wealth.
Ted Rechtshaffen, a certified financial planner and president of TriDelta Financial, said his advice to clients has always been to use the TFSA for any taxable money they have. Those people will have less of a tax shelter.
“It’s like anything, the money comes from somewhere. They will have less money in their pocket,” he said. “If your retirement is a little iffy, this change might say to you work another year to pay for the tax sheltering that you won’t have.”