TFSA room bumps to $5,500

Finance Minister Jim Flaherty’s November 2012 Economic Statement had some unfortunate but not entirely unexpected news.

The global economy and consequently the Canadian economy continue to face headwinds, such that the return to a federal budget surplus may not happen until 2016-17. That’s a year later than the last projection in the 2011 Economic Statement, which in turn is one year later than what was touted in the 2011 election campaign.

Doubling TFSA room in 20__?

If this last projection indeed holds true, it would be disappointing for those anticipating the pending enhancement to the TFSA. In the 2011 election campaign, the Conservative party promised to double the annual allotment of TFSA contribution room, but only after achieving a budget surplus. With this session of Parliament due to expire in 2015, it remains to be seen whether that balanced budget can be posted in time.

Providing some comfort in that regard just days after Flaherty’s comments, Prime Minister Harper reiterated the government’s intention to balance the budget before the next federal election. The projections are still very close to that target.

So whether you think this is politicking or just an optimistic statement about the fortunes of the economy, the signs continue to point in the right direction. And that’s not to say that the promise could not be fulfilled if the Conservatives remain in power.

It’s available to all Canadians, 18 years and older;
Any interest, dividends and capital gains earned in a TFSA are not subject to tax;
A TFSA allows you to invest in a number of types of investments, be it a high-interest savings account, mutual funds, guaranteed investment certificates, listed securities, or other types of qualified investment products;
Unused TFSA contribution room is carried forward and accumulates for future years;
Income earned in a TFSA and withdrawals do not affect your eligibility for federal income-tested benefits and credits; and
Contributions to a spouse’s or common-law partner’s TFSA are allowed.

TFSA indexing in the meanwhile

Let’s not despair too soon anyway. The TFSA indexing formula continues to operate irrespective of any would-be changes. From its first year of availability in 2009 through to 2012, the annual dollar limit has been $5,000.

Below the surface, however, the base reference figure has been annually bumped by the federal indexing factor. By my calculations, it stood at $5,243 in 2012, requiring a mere 0.1% change in the consumer price index this year in order to break the $5,250 threshold.

With the release of the Payroll Deduction Tables from CRA in early November, we have confirmation that the factor for 2013 will be a full 2%, bringing the base to about $5,348. This means the new TFSA dollar limit in 2013 will be $5,500.

It has taken five years to reach this first increase, during which the base has increased an average of about 1.4% annually. Based on the forward-looking average growth outlook of 2.3% in this Economic Statement, the automatic increase to $6,000 will occur four years out in 2017. So, even without the doubling, more TFSA contribution room lies on the horizon.

The income-splitting promise

Of course, the additional TFSA room does not create more cash in taxpayers’ hands. It is the other big promise from the 2011 election that could do that—the Family Tax Cut. That would allow up to $50,000 to be shifted to a spouse for annual income recognition.

As a household with a single wage earner and children under 18, our family could benefit if and when that comes about. I say that we “could” benefit because the children will all be in full-time school in a couple of years, and we could be back to a dual-income situation by then. Still, we will likely derive tax savings to some extent, which may very well be earmarked for our TFSAs.

Doug Carroll, JD, LLM (Tax), CFP, TEP, is vice president, tax and estate planning, Invesco Canada.