TAX-FREE SAVINGS
The TSFA is a powerful tool for Canadian savers and investors
The backlash is wrong
The federal Conservatives have come up with an eclectic mix of tax cuts during their time in office, some of them ill-advised (slashing the GST, income-splitting for parents), and many of them downright gimmicky (increased tax deductions for long-haul truck drivers’ meals). Should they retain power in the next election, one wonders what they’ll think of next: A Helping Families With Felines cat food deductible to appeal to the pro-kitten demographic?
One move they deserve a tremendous amount of credit for, however, is the creation of the Tax-Free Savings Account (TFSA). It’s easy to dismiss Tory hyperbole, given how often we’re bombarded with it (*cough, cough, terrorism*), but the late Jim Flaherty wasn’t overselling when he called the TFSA the “single most important savings vehicle since the introduction of the RRSP” after introducing it in the 2008 federal budget.
So it’s disappointing to see such a powerful tool for regular savers and investors get dragged through the mud the way it is now. The Tories’ recent pledge to double the annual contribution limit has led to something approaching a smear campaign, with the left-wing Broadbent Institute leading the way. In a recent report, it argued the program was unsustainable and would handcuff future governments in order to line the pockets of the rich (as though predicting what Canada and the world will look like 50 years from now is even remotely possible).
“If income splitting is a train wreck of a policy idea, then the TFSA doubling proposal is a horror show,” said think-tank executive director Rick Smith, calling to mind scenes of blood in the streets (reminder: we’re talking about taxes). That cartoonish depiction has been helped along by the parliamentary budget office, which warned the federal government would be giving up $15 billion per year in revenues 60 years from now (!), and media reports that jumped all over the “well, more money for the rich!” narrative. There’s the evil rich guy, chortling away as he piles his cash into the shape of a comfortable bed for the night.
Let’s consider another TFSA scenario: Joe is 25 and lands a decent, middle-class job with a crappy pension. By living well below his means, he manages to scrimp and save $10,000 per year in his TFSA and, with a little luck, earns a five per cent annual return on his investments. If Joe re-invests all of his gains, what does he have when he’s ready to retire 40 years later at age 65? A beach home for every season? A private jet? A hover-yacht? A money-bed of his own?
No, what he has 40 years later is about $1.2 million in today’s dollars, which is a little more than many financial advisers would recommend for a comfortable, middle-class retirement. If Joe were to live off the five per cent interest, it’d amount to $60,000 per year — not enough for jet fuel, let alone the jet. Now strip out a large chunk for inflation.
“But, but, it’s a million dollars! He’s evil and rich!” I hear some people saying. Keep in mind this is after 40 years of diligent saving, modest living and low-risk investing. Why shouldn’t there be a significant reward at the end of a lifelong effort like that? Yes, some actual rich people, at least the post-economic meltdown version people cling to, will also benefit from the program, but to paint the TFSA boost as benefiting only the rich is a gross oversimplification.
Furthermore, Joe’s life was perfectly linear, which glosses over another great strength of TFSAs – their versatility. Whereas RRSPs are aimed squarely at retirement, TFSAs allow people to save money for whatever their lives throw at them (and take that money out at any time, without penalty). If a family suddenly needs $3,000 for a new furnace, the cash is available. Or if the mother gets a promotion at work, there’s more room to park the extra pay. Or whatever. It’s there. It also allows people to purchase safe investments or even hold cash in highinterest savings accounts, which would actually cost them money outside of a tax shelter.
Why is it that, if something doesn’t benefit every single person in our society equally, it should benefit no one at all? Yes, not everyone can afford to max out their TFSAs every year, just as not everyone can afford to max out their RRSPs every year (and where’s the hue and cry about that?). Besides, if TFSAs become too unwieldy in the future — and inflation may well prevent that from happening — there will be opportunities to adjust. The government of the day could add a point or two to the GST, which would target those who can afford to spend more, or add a generous cap, after which an Old Age Security clawback would kick in.
But please, let’s not limit people’s ability to save now because a couple of papers tried to predict what this program, and this country, would look like in 2060. Double the TFSA limit, and then leave these wonderful accounts alone.
Whereas RRSPs are aimed squarely at retirement, TFSAs allow people to save money for whatever their lives throw at them (and take that money out at any time, without penalty).