TFSA – (Perhaps Not) A Ticking Time Bomb? - Part 1

Controversy has erupted in the news this week over the potential lost government revenues 50 years from now, due to the prospect of doubling of Tax Free Savings Account (TFSA) limits in the future. 

That certainly requires prudent study. Here’s why:

The real harm in sensational headlines like this is their potential to confuse the public away from real and powerful tax free savings opportunities to secure their financial future. Unfortunately, part of the negativity around increasing in TFSA limits from $5,500 to $10,000 or $11,000 is the view that this will only help the 16% of Canadians topping up their contributions now – most commonly thought to be the “rich.”

We perhaps need to add a grain of salt to that flavouring, because this 16% may certainly include any financially savvy adult who makes it a priority to save in the TFSA.  This can include anyone with extra money to invest:  working university students who add their income from tips to the plan, and seniors who can no longer contribute to their Registered Retirement Savings Plan (RRSP) by virtue of age.

To be clear:  the TFSA helps those who pay taxes on investment income.  In Canada today, that’s about 30% of Canadians, but in time, it will be many more, thanks to the TFSA.  That’s where the effect on government coffers brings concern.

In fact, if all those Canadians retiring 50 years from now decided to save for retirement in a TFSA instead of an RRSP, government revenues would actually increase immediately, and by billions of dollars. 

Here’s a closer look at that: 

Canadians have saved just under $1 trillion in their RRSPs.  The latest Stats Can figures show $37.4 billion was deposited in RRSPs in 2013 alone. The tax figures¹ appear below:

Canadians are now contributing close to the same amount ($32.4 billion) to their TFSAs.   Lost revenues (in millions of dollars) from the TFSA savings are much lower (with 2013 and 2014 being projections):

These costs are estimated to be over $1 billion for 2015, according to a recently released report by the Office of the Parliamentary Budget Officer. The RRSP, however, is costing governments many times more, as the charts indicate.  One might conclude that if the TFSA has the potential of replacing the RRSP as a viable and preferred retirement income vehicle, it wouldn’t be all negative for government.

In addition, retiring boomers are living longer than ever, and those boomers will do more withdrawing from their RRSPs than contributing over the next 40 years.  Government coffers fill now, too, as those withdrawals are taxed.   Those taxes will offset at least some of the costs of the increasing TFSA contribution limits.

The real message average Canadians should take from bombastic headlines? Keep topping up your TFSA as long as you can; top up your RRSP too, to get the immediate tax savings.  And if you’re amongst the 84% of Canadians who haven’t yet topped up the TFSA, do so quickly, because if the current climate prevails, these jewels may soon be gone.

Next week in part 2 of the article, we look at savings opportunities for the middle class.

¹ Federal Tax Expenditures and Evaluations 2014: http://www.fin.gc.ca/taxexp-depfisc/2014/taxexp14-eng.asp

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