# Making TFSA room retroactive to make up for 2008 losses



## Jon Chevreau (Apr 4, 2009)

Just posted a blog entry that contains link to Saturday column where Mercer's actuary Malcolm Hamilton suggests Ottawa should make Tax Free Savings Accounts contribution room retroactive to age 18 in order to help retirees and near-retirees make up for lost tax-sheltering room in their RRSPs, RRIFs and DC pension plans.

http://network.nationalpost.com/np/blogs/wealthyboomer/default.aspx


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## OhGreatGuru (May 24, 2009)

I had read the article, and it doesn't make any sense, other than to curry favour with a particular segment of the electorate. Retirees and near-retirees have not "lost tax-sheltering room" as a result of the market fall. They have lost asset value in their retirement funds, but this should only be temporary. The only way they "lose room" is by making withdrawals. In the case of RRSPs this is not news, and is why most people should not withdraw RRRSP money early. In the case of RRRIF & DC plans, it is true they are having to draw down their tax-sheltered assets faster than they would like as part of their retirement income stream. But if they are withdrawing a large percentage their retirement assets in one year, there is something wrong with their retirement plan that is unrelated to the market situation. And they are acquiring $5K/yr in TFSA room to put away any retiement income that is excess to their needs. 

(65-18) x $5K = $235,000. I have difficulty finding sympathy for a "poor retiree" who has that much spare cash to hide from the tax man, to "compensate" him for the fact that his registered portfolio dropped in value this past year, like everyone else's. 

I think the author is simply lobbying for a change in government policy that will help investment advisors attract more business.


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## Jon Chevreau (Apr 4, 2009)

The author, if by that you mean Hamilton, is not an investment advisor and has no reason to suggest something that would benefit advisors. He's a pension consultant and actuary. And I'm not an advisor either. What we do have in common is we're both baby boomers in our mid to late 50s, so-called "near retirees" who have been affected by the financial crisis. To the extent many of the forum members here are a decade or two younger, naturally your perspective may be a bit different -- other threads here build TFSA projections into their plans and the younger you are the bigger role the TFSA can play. 

It's not like the TFSA is totally tax-free: remember that when CD Howe originally described the idea, it was a TPSP: Tax Pre Paid Savings Plan. That is, when you come up with $5,000 for a TFSA contribution, odds are you had to earn $6,500 or so to get it; paying $1,500 of income tax.
So Ottawa has already gotten its pound of flesh on TFSA contributions: it just doesn't get to apply a second level of taxation on the subsequent investment income. 

In fact, the same Hamilton has previously described non-registered savings as "futile," particularly if you try to hold "safe" fixed income investments in non-registered plans. As you know, interest income is taxed at the top marginal rate: say 46% in Ontario. And remember you already paid income tax at the top rate on earned income in order to come up with such non-registered investments in the first place. 

Also remember that the Tories came up with the TFSA as a sop to the many who elected them on the much bigger promise of a tax-free capital gains rollover on securities held for several months. That for many would have involved numbers in the 100s of 1000s, just as with the retroactive TFSA idea.


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## CanadianCapitalist (Mar 31, 2009)

While I understand the motivation behind the suggestion to allow extra TFSA room, I'm worried that in the future, it could work in reverse. Does it mean that if stock markets provide good returns, the Government would have the option to cut back on contribution room?


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## Jon Chevreau (Apr 4, 2009)

I doubt that, CC! Though maybe investors could give themselves a "contribution" holiday if stocks really did well, and divert spending to consumption, thereby boosting the economy. But if stocks did soar, the government would eventually "claw back" OAS benefits for RRSPs or RRIFs that grew too large. That wouldn't happen for a TFSA of course.

But going back to "Guru's" $235,000 figure of TFSA room for a 65 year old retroactive to age 18, while it may seem like a big number it really isn't. Remember this is all about fair and equal tax treatment of Defined Benefit plans for DC plans and RRSPs. Arguably the average government worker inflation-indexed DB plan that is in effect backed by all us taxpayers is worth at least $1 million if that's the amount of capital required to generate a $50,000 per annum pension (figuring a 5% return from bonds or a bond-heavy balanced portfolio). Really top-level mandarins hauling down a $100,000 pension have the equivalent of $2 million in capital to generate such a pension.

Seen thus, $235,000 for retroactive TFSA contribution room doesn't seem so out of line, does it? Remember, there are people out there with $1 million RRSPs that were wacked down to $600,000. So even the retroactive room would not be making them whole on tax-sheltered room. And remember too no one is saying the government is being asked to make up the actual losses. No, it's still up to the investor to come up with the money, which again is after-income-tax money.


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## Cal (Jun 17, 2009)

As much as I would love this to come into effect. I just can't see the gov't taking a pass on taxing whatever $235,000 of equity a 65 year olds investment wealth would create in gains for any given year.

Too much wealth and too many 65 years olds. Haha. (I just stuck w the 65 year old example)


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## OhGreatGuru (May 24, 2009)

Jon Chevreau said:


> ... Remember this is all about fair and equal tax treatment of Defined Benefit plans for DC plans and RRSPs. ...


This is so illogical it is contemptible. But if it is coming from CD Howe it would be par for the course. They are comparing apples and oranges and claiming the difference is due to tax discrimination.

PS: I am the fortunate recipient of a DB pension. Not nearly as munificent as the $100K example you give. But, by one rule of thumb, it would have an "asset value" of about $880,000. But this is an entirely imaginary number, used for various financial planning purposes. My DB plan only pays me a monthly pension, on which I am taxed the same as someone receiving equal payments from a RRIF or DC plan. I cannot withdraw this "assumed asset value"; I cannot bequeath it to my heirs. If I die early there is no benefit to my estate, only a 60% widow's pension. Whereas a surviving spouse can inherit the entire balance of an RRSP or RRIF tax-deferred; and an estate can inherit the entire balance less taxes due.


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## DAvid (Apr 3, 2009)

Since most in DB plans have not sheltered all they might (unless they have bought RRSP in addition to their DB contributions) this proposal benefits those who have already consumed their entire RRSP room, and have extra cash on hand to shelter in this manner. The only reason the DB recipients have the ability to contribute more to make up the "losses" due to the market slump is because they are not fully contributed. If the employee or employer contribute more in any given year the employee's RSP deduction limit decreases.

Like Guru says -- this is pandering to a particular segment of the population.


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## Jon Chevreau (Apr 4, 2009)

The second video interview with Malcolm Hamilton was published today: this is the one where he makes the TFSA retroactivity suggestion so you can get it straight from the horse's mouth:

http://www.financialpost.com/personal-finance/wealthy-boomer/index.html


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## Jon Chevreau (Apr 4, 2009)

Simon Fraser's Jon Kesselman -- an early proponent of what were then called TPSPs or Tax-Prepaid Savings Plans -- sees some issues with how Hamilton's idea would actually be implemented. But he does see plenty of scope for tinkering with the TFSA which is, after all, still in its infancy. In particular, he agrees with Hamilton that there should be "higher annual TFSA contribution limits for older cohorts over an extended transition period."

Full details on my latest blog entry, just posted:

http://network.nationalpost.com/np/...entially-larger-tfsa-room-for-older-folk.aspx


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## Jon Chevreau (Apr 4, 2009)

On my blog, Malcolm Hamilton has responded to Jon Kesselman's request on how the mechanics of retroactive TFSA contributions would work. I think the argument is pretty convincing:

http://network.nationalpost.com/np/...elaborates-on-retroactive-tfsa-mechanics.aspx

Also, this followup column appeared in various Canwest dailies, under the headline Retroactive TFSA idea strikes a chord: 

http://www.thestarphoenix.com/Retroactive+TFSA+idea+strikes+chord/1839621/story.html

Note reference to this forum at end!


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## CanadianCapitalist (Mar 31, 2009)

I read with interest the debate surrounding boosting TFSA contribution room retroactively. While I think Mr. Hamilton's suggestion seems fair, I do have some concerns:


I'd like to see some numbers on how many Canadians 55 and over will benefit from this proposal. My understanding is most Canadians have a lot of RRSP contribution room left. The folks who have maximized their contributions are a small segment of the population. If they have been maximizing their RRSP contributions all these years, they have a tidy amount of capital accumulated already.
Where does this end? A few years back, many investors, especially seniors, wanted some sort of compensation for their losses in income trusts. Now, due to a bear market, they are supporting boosting TFSA contribution room. What happens if there is another bear market and a precedent of Government ameliorating market losses is established now?

I'm also not convinced that investor portfolios are in a bad shape at today's market values. Take my own RRSP portfolio. I've been investing since 2000 and it has hardly been the best of times for stock investors. However, my RRSP market value is about 10% more than my contributions. This is despite my poor investing behaviour in the early days and having an allocation of 80 to 100 percent in stocks. It is hard to believe that older investors who should have a higher proportion in fixed income are doing worse.

PS: Jon, thanks for mentioning CMF in your column.


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## Jon Chevreau (Apr 4, 2009)

This isn't really compensation. The idea isn't to GIVE people the money they lost in their RRSPs, via taxpayers. To contribute $150,000 or so retroactively to a TFSA would still require you to come up with the money, post-tax I might add. That is if you earned $200,000 and paid 25% income tax to get it, then you could contribute the $150,000 to the TFSA. Not exactly a free lunch and as you point out not that many people may have that kind of money, in which case it's not going to cost the government much in deferred taxes on investment income.


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## CanadianCapitalist (Mar 31, 2009)

Jon Chevreau said:


> This isn't really compensation. The idea isn't to GIVE people the money they lost in their RRSPs, via taxpayers. To contribute $150,000 or so retroactively to a TFSA would still require you to come up with the money, post-tax I might add. That is if you earned $200,000 and paid 25% income tax to get it, then you could contribute the $150,000 to the TFSA. Not exactly a free lunch and as you point out not that many people may have that kind of money, in which case it's not going to cost the government much in deferred taxes on investment income.


Yes, I agree that it is not a true compensation for market losses. However, by boosting TFSA room retroactively, the Government is losing some future taxes and hence it is a cost to the taxpayer -- maybe not today but certainly in future years.

Let's say that I have $150,000 in a taxable portfolio. If I'm paying 1% tax on the dividend stream from the portfolio and I'm able to shelter it in a TFSA, there is a loss of $1,500 of tax income. It is a cost to the taxpayer.

If the Government were running a surplus, I'd be more enthusiastic of this proposal. But the reality is we are in a deficit situation today. Where is the money going to come from to pay for the costs of this proposal?


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## Jon Chevreau (Apr 4, 2009)

Remember the original name for the TFSA idea was TPSP or Tax PrePaid Savings Plan. So in this $150,000 example, you ALREADY paid the government $50,000 in income tax. Surely that's enough? The TFSA is just making it possible to build wealth tax effectively by removing double taxation: or triple taxation when you think about it, since when you do spend the funds ultimately you'll be paying GST and HST. So even under this retroactive plan, the government gets the initial income tax on the earnings to come up with the TFSA savings, and it gets another tax whack on ultimate consumption. I'd argue that's plenty of tax revenue -- remember too that unlike the RRSP, the government does not have to provide a tax deduction on the TFSA.


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## MoneyGal (Apr 24, 2009)

My problem with this is not how much tax is paid / has already been paid and whether that is "enough" (I personally feel that I've already paid enough taxes. Where's my retroactive re-instatement of, oh, I dunno, the lifetime GCE?) -- it is that this is a proposal that would very clearly benefit only a small proportion of the overall population. 

I would vastly, vastly, vastly prefer lower overall taxes than this "pick and choose" _let's reward another demographic _approach. Boomers are so much more numerically dominant than my demographic, though, that I suspect we will continue to see these kinds of proposals. 

Also: the "my RRSP lost x%" argument always seems to be predicated on peak values. There's a lot of ways to value investment gains / losses but I doubt marking to the peak accurately describes most peoples' portfolio returns. Finally, those who stayed the course are within 10% of peak values now. So now we are rewarding people for behavioural blips? I dunno.


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## steve41 (Apr 18, 2009)

When you run the numbers (using the actual tax formulation with indexed brackets, clawbacks etc) there is no discernible advantage for the retiree with _only_ RRSP/LIF capital. For the retiree with a sizable chunk of savings outside his RRSP, then the advantage is much more pronounced.

It seems to me that the penalized retiree will be the middle to low net worther who has religiously saved to his rrsp _only_. Those HNW-ers who have managed to save additionally outside their RRSP will be advantaged unfairly, IMHO.


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## MoneyGal (Apr 24, 2009)

Coming back to this to note that the reason I am peeved by it is precisely because I am *not* in the affected demographic (I just mean people within 10 years of retirement on either side, not HNW'ers). 

That is: it is difficult for me to put myself in their shoes, so to speak. Maybe I'd see things differently if I was 25 years older. But from where I stand, I'm still grouchy.


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## CanadianCapitalist (Mar 31, 2009)

MoneyGal said:


> My problem with this is not how much tax is paid / has already been paid and whether that is "enough" (I personally feel that I've already paid enough taxes. Where's my retroactive re-instatement of, oh, I dunno, the lifetime GCE?) -- it is that this is a proposal that would very clearly benefit only a small proportion of the overall population.


To me foregone taxes are an important part of the equation. Money to pay for this has to come from somewhere and there is only one taxpayer. So, the cost of a proposal that benefits a small segment of the population would be borne by the majority -- you and I and future taxpayers.


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## CanadianCapitalist (Mar 31, 2009)

MoneyGal said:


> Coming back to this to note that the reason I am peeved by it is precisely because I am *not* in the affected demographic (I just mean people within 10 years of retirement on either side, not HNW'ers).
> 
> That is: it is difficult for me to put myself in their shoes, so to speak. Maybe I'd see things differently if I was 25 years older. But from where I stand, I'm still grouchy.


Though I'm not in the affected demographic, the way the proposal is worded by Malcolm Hamilton would benefit even younger Canadians. Say you are 36 years old this year. This proposal would mean that your TFSA contribution room is bumped up to $90,000 next year. ($5,000 for the 17 years since age 18 plus $5000 for 2010). So, if you are a younger Canadian with no RRSP room and significant taxable portfolio, you would benefit. However, it doesn't seem fair to me that all Canadians should bear this cost.


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## MoneyGal (Apr 24, 2009)

I don't mean I couldn't benefit. I just mean I'm not in the demographic for which the proposal is designed. Hamilton says, 

_some Canadians need a little help right now....in *particular those between the ages of 50 and 70* who had large RRSPs, lost a lot of money in the stock market, and now have the thankless task of trying to salvage their retirement plans by saving outside a tax shelter and earning a negative rate of return after taxes and inflation._

So even though everyone over 19 could theoretically benefit from this, the reality is that most benefit accrues to older people, as noted above -- and it is people in the "retirement risk zone" (10 years either side of 60, for the sake of argument) for whom it is really designed. And I'm not in that group.


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## Jon Chevreau (Apr 4, 2009)

There's another huge group of Canadians this proposal would benefit: those with very low incomes: the ones who were discouraged from making RRSP contributions (even if they had the money) because RRIF withdrawals would just result in lower OAS and GIS payments. Retroactive TFSA room would go a long way to alleviating "senior poverty" in such cases, assuming they'd even be able to come up with the money. And more affluent seniors who are dismayed to discover that when their RRSPs became RRIFs with taxable withdrawals would welcome the opportunity to shelter more of that RRIF income in a larger TFSA. Note again that as in my previous $200K/$150K example, such seniors would first be paying income tax on the RRIF withdrawals so again Ottawa would still extract its pound of flesh, tax-wise.


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## OhGreatGuru (May 24, 2009)

Jon Chevreau said:


> *There's another huge group of Canadians this proposal would benefit: those with very low incomes:* the ones who were discouraged from making RRSP contributions (even if they had the money) because RRIF withdrawals would just result in lower OAS and GIS payments. Retroactive TFSA room would go a long way to alleviating "senior poverty" in such cases, assuming they'd even be able to come up with the money. *And more affluent seniors who are dismayed to discover that when their RRSPs became RRIFs with taxable withdrawals would welcome the opportunity to shelter more of that RRIF income in a larger TFSA.* Note again that as in my previous $200K/$150K example, such seniors would first be paying income tax on the RRIF withdrawals so again Ottawa would still extract its pound of flesh, tax-wise.


More smoke & mirrors. People with very low incomes don't have the surplus cash flow to put away $5K/yr now, much less the "retroactive to age 18" catchup that is being proposed. The people who will benefit most from TFSAs in the long run are people with plenty of disposable income, which is one of my social policy concerns about the present plan. Giving a 65 -yr old a further ~235 K tax shelter retroactively is really rubbing the noses of the poor in it.

I don't believe we need to have too much sympathy for seniors whose RRIF income is so far in excess of their needs that they are accumulating a large non-registered investment account, but don't believe they should be paying any taxes on the earnings on those accounts.


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## Jon Chevreau (Apr 4, 2009)

Here's a typical email I'm getting from seniors who have been hit hard by the 2008 crash: 

_"Withdrawals from RIF's and GIC's should not be taxable after age 65, especially for females with small company pensions and small govt pensions. It seems absolutely ridiculous to be pushed into a higher income bracket when forced to withdraw $2,000 or less from one's small RIF's and GIC's. TFSA's are a great idea too for people who are under age 65 and younger to save for their retirement. People over age 65 may not have the extra money to take advantage of TFSA's." _


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## steve41 (Apr 18, 2009)

The down side, from what I can determine, is that for the retiree who has only RRSP/LIRA savings, the proposal does nothing.

The individual with savings outside his RRSP will benefit, however. I don't know how the stats break down, but my hunch is that the former group represents a fairly large voting block.


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## Jon Chevreau (Apr 4, 2009)

Another prominent pension consultant, Greg Hurst of Morneau Sobeco, posted this on my blog:

_"Excellent idea Malcolm. I agree with you that it is simple and fair, and also would appear to be very efficient in the sense that it would simply be a minor tweak without any real administrative impact."_

http://network.nationalpost.com/np/blogs/wealthyboomer/default.aspx


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## steve41 (Apr 18, 2009)

I must be missing something. Say I was retired and had $500K in my RRSP or LIF. I have no other savings. If I am going to take advantage of this new TFSA room, the only place I will find the capital (without leveraging) is to grab it from my registered capital. I assume this will still invoke tax in the way it always has.

When you run the numbers, the 'staying the course' option is virtually the same as the 'moving RRSP capital to the TFSA' option. If the retiree has sufficient savings outside his RRSP, then the strategy makes sense... otherwise, for the average retiree with RRSP/LIF only, it makes no sense at all.


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## Jon Chevreau (Apr 4, 2009)

There are plenty of ways people could come up with the capital for retroactive TFSA contributions:

1.) Inheritance

2.) From existing non-registered savings or investments

3.) Selling your principal residence or downsizing to smaller one.

4.) Selling a business.

5.) Selling a vacation property or investment property.

That's just off the top of my head: there are no doubt quite a few others. In the case of non-registered investments, I'd argue many seniors and near-retirees took on more risk than they were truly comfortable with because the dividend tax credit makes Canadian stocks more tax efficient than interest income. That's why so many took such a huge hit on the 2008 stock crash. By letting them convert what remains of their non-registered savings to a TFSA, they could revert to the strategy David Trahair argues for in his book, Enough Bull: a ladder of GICs up to five years.


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## steve41 (Apr 18, 2009)

All this is true, but if the message that attaches to this new TFSA ceiling is, _"... and oh, by the way, this only applies to those of you who have received or will receive an inheritance, are wanting to downsize your house (if you haven't already), sell that favorite cottage, sell that business (if you are a small businessman); unfortunately it still leaves the rest of you regular, prior wage earning retirees who have followed the conventional wisdom for all your lives, (namely, putting your retirement savings into an RRSP) out of luck"... _It's still a tough sell, IMHO.


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## Four Pillars (Apr 5, 2009)

Jon Chevreau said:


> Here's a typical email I'm getting from seniors who have been hit hard by the 2008 crash:
> 
> _"Withdrawals from RIF's and GIC's should not be taxable after age 65, especially for females with small company pensions and small govt pensions. It seems absolutely ridiculous to be pushed into a higher income bracket when forced to withdraw $2,000 or less from one's small RIF's and GIC's. TFSA's are a great idea too for people who are under age 65 and younger to save for their retirement. People over age 65 may not have the extra money to take advantage of TFSA's." _


I don't know how many times I've heard the arguement that the "poor seniors" shouldn't have to pay tax on RIF withdrawals. 

Two things:

1) If the money is in a RIF then no income tax was ever paid on it. The RSP/RIF program is tax-deferral not tax-free. Everyone knows (or should know) this and they shouldn't complain when they have to pay tax on the withdrawals.

2) The idea that someone is "forced" to withdraw from their RIF is incredible. Yes, the withdrawals are mandatory and the investor (and/or financial advisor) should know this when they are making RSP contributions. This is not a new rule - it's always been there. It's not like the investor has to withdraw the entire RIF. Also - they don't have to spend the net withdrawal - they can save it.

In this email the "female retiree" hints at poverty, yet she complains about 'being forced' to withdraw from the RIF. If her income isn't enough then I would think she would want to withdraw more from her RIF, not less.


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## Jon Chevreau (Apr 4, 2009)

You're right, 4P but I've always wondered about all the energy Ottawa puts into alleviating "Senior's Poverty" (remember the aborted Seniors Benefit?), and yet they continue to tax RRIF income.

You'd think the average working Canadian who has paid income tax on earned income from 18 to 65, plus tax on interest and dividend income on non-registered investments, plus capital gains tax, PLUS provincial sales tax and GST on every purchase of a good or a service, could catch a break in their last decade or two of life. Remember, even in retirement they will continue to need goods and services, perhaps more than in their working years if their health fails and they travel a lot. Ottawa will still be reaping consumption taxes right to the end, up to and including the cost of the burial and casket.


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## MoneyGal (Apr 24, 2009)

But...poverty is almost non-existent amongst senior households. Child poverty is a much more pressing social issue. 

See in particular this report, from a non-partisan, independent source, which shows poverty levels of under 2% for married senior households. 

Take a look at Chart 7 -- poverty for all age groups is highest amongst kids, then adults aged 18-64, then seniors. 

(These findings have not shifted from 2005, but the author put special emphasis on the relative wealth of senior households, compared to all other households in Canada, in that year's report.)

When we look at the population as a whole, who really needs to catch a break?


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## CanadianCapitalist (Mar 31, 2009)

Like Jon mentioned, our perspective on this debate depends on which side of the generational divide we belong to. While I agree that we are heavily taxed, giving a tax break to a particular demographic would simply mean it comes out of another taxpayer's pocket. In this case, the baby boomers are getting a benefit at the expense of the younger demographics. I suppose that's why older Canadians are uniformly positive over the proposal and younger ones uniformly negative. 

Michael James wrote about this today:

http://michaeljamesmoney.blogspot.com/2009/07/proposed-tfsa-upgrades.html



> Both of these proposals amount to a transfer of future wealth from young to old. To put a finer point on it, because only wealthier people can make use of large amounts of TFSA room, these proposals would transfer wealth from the young to wealthy older Canadians.


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## CanadianCapitalist (Mar 31, 2009)

MoneyGal said:


> When we look at the population as a whole, who really needs to catch a break?


I hate to be a cynic but seniors vote in large numbers; children don't. Guess who the pols like to shed crocodile tears for?

Recall what happened when income trust taxes were introduced by the Tories. It was accompanied by a significant sop: the ability for senior couples to split income. The latter proposal put more money in more voters pocket compared to voters affected by the former.

It is especially surprising that the source of the TFSA proposal is Malcolm Hamilton, who points out in his research (that shows Canadians can retire on modest portfolios) that seniors have more disposable income than younger Canadians.


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## Jon Chevreau (Apr 4, 2009)

Glad to see Michael James weigh in but I had to chuckle about the notion many baby boomers took advantage of the $100,000 capital gains exemption. I'm 56 now but when that was available I was like lots of people here: paying off the mortgage and trying to maximize RRSPs. Taxable portfolios weren't a priority and by the time we were in a position to take advantage of it, it was pulled out from under us. Maybe Pre-boomers and very wealthy ones got it but not us ordinary folk. 

The other point Michael makes is kind of strange: the notion that only boomers and older folk can take full advantage of a larger TFSA. Actually, it's the opposite. The whole point is the boomers only get 5 or 10 years worth of TFSA contributions while someone who's 18 today will get $235,000 of TFSA room by the time they're 65, plus all the tax-free growth associated with that room.

Certainly, it's important to be fair across the generations. What can be fairer than saying ALL Canadians -- those in their 20s, 40s or 65-plus -- all get a lifetime contribution amount of $235,000 for their TFSAs? There's nothing magical in doling the amount out $5,000 at a time year by year. 

And there's precedent here. Remember they liberalized RESPs so that you no longer had to do it $4,000 year by year: they just opened it wide open so you can do $50,000 lump sum in year one.

That's all Malcolm and others are saying about the TFSA. All Canadians should get $235,000 (or whatever number) TFSA room. When they contribute is up to them and their financial circumstances.


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## steve41 (Apr 18, 2009)

OK... say you are 64, have 2M in savings, 1.5M in your RRSP and $500k in nonreg. (T5-ed as all interest)

Say the TFSA ceiling is raised to 50K per year, and you move 50K from your non-reg into the TFSA for the next 10 years. Result... your aftertax die-broke lifestyle comes in at $90,760 (5%/2% ror/cpi, out to age 95) If this new proposal doesn't come about, your ATI comes in at $88,431... this means the new proposal would represent a respectable advantage to your lifetime spending of $2,329 annually.

Now, say you were in the situation where your $2M was all inside your RRSP and no money outside your RRSP, nor the expectation of any. Result... if you move the same $50K for 10 years out to your TFSA from your RRSP, your aftertax die-broke lifestyle comes in at $81,584 (same 5%/2% ror/cpi, out to age 95) If this new proposal doesn't come about, your ATI would come in at $81,491. To you, the new TFSA ceiling will mean a measly $93 per year.

The retiree with money outside his RRSP will have a tremendous advantage over the retiree with all his money in his RRSP.


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## 83gemini (Apr 4, 2009)

I think since, broadly speaking, Canada's welfare regime directs the bulk of its money (directly and indirectly) to older Canadians, giving more to older Canadians would be par for the course, even if it's bad public policy.


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## steve41 (Apr 18, 2009)

FP said:


> Two things:
> 
> 1) If the money is in a RIF then no income tax was ever paid on it. The RSP/RIF program is tax-deferral not tax-free. Everyone knows (or should know) this and they shouldn't complain when they have to pay tax on the withdrawals.
> 
> 2) The idea that someone is "forced" to withdraw from their RIF is incredible. Yes, the withdrawals are mandatory and the investor (and/or financial advisor) should know this when they are making RSP contributions. This is not a new rule - it's always been there. It's not like the investor has to withdraw the entire RIF. Also - they don't have to spend the net withdrawal - they can save it.


 FP.... Right on! Now, if only everyone could have those two points burned onto the inside of their eyeballs. A point number three should perhaps be... _when considering the tax on those far term 'forced' withdrawals, remember to consider the 'time-value-of-money' effect.... those taxes are being paid way out in time, and as well, the effective tax rate is lower in the future due to the indexing of the tax brackets and the various tax breaks for seniors._


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## CanadianCapitalist (Mar 31, 2009)

Jon Chevreau said:


> The other point Michael makes is kind of strange: the notion that only boomers and older folk can take full advantage of a larger TFSA. Actually, it's the opposite. The whole point is the boomers only get 5 or 10 years worth of TFSA contributions while someone who's 18 today will get $235,000 of TFSA room by the time they're 65, plus all the tax-free growth associated with that room.
> 
> Certainly, it's important to be fair across the generations. What can be fairer than saying ALL Canadians -- those in their 20s, 40s or 65-plus -- all get a lifetime contribution amount of $235,000 for their TFSAs? There's nothing magical in doling the amount out $5,000 at a time year by year.


It is true that the way TFSAs are structured are not very favourable to those nearing retirement. However, younger people today get the $235,000 of contribution room only if the TFSA stays as it is for their lifetimes. I wouldn't count on it. If the TFSA gets too popular, you'll start to get grumblings about "tax leakage" from Government circles. 

It comes down to cost. By parceling out TFSA contribution room in $5,000 chunks, the Finance Department is limiting the tax advantages. In the interview, Mr. Hamilton says that the costs of retroactive TFSA room is minimal. I'd like to see some numbers backing up that claim.



> And there's precedent here. Remember they liberalized RESPs so that you no longer had to do it $4,000 year by year: they just opened it wide open so you can do $50,000 lump sum in year one.


True. But someone contributing $50K to a RESP loses $6,200 or so of future CESG. In any case, the investment growth within a RESP is not exactly tax free. It is taxed at the hands of the beneficiary. Granted most students will pay little or no tax but the Government will get its pound of flesh from a RESP that is too successful.

I should clarify that I'll personally benefit if retroactive TFSA becomes a reality. I'm 35 and I'll gain quite a bit of TFSA room that will come in handy for saving outside a RRSP. However, I believe that, while personally beneficial, this isn't very fair because this proposal disproportionately benefits older & wealthier Canadians exclusively.


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## Jon Chevreau (Apr 4, 2009)

When Malcolm says there's not much cost to Ottawa with the TFSAs, he means there are no tax deductions up front, as there is with an RRSP. So in the short term, it costs Ottawa less to give us TFSA room rather than RRSP room. 

Over the long haul, it's different but as you point out, over the long haul they may well change the rules mid-stream as indeed they did with the now departed $500,000, then $100,000 capital gains tax exemption.

Perhaps someone handy with a calculator could compare the "costs" to government of the $100,000 exemption versus $235,000 of TFSA room. Might be in the same ball park, I suspect. For couples, double the figures.


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## steve41 (Apr 18, 2009)

Alright let's shine some light on this perception that the TFSA is going to somehow tremendously advantage the younger taxpayer in some magical way. For the average individual strictly saving for retirement, the TFSA has virtually no advantage over the RRSP.

For instance, a 32-yr old wage earner grossing $50K per year, retiring at 60 and dying broke at 95, his lifetime constant ATI solves at $36,159. (based on $20K in his RRSP, 6% growth, 2% inflation, living in BC)

That same individual who chooses to invest in his TFSA exclusively instead, will realize a whopping $36,174. 

$15 dollars a year advantage. Whoop de doo.

Now... when you take the estate issue into account, the TFSA will deliver a better estate result should our guy die early, and if he is called on to come up with an unscheduled lump sum withdrawal at some point, the TFSA provides a better way to do that, but for the constant income-no estate concern individual, the RRSP and the TFSA are a saw-off.

(this outcome will vary for individuals with higher or lower salaries, but it is interesting to see just how tax-neutral the RRSP is in this 'normal' simple example)


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## stephenheath (Apr 3, 2009)

While I understand you did a simple example steve41... I received quite different results between the two when I did my calculations.

The first thing that should have caused a significant difference was the forced RRIF withdrawals... the money moves outside the RRSP and is taxed, and then the income from it is taxed again.. if you're assuming a lifespan of 95, that's 25 years when the income would continue to grow tax free if it was left in there. I think the difference may be that you're assuming drawings to live off of, but I'm planning to have enough money to live on already outside the TFSA/RRSP.

The second thing was that the RRSP withdrawals, because they count as income, can kick in the clawing back of the OAS and GST tax credits, whereas the TFSA does not.

That said, since I plan to max out both in my case it doesn't make a difference, but for those just contributing to one or the other, the TFSA seems to make more income if you're going to take less than the minimum RRIF's out or if you have enough other income that it pushes into clawback territory.

PS: Regarding



> Alright let's shine some light on this perception that the TFSA is going to somehow tremendously advantage the younger taxpayer in some magical way. For the average individual strictly saving for retirement, the TFSA has virtually no advantage over the RRSP.


To me the advantage is having both available and thus having that much more income growing tax free, so for those that keep up with it through the years it's kind of like they boosted the RRSP contribution room. (Which they could have easily done as well).


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## steve41 (Apr 18, 2009)

All that is considered.... the forced rrif withdrawals incurring tax, OAS clawback... (for this guy, he never gets to OAS clawback in any event)

Plus, remember, I don't approximate taxation... I use the full progressive T1 algorithm with fed and prov taxes, pension tax credit, age 65 credit and, importantly, indexed tax brackets.

The only thing I did differently is that while I assumed 2% inflation, I considered his salary to grow at 3%, which is a bit more realistic for a 32 year old. It changes thing a bit.


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## Jon Chevreau (Apr 4, 2009)

Terry Corcoran on Malcolm Hamilton's retirement rescue plan; Hamilton explains how TFSA retroactivity works; letters http://cli.gs/yRgvBv

If link broken, try this: http://network.nationalpost.com/np/...oran-malcolm-hamilton-s-rrsp-rescue-plan.aspx


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## Jon Chevreau (Apr 4, 2009)

Looks like CARP -- the Association for 50 Plus -- will also be getting behind the retroactive TFSA contribution recommendation. Here's what CARP vp advocacy Susan Eng said today:

http://network.nationalpost.com/np/blogs/wealthyboomer/default.aspx


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## DAvid (Apr 3, 2009)

Seems like CARP is talking more about the issue raised by Michael James in this discussion. The bulk of the comments from Ms. Eng seem to be for those who have lost pensions owed to them by now bankrupt corporations, or for a well managed investment program, like CPP, for folk to participate in. The tacit support of Hamilton's retroactive TFSA seems almost an aside, and of course would not help the seniors CARP has been lobbying for, as many are without high levels of income, either because they did not contribute to a plan, or have lost their pensions to bankruptcy.


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## steve41 (Apr 18, 2009)

These two projections illustrate just how close the RRSP is to being tax neutral. The subject is 32, earns $50K salary, and has $20K already in his RRSP. The only oddity is that I have assumed his salary will grow at 3% even though inflation is 2%. This is a more realistic assumption for someone just starting out in a career.

Taxation is BC-based, growth on capital is 6% throughout and he will take early (age 60) CPP. His 'die-broke age' is 95.

Study 1... contributing primarily to RRSP

Study 2... contributing solely to TFSA

Note... the 'outside the RRSP' capital is not taxed on growth, so any reference to 'non-reg' in these reports should be considered as TFSA in nature. I assumed no limit on TFSA contributions.


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## Jon Chevreau (Apr 4, 2009)

Perhaps not surprisingly, almost 90% of CARP members responding to a poll on retirement income reform were in favor of retroactive TFSA contributions. Details on my blog today:

http://network.nationalpost.com/np/blogs/wealthyboomer/default.aspx


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## steve41 (Apr 18, 2009)

Here is my take.

For years, the average Canadian saving for retirement has relied on the mathematical reality of the income tax system, namely.... saving for retirement is more efficient inside your RRSP. The near-term tax deduction on contributions offsets the far-term tax on withdrawals. Capital saved outside your RRSP (even when dividends and capgains are taken into account) will be subject to taxation (friction) on growth, and result in a less advantageous outcome than going the RRSP route.

Now, all of a sudden, the government is going to change the rules of the game... "all those individuals who avoided or curtailed saving to their RRSP contrary to the math are going to be arbitrarily rewarded... we are removing the effect of taxation on growth of your 'outside the RRSP' capital. For those of you poor suckers who fell for the scam and dutifully opted for the RRSP.... tough luck."

I would be willing to bet that CARP didn't explain the biased nature of the proposal.


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