TARGET: TFSA
If you like the way your savings are shaping up, you’d better dig deeper into the NDP’s plans for them.
There’s more to the debate over tax-free savings accounts than whether to keep the annual contribution limit at $10,000.
The party lines on the annual contribution limits are well established: The Tories raised the limit to $10,000, from $5,500, in the last budget and the party’s two main opponents, the Liberals and New Democrats, have both said they would roll back that increase.
But there are some key policy differences between the Liberals and NDP that could fundamentally change the way people plan their financial futures and utilize the TFSA — if you like the way the TFSA works now, the uncertainty in the NDP’s plans should give you pause.
Fred Vettese, chief actuary of Morneau Shepell, has laid out a retirement plan where people build up their TFSA and continue to receive old age security without any sort of clawback — which, as of 2014, kicks in if you have an annual retirement income of more than $71,592. Vettese has suggested that some seniors with high TFSA balances could collect the guaranteed income supplement, generally a program aimed at lowincome Canadians.
They key to this scenario is withdrawing money from your TFSA, which doesn’t count in the income test for OAS or GIS. This is probably the exact example opponents of expanding the TFSA worry about when they suggest an increase of the annual contribution will largely benefit the rich.
“There is no way (TFSA withdrawals) could be included in any kind of income test.
“It’s income on which the person has paid tax. That’s crazy,” says Vettese, adding that it’s much different than registered retirement savings plans withdrawals, which are taxed because the deposits are taxfree.
When asked by the Financial Post, the Liberals were clear in saying they wouldn’t change the rules when it comes to counting TFSA withdrawals as income. Since the Conservatives created the TFSA it seems unlikely that they are going to change those rules. But this is the type of “loophole” on the NDP radar.
“Concerns have been raised about the fact that the current regime could allow very wealthy individuals to shelter substantial income while collecting old age security benefits and guaranteed income supplements that are meant to support low-income seniors. We will review the rules while ensuring that lowincome and middle-class seniors are not penalized for TFSA withdrawals,” the party told the Post, when asked their position.
TFSA proponents also point out that current rules allow you to accumulate assets in a principal residence without facing tax on capital gains, and Canadians need alternative investment vehicle other than their home.
“Why do people have such big homes? They have two kids or no kids and a dog. Why have it? Because it’s a tax shelter,” says Ted Rechtschaffen, a certified financial planner and president of TriDelta Financial. “You could have a $7-million house, money in your RR SP and no nonregistered money. You could live off the line of credit (on your home). You could have a fortune and show no income or tax, if you shelter it in a house.”
Rechtschaffen says there is a clear challenge for government to deal with income testing versus net worth testing but says that, in the interim, planners will work with clients to maximize their wealth, avoid taxes and collect money from government programs.
“You could a have a couple who bought a condo and put their money into paying down a mortgage. It’s now paid off and they’ve managed to save even just $2,500 per year in their TFSA.
“That will add up. They would have two assets with no dividend income, no interest income and no capital income,” he says.
Essentially, you could easily be a millionaire and be collecting GIS.
One answer to massive TFSA balances might be some sort of cap. The general consensus is that putting a cap on the total amount accumulated would penalize Canadians who made some very successful investment choices.
Putting a cap on contributions seems more palatable, although it would be political suicide to make it retroactive.
But even on the discussion of the cap, there are differences: The Tories didn’t answer that question when it was posed, but it seems unlikely such a move would come from them; the Liberal Party said they have no plans to impose a cap; and the NDP offered a vague promise to speak out more about their policy over the course of the campaign.
Taking a closer look at the party positions on the TFSA you may be surprised about which party platforms align: The NDP and Liberals differ from the Conservatives on the big question of the annual contribution limit (though the Liberals would bring back indexation), but in most other areas, the Liberal position is almost identical to the Tories.