April 21 Federal Budget | Page 2 | Tax Free Savings Accounts | Discussion forum

Loonie, some of your points make some sense to me but overall I can tell that we see society from quite different vantage points, so I'll just leave it at that. With regard to income averaging, I miss it too, but RRSP can be used for that purpose. One of my sons was in the mining business for a few years, made great dough, socked max RRSPs away, got tax deductions at highest rates. I think he's looking at spending a few years on the sidelines now, being a professional gal's boy toy and around the house handyman, so over time he could withdraw from his RRSPs at levels that will minimize or have no tax. He's a lot smarter than his dad was.

Loonie said
...
My question is, why do the wealthy think they need this kind of tax break? In the first year, if they couldn't put it in a TFSA, and invested it in GICs etc and earned 3% on their extra $5500, and they were in a 50% tax bracket, the tax would be about $82; if they invested it in the stock market and achieved a higher return, the tax might work out to something similar because of the dividend tax credit and/or capital gains tax system bringing down the tax rate. For a wealthy person, this is peanuts. However, when you add up everyone in this category, it makes a big difference to the govt budget. And in years to come, it will amount to much more - which they would be able to afford, if they are continuing to accumulate it tax-free rather than spending it.

That's not the question actually. The doubling of the TFSA annual limit was a campaign promise. Whether it is good policy or not is a different matter. They promised it. They got elected. Now, there's a chance to fulfill it and they may take it.

An extra $5,500 a year in an TFSA is not much in the first year. But, it will be substantial over a longer period due to compounding. The extra $5,500 per year over 20 years, at 5% per annum average compounded, will become an extra $190,956. Subtracting the $110,000 of original contributions, one ends up with a extra gain of $80,956 which the government gave up the taxes on.

With stocks, there is a good chance one could achieve long-term return of 7% per annum. With 7%, one would end up with an extra $241,258 in the TFSA in 20 years. Of that, $131,258 would be gains, which the government gave up the taxes on.

Loonie said
...
I'm sure most of us can think of tax breaks that were once available but are no more. My favourite was "income averaging", which was very sensible, especially for people in sales with inconsistent incomes. If your income was unusually high one year and unusually low the next year, you could "average" them out to achieve a lower tax bill overall. It was fair and a good idea. I don't remember which government brought it in or got rid of it, but it's long gone now. I wish they would bring in some good ideas like that which are fair and really help people who need it.

I found this 2011 Globe & Mail article Income averaging deserved to die. Let's not revive it. Looks like income averaging was gone way back in 1988. The article's writer Kevin Milligan is not keen to see it come back:

I see three reasons why income averaging deserved its death, and should stay that way.

First, the averaging mechanisms became extremely complicated. There were rules to make sure high-income people didn't use income averaging as a tax dodge. There were adjustments for inflation. There were special rules for trusts. In short, income averaging added a substantial administrative burden to the tax system.

Second, we don't have so many tax brackets any more. In 1971, there were 17 different federal tax brackets. The income ranges for these brackets were much smaller in the past, meaning you were more likely to be bumped into a higher bracket with volatile income. Now in 2011, with only four broad brackets, volatile income creates fewer problems.

Third, the rate structure is much flatter now. Federal tax rates in 1971 ranged from 11 per cent up to 80 per cent. For 2011, the rates range from 15 per cent to 29 per cent. ....
....

Also, Form T581 indicates that income averaging involved more than just moving income from one year to another. One had to prepay federal income taxes, at a rate of 29%, and the provincial income tax (Ontario was an additional 51% of the 29%) on such income that was to be taxed in some future year.

Norman1 said

Loonie said
...
I'm sure most of us can think of tax breaks that were once available but are no more. My favourite was "income averaging", which was very sensible, especially for people in sales with inconsistent incomes. If your income was unusually high one year and unusually low the next year, you could "average" them out to achieve a lower tax bill overall. It was fair and a good idea. I don't remember which government brought it in or got rid of it, but it's long gone now. I wish they would bring in some good ideas like that which are fair and really help people who need it.

I found this 2011 Globe & Mail article Income averaging deserved to die. Let's not revive it. Looks like income averaging was gone way back in 1988. The article's writer Kevin Milligan is not keen to see it come back:

I see three reasons why income averaging deserved its death, and should stay that way.

First, the averaging mechanisms became extremely complicated. There were rules to make sure high-income people didn't use income averaging as a tax dodge. There were adjustments for inflation. There were special rules for trusts. In short, income averaging added a substantial administrative burden to the tax system.

Second, we don't have so many tax brackets any more. In 1971, there were 17 different federal tax brackets. The income ranges for these brackets were much smaller in the past, meaning you were more likely to be bumped into a higher bracket with volatile income. Now in 2011, with only four broad brackets, volatile income creates fewer problems.

Third, the rate structure is much flatter now. Federal tax rates in 1971 ranged from 11 per cent up to 80 per cent. For 2011, the rates range from 15 per cent to 29 per cent. ....
....

Also, Form T581 indicates that income averaging involved more than just moving income from one year to another. One had to prepay federal income taxes, at a rate of 29%, and the provincial income tax (Ontario was an additional 51% of the 29%) on such income that was to be taxed in some future year.

I won't take the time to revisit all the aspects of past income-averaging. If it was awkwardly arranged, then it could be done better another time. I can say that it worked well for me for the 2 or 3 years that I needed it and that people I know who have worked in real estate for many years wish they still had it and find the RRSP is their only alternative and that it is not as good. I daresay Kevin Milligan isn't old enough to know what he's talking about from personal experience or else he'd be a full professor or emeritus by now. The accompanying changes in the tax structure which he cites were not considered a good thing by everyone.

I don't think that raising the limit will restrict future govt. The TFSA contribution can be stopped at anytime. The limits can be decreased.. Caps can be imposed etc. It certainly wasn't I'll advised in that respect. While it probably garnered a few votes the con's showed they had clear goals. Set the goals and stuck to them..

Just look at Ontario for an example of a Liberal run country/province. Ontario is gonna be a fiscal laughingstock..

Loonie said
...
With respect, I don't think anyone gets to tell me what my question is.

Yes, it was an ill-advised campaign promise which garnered votes, and they are likely to fulfill it, hoping that people will not notice how it will strap the governments of the future.
I already said that it would amount to much more in years to come, so calculating it only supports what I said. It would indeed be a huge loss to the govt., which we can't afford.

However, as for returns from the stock market, it's impossible to predict returns 20 years down the road or how much of it will be capital gains or dividends, both of which are already favourably taxed. It doesn't matter what may have happened in the past. The future is unknowable. However, the wealthier you are, the better advantage you already get from capital gains, without sheltering it in a TFSA. Isn't that enough? It seems some people think they have a right to not pay any tax on investment income. From that point of view, what is so magical about $11,000? Why stop there? How do you rationally decide what is an optimum level? There is none.
....

I think the doubling of the annual TFSA limit is just the fulfillment of a campaign promise. There's nothing more to it. I don't think one will get any additional insights by pondering if the rich need it or not. More money is always welcome, by the rich and the poor. Do the rich or anyone really need those stainless steel appliances, marble countertops, or heated car steering wheels?

Like Yatti420, I don't think it will restrict future governments either. Implementation would be through changes to the Income Tax Act. Such changes could be undone easily. To me, that looks like political fear mongering.

I've seen enough changes to the Canadian tax system to believe that policies can change and easily so. The capital gains inclusion rate went from 0% to 50% to 75% to 66 2/3% and back to 50% over less than five decades. A capital gains exemption was introduced and then restricted when its effects became undesirable. The taxation of income trusts remained the way it was until the banks started thinking about reorganizing as trusts. You mentioned the repeal of forward income averaging. Wasn't there something called the Registered Home Ownership Savings Plan (RHOSP) that's now gone? TFSA's could be abolished the same way, if needed.

I also don't agree that stock market returns are impossible to predict. If that were the case, then those projections about the amount of taxes lost by doubling the TFSA limit would be completely bogus.

If it comes to pass, I would enjoy the extra $5,500 of TFSA contribution room each year, for as long as it lasts.