Improving the TFSA

With a federal budget on the horizon, and the low likelihood of any goodies, I started thinking about the Conservative party’s campaign promise to eventually double TFSA contribution room.The fine print also adds, however, that it will only be implemented when the federal budget is balanced within the party’s next full term in office.

Assuming the Conservative majority government can reach a balanced budget in the next five years, what might this doubled TFSA room actually mean?

Current TFSA room

The annual TFSA dollar amount stands at $5,000, as it was when the program was launched in 2009. With indexation factors of 2.8%, 1.4% and 0.6% in the intervening years, we’ve yet to reach the critical point to bump up another $500, as per the indexing formula.

By my estimate, the underlying figure thus stands at $5,243—requiring just over a 0.1% factor to break $5,250 and give us $5,500 room in 2013.

That’s still a far cry from $10,000.

More room, but to what end?

By Conservative party accounts, the TFSA program has been a huge success in many respects—4.7 million Canadians have embraced it. The party platform extols its special benefit to seniors: “they can withdraw savings without any clawback of their OAS or GIS payments.”

So, if part of the focus is on assisting seniors facing clawbacks, will more TFSA room further this objective?

At present, the GIS is fully clawed back for single recipients once income (net of OAS) exceeds $16,368. If the GIS recipient has a spouse who doesn’t receive OAS, the clawback limit is $39,264. Intuitively, this doesn’t appear to be a demographic that has exhausted the current $5,000 TFSA allotment and is yearning for more.

Also under current rates, the OAS clawback begins at $69,562. If a retired single person receives maximum CPP and OAS pensions (though most receive less) of just over $18,000, about $50,000 could be drawn annually from a RRIF before clawback applies.

A two-spouse household would require more income, but would also generally be entitled to second CPP and OAS pension incomes, and have the potential for pension income splitting.

For individuals and couples facing the prospect of an OAS clawback, a $5,000 TFSA is a welcome avenue. Assuming limited dollars to devote to savings (which applies to most working families) taxdeductible RRSP contributions would remain the priority for this targeted sub-clawback retirement income base, supplemented by some proportional reallocation to after-tax TFSA deposits. I’m just not convinced that doubling the TFSA room is necessary for this demographic, either.

More information needed?

Don’t get me wrong. On a personal level, I’m quite happy to have more tax-sheltering room, and will figure out later when and how to use it.

But for most of the population, more TFSA room will not translate to more TFSA deposits because it doesn’t give the person any more cash to save. But then again, it doesn’t have to. A more effective use of the TFSA may simply be a function of education and better understanding, both individually and collectively.

As last year’s Canada Revenue Agency report advised, the TFSA is still something of a mystery to many Canadians. Accordingly, CRA will be redoubling its efforts to simply get the word out.

Maybe we should see how that works and what other potential improvements may come to light, and revisit TFSA room in a few years’ time.

Doug Carroll, JD, LLM (Tax), CFP, TEP, is Vice President, Tax and Estate Planning, Invesco Canada.