Expect Liberals to roll back TFSA limit next year
It’s not going to the top item on the priority list but we can expect the contribution limit for tax-free savings accounts (TFSAs) to be rolled back in the New Year.
Prime minister-designate Justin Trudeau made that pledge during the election campaign, saying the increase to $10,000 a year announced in the Conservatives’ 2015 budget only benefits the rich. The Liberals say they will roll it back to $5,500, where it stood before the budget announcement.
Based on an Angus Reid poll published in September, any rollback will not sit well with a significant majority of Canadians. Two-thirds of those surveyed wanted the limit kept at $10,000. Of those who described themselves as Liberal supporters, 62 per cent opposed the rollback idea.
As one reader wrote: “I’m not in favour of a rollback and I’m not ‘rich’. My annual income is approximately $60,000. I’m retired, debt free and the only pension money comes from CPP and OAS. Yes, I have a RRIF and investments outside of my RRIF. I also have been using my TFSA to place monies I have to take out of my RRIF account that I don’t need.
“The reality is $10,000 per year is not very much, but to the average retired Canadian who wants to continue to build up their investments without creating more taxes to pay, the $10,000 limit is a useful and helpful tool.”
Of course, opinions such as this don’t matter a hoot at this point. Mr. Trudeau has a strong majority government and he can do whatever he wants. Rolling back the TFSA limit may cause a ripple of discontent, but nothing more.
Even more important, a rollback would give the Liberals some extra money to put toward implementing some of their expensive promises. The Liberal platform says cancelling the TFSA increase will save the federal government $160 million in fiscal 2016-17, increasing to $360 million in 2019-20. Total saving over the next four fiscal years is expected to be $1.05 billion. Those figures coincide with the Conservatives’ cost estimates published in the 2015 budget.
So the rollback is coming. The main question now is timing. Normally, a tax measure such as this would be included in a budget. Given the heavy agenda facing the Liberal government, it would be unrealistic to expect the new finance minister to be ready to bring down his or her first budget before February or March.
That would mean the current contribution limit would still be in place on January 1, 2016, thereby allowing Canadians who have the money one more kick at the $10,000 can. Theoretically, a budget measure could be made retroactive to the first of the year but it’s rarely done in the case of tax increases (which this would effectively be) and would create a major administrative problem as people were forced to withdraw a portion of contributions already made. In such circumstances, it’s more likely that the rollback would be put into effect as of budget day.
There’s one other TFSA issue the new finance minister will have to deal with: will indexing be restored? Under the original rules, the TFSA contribution limit was indexed to inflation, using a complex formula that only allowed for increases in increments of $500. That meant the contribution limit would be rounded up or down each year to the nearest $500. The effect was to delay any increase in the limit until the inflation factor reached at least $250. That’s why there was no rise in the contribution limit from the time the TFSA program was launched in January 2009 until four years later, at the start of 2013, when it went to $5,500.
As part of the trade-off for raising the limit to $10,000 earlier this year, the Conservatives ended indexing, thereby freezing the contribution limit at that level. When the Liberals turn back the TFSA clock, they should in all fairness restore indexing as well.
We’ll see how it plays out. In the meantime, take advantage of the expanded limit while, and if, you can. Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. His website is BuildingWealth.ca