# When do you predict TFSA will get curbed or removed?



## savvybuck

I love the TFSA, but there's no way it can be allowed to continue forever...

If an upper class 18 year old contributes $5,000 per year until 65 and assuming 7-9% growth rate, he would have a million by 65 and whatever gains from that portfolio would be tax free.


Or even those who gambled on penny stocks and now they are sitting on $200-300K portfolios can redistribute to index funds and let that grow tax free


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## Eclectic12

They'll do fine ... but with only 47% of Canadians having a TFSA and of that, 57% holding cash - most people aren't anywhere close to 7-9%.

Then start adding in all the posts from people that say "I turned $5K into $1K, can I claim the capital loss or put new money in to replace it?", I am doubting the tax revenue lost is all that high. Then add in that where people would have contributed to an RRSP for a refund they have re-directed to a TFSA, the gov't does not have to pay out the refund.


Even in the CMF TFSA thread, where the returns should be better than average - nobody is posting that they have cracked the $100K barrier.


So I suspect we are a long way off.


Cheers


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## Taraz

savvybuck said:


> I love the TFSA, but there's no way it can be allowed to continue forever...
> 
> If an upper class 18 year old contributes $5,000 per year until 65 and assuming 7-9% growth rate, he would have a million by 65 and whatever gains from that portfolio would be tax free.
> 
> 
> Or even those who gambled on penny stocks and now they are sitting on $200-300K portfolios can redistribute to index funds and let that grow tax free


The Americans have had the comparable Roth IRA since '98. For every person who wins at penny stock gambling, there are 10 that lose (and the losses aren't deductible).


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## Four Pillars

Eclectic12 said:


> Then add in that where people would have contributed to an RRSP for a refund they have re-directed to a TFSA, the gov't does not have to pay out the refund.


This.

I think the TFSA is a good & useful tool, but it is very over-rated, especially in places like this forum. If you think the TFSA is too good to be true, then either you have a different tax situation than most people or you don't understand how RRSPs work.


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## OhGreatGuru

Not while the Conservatives are in power, because they would have to admit they made a mistake in how they set it up.
Not while there is a minority government, because changing it will be unpopular with some people.
So we will have to wait for a majority government of some other stripe than Conservative.


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## Four Pillars

And one more thing...

One 'loophole' which I think should get closed is that currently withdrawals from TFSA don't count for GIS eligibility which is crazy.


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## sags

I agree with Four Pillars...........

I think the most likely change will be the inclusion of both income and assets to determine GIS eligibility.

The concept will be......"spend your own money first".........and it will be popular with the taxpayers of the day, as they face rising costs to GIS for those without pensions or retirement savings.

It would be hard to defend what some see as welfare for seniors..........when they could have a million dollar home, TFSA or both.


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## Eclectic12

savvybuck said:


> ... If an upper class 18 year old contributes $5,000 per year until 65 and assuming 7-9% growth rate, he would have a million by 65 and whatever gains from that portfolio would be tax free ...


I forgot to mention that at least this way, there is the contribution limit to provide somewhat of a cap. 

You might not be aware that prior to Jan 1, 1972 - all capital gains were tax free, whether one was middle or upper or lower class.
http://business.financialpost.com/2012/04/21/how-to-calculate-your-capital-gains-tax-or-not/

( *sigh* I was born too late! :rolleyes2: )




Four Pillars said:


> And one more thing...
> 
> One 'loophole' which I think should get closed is that currently withdrawals from TFSA don't count for GIS eligibility which is crazy.


... +1 ... though personally, since I see OAS as being for those who need it - I wouldn't mind if TFSA withdrawals were added to the income test ... but that's just me.


Cheers


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## steve41

sags said:


> I agree with Four Pillars...........
> 
> I think the most likely change will be the inclusion of both income and assets to determine GIS eligibility.


They already tried that. The Seniors Benefit was a major bust.


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## Eclectic12

Four Pillars said:


> ... I think the TFSA is a good & useful tool, but it is very over-rated, especially in places like this forum.
> If you think the TFSA is too good to be true, then either you have a different tax situation than most people or you don't understand how RRSPs work.


I understand the gist ... but I'm surprised the TFSA would be over-rated in this forum. If more people on this forum are learning about investing and ending up with more money - won't the number who have maxed out both registered accounts be higher?


Cheers


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## humble_pie

i def agree that TFSA withdrawals should be added to GIS & OAS applications & eligibilities. Existence of a TFSA must be taken into consideration. I can't understand how or why they failed to plan for this.

btw does anyone know what happens to a TFSA upon death? is there some ghastly consequence like suddenly the taxpayer, who had been enjoying his TFSA tax-free, becomes fully taxable upon death for what's left in the plan?

an rrsp can be bequeathed to spouse or minor children as a tax-free rollover event, but can a tax-free account? somehow i doubt this.

i've never researched this issue, just asking out of idle curiosity ...


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## al42

btw does anyone know what happens to a TFSA upon death? is there some ghastly consequence like suddenly the taxpayer, who had been enjoying his TFSA tax-free, becomes fully taxable upon death for what's left in the plan?

Here u go.

http://www.theglobeandmail.com/glob.../learning-from-tfsas-rule-book/article791507/


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## DividendLuvr

humble_pie said:


> an rrsp can be bequeathed to spouse or minor children as a tax-free rollover event, but can a tax-free account? somehow i doubt this.
> 
> i've never researched this issue, just asking out of idle curiosity ...


The answer is yes, through the same process as designating a beneficiary for your RRSP.


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## Barwelle

Eclectic12 said:


> Then start adding in all the posts from people that say "I turned $5K into $1K, can I claim the capital loss or put new money in to replace it?


Wow that's an interesting idea... Gov't doesn't lose tax revenue from reduced taxes when capital losses occur in TFSAs. So there is a bit of a balancing effect.

So if you take the worst example of investor who continually loses money over time by buying high when times are good, and panicking in the bad times, selling low... The government is getting _more_ tax revenue from that person than if they had it in an unregistered account! (Assuming they would have other capital gains that they could offset with their losses...)


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## Ethan

Eclectic12 said:


> Even in the CMF TFSA thread, where the returns should be better than average - nobody is posting that they have cracked the $100K barrier.


My wife and I combined have over $100k in our TFSA's. Slightly more than $38,000 in tax-free gains! Hopefully the limit gets increased to $10k when Canada starts running surpluses.


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## liquidfinance

My prediction is that they will change it to something similar to the British Tax Free ISA

Annual Limit indexed to Inflation. Currently $22000 at current exchange rates in trading accounts or $10989 in cash accounts. 

Gains and income remain tax free as they are now

You do not regain any contribution room once you make a withdrawal. 
Contribution room does not carry over. Use it or lose it. 


Failing that they could keep it the same as now but with a lifetime limit. Changes will probably be 12 months after the federal election or the year after Harper doubles the limit.


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## doctrine

> If an upper class 18 year old contributes $5,000 per year until 65 and assuming 7-9% growth rate, he would have a million by 65 and whatever gains from that portfolio would be tax free.


At 9%, it's not a million, it's almost 4 million. Of course, that's not inflation adjusted, but contribution room does grow by inflation as well which will compensate for some inflation loss. All in all, for people who invest aggressively in their TFSAs, there is serious long term potential for tax sheltering. And there is a possibility the government could increase it to $10k/year.


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## humble_pie

thankx so much, al42 & dividend lvr, for the helpful info


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## My Own Advisor

This account could be amazing for any aggressive young saver, as doctrine says. I can't wait until they raise it to $10/year. I will do whatever I can to try and max it out every year.


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## donald

I was just wondering if the banks(canadian financial institutions ect)have any benefit to have that much more assets under management and thus spins off directly to the canadian economy/government/businesses ect
If you have a extra billion(i have know idea,just throwing it out there)in tfsa in the country(citizens)this can not be a bad thing no?
I might not be wording this right and admit i'm not versed in what i am talking about,but i am sure someone knows what i am trying to convey.


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## cainvest

I think the TFSA is good just the way it is ... no need to change anything.


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## andrewf

Whether someone holds a bank MF in their TFSA or non-reg, the bank still makes their 2% on assets and pays tax on their profit. The government loses out on the ~30% tax of the ~7% nominal return if it's in a TFSA, though.


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## GoldStone

Four Pillars wins the thread:



Four Pillars said:


> I think the TFSA is a good & useful tool, but it is very over-rated, especially in places like this forum. If you think the TFSA is too good to be true, then either you have a different tax situation than most people or you don't understand how RRSPs work.


It's very common to underestimate how good of a deal RRSPs are. 

1. you enjoy tax free compounding.
2. you often get a contribution match from your employer.
3. you have a chance to play the tax arbitrage game, if your MTR on withdrawals is lower than MTR on employment income.
4. investing pre-tax money is akin to an interest-free margin loan from the government, with no chance of a margin call until you turn 71.

1: RRSP/TFSA tie
2, 3, 4: advantage RRSP

Think long and hard about point #4. It's amazing.


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## bgc_fan

While RRSPs do have a lot of advantages. The TFSA does have the one advantage that a lot of people here want to give up: namely that TFSA withdrawals don't count as income. This is pretty important when dealing with clawbacks and income tax. 
While those with pension plans are fewer and far between, TFSA does give a good alternative as the pension adjustment will greatly reduce RRSP room, and if you are collecting a pension, the tax arbitrage may not be as effective as if your RRSPs were the sole income source.


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## cainvest

bgc_fan said:


> namely that TFSA withdrawals don't count as income.


Could be a very key point sometime in the future.
If your retirement tax structure puts you over the clawback you can just start using TFSA to bring you back under.
Also, if you want to make a "big purchase" one year, say to get that [insert higher priced item here (car, boat, etc)] you always wanted, TFSA comes to the rescue.


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## My Own Advisor

TFSAs work for everyone, regardless of income. RRSPs work for most but the more employment income you make, the better.


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## carverman

My Own Advisor said:


> TFSAs work for everyone, regardless of income. *RRSPs work for most but the more employment income you make, the better*.


Agree..and for those in retirement and close to that age (69) where you have to convert your RRSP into a RRIF, the TFSA makes more sense, even if the max contribution is $5500 per
year, unless you have made withdrawals in the previous year. For someone at my age group and tax bracket 16% fed and 5.05% Provincial, If I put 5,500 into an RRSP at this point,
I only get a tax break of 21% ($1155) against my taxes in the year I contribute. True that inside the RRSP all interest and growth is sheltered....but when it's time to pull some of that
out as supplementary income...it's added back as income and the 21% tax applies again (minus deductions of course).


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## Eclectic12

DividendLuvr said:


> The answer is yes, through the same process as designating a beneficiary for your RRSP.


Is it? 

I thought that a TFSA has to specifically name a "Successor Holder" for the spouse or common law partner to be able to keep the TFSA running.
Otherwise the named beneficiary is a "Designated Beneficiary" who receives the proceeds but has to start paying taxes on any gains made during the windup and after receiving the proceeds. I seem to recall an article saying that even if the spouse is named, unless the "Successor Holder" is explicitly stated, the spouse will be treated as a "Designated Beneficiary".

For the RRSP - I thought that there was no such need for a specific designation as simply naming them as a beneficiary gave the best benefit.

... or maybe things have changed?


Cheers


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## Eclectic12

Barwelle said:


> ,,, So if you take the worst example of investor who continually loses money over time by buying high when times are good, and panicking in the bad times, selling low [_in a TFSA_] ... The government is getting _more_ tax revenue from that person than if they had it in an unregistered account! (Assuming they would have other capital gains that they could offset with their losses...)


Yes ... though the same is true for an RRSP ... yet another reason to make sure one's methods are minimising losses.


Cheers


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## Eclectic12

Ethan said:


> My wife and I combined have over $100k in our TFSA's. Slightly more than $38,000 in tax-free gains! Hopefully the limit gets increased to $10k when Canada starts running surpluses.


Congrats!

You are the first I can recall posting here ... compared to the many at work who are holding cash or are up maybe 10%.


Cheers


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## Eclectic12

doctrine said:


> ... All in all, for people who invest aggressively in their TFSAs, there is serious long term potential for tax sheltering...


Potential ... yes ... the trick is how many can do it consistently or wisely move huge gains from a successful aggressive pick into more conservative investments.




My Own Advisor said:


> This account could be amazing for any aggressive young saver, as doctrine says...


At savings rates of 1% to 3%, I suspect you mean a saver that has also has good investing track record ... 




donald said:


> I was just wondering if the banks(canadian financial institutions ect)have any benefit to have that much more assets under management and thus spins off directly to the canadian economy/government/businesses etc. ...


It depends on whether they have place to put the savings deposits to work for more than they are paying. With so much apparently in cash, the payout won't be high ...

For the economy, I suspect the only real gain is if people were going to stick the money under their mattress. If they are a saver, they would have likely kept in a savings account that would have the same net effect. It might actually be slowing down the economy if the individual is deciding not to spend as they can put the money away tax free in the TFSA.

For those who put their TFSA money into either MF's or stocks, then the banks will be making MERs or commissions.


Cheers


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## Four Pillars

Eclectic12 said:


> I thought that a TFSA has to specifically name a "Successor Holder" for the spouse or common law partner to be able to keep the TFSA running.
> Otherwise the named beneficiary is a "Designated Beneficiary" who receives the proceeds but has to start paying taxes on any gains made during the windup and after receiving the proceeds. I seem to recall an article saying that even if the spouse is named, unless the "Successor Holder" is explicitly stated, the spouse will be treated as a "Designated Beneficiary".
> 
> For the RRSP - I thought that there was no such need for a specific designation as simply naming them as a beneficiary gave the best benefit.
> 
> ... or maybe things have changed?
> 
> 
> Cheers



http://www.moneysmartsblog.com/esta...ry-successor-holder-tax-free-savings-account/


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## Eclectic12

bgc_fan said:


> While RRSPs do have a lot of advantages.
> 
> The TFSA does have the one advantage that a lot of people here want to give up: namely that TFSA withdrawals don't count as income. This is pretty important when dealing with clawbacks and income tax.


True ... though for the clawbacks, at some point it becomes a zero sum game. There's only so much one can put in a TFSA and for the clawbacks, it doesn't matter whether the income is CPP, a company pension or investments.

In fact, eligible dividend income is the worst from a clawback perspective as something like $1.38 is reported for the income test versus $1 of received dividends.




bgc_fan said:


> While those with pension plans are fewer and far between, TFSA does give a good alternative as the pension adjustment will greatly reduce RRSP room, ...


For those with a defined benefit pension, the PA is significant. There are fewer and few of these.

For everyone else, I'm not sure why you'd see the PA as an issue. For a defined contribution pension - where the employer puts in $1 and the employee puts in $1, the PA = $2.

Without the PA, those with a pension would be able to tax deferr more money than those with only an RRSP.




bgc_fan said:


> ... and if you are collecting a pension, the tax arbitrage may not be as effective as if your RRSPs were the sole income source.


Maybe ... it varies. 

Don't forget that there's nothing that says one can't pull extra out of the RRSP in low income years or early retirement before CPP kicks in to help the situation.

Then too, the pensions I have belongs to are only paying out 2% per year worked so even if one has been around twenty years - that's only 40% of current income. I'm pretty sure CPP isn't going to make that up.


Cheers


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## savvybuck

Eclectic12 said:


> They'll do fine ... but with only 47% of Canadians having a TFSA and of that, 57% holding cash - most people aren't anywhere close to 7-9%.
> 
> Then start adding in all the posts from people that say "I turned $5K into $1K, can I claim the capital loss or put new money in to replace it?", I am doubting the tax revenue lost is all that high. Then add in that where people would have contributed to an RRSP for a refund they have re-directed to a TFSA, the gov't does not have to pay out the refund.
> 
> Even in the CMF TFSA thread, where the returns should be better than average - nobody is posting that they have cracked the $100K barrier.
> 
> So I suspect we are a long way off.
> 
> Cheers


Note that we are only 4 years into the TFSA.
Personally, I am at 20%, $37.5K from $31K limit... not the greatest.

How about 10 years later? Your contribution limit would be 52K. I am bullish of the economy and perhaps the market will soar and TFSA would be $100K.

How about 40 years later? Your potential tax free gain would be in the millions. That's millions that the government lost in potential revenue.

Compounding has an amazing effect with time.


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## Eclectic12

savvybuck said:


> Note that we are only 4 years into the TFSA.
> Personally, I am at 20%, $37.5K from $31K limit... not the greatest.


If you mean the TFSA existing - the TFSA was started Jan1, 2009, which puts the TFSA into year six ... unless you mean you have only used it for four years?




savvybuck said:


> How about 40 years later? Your potential tax free gain would be in the millions. That's millions that the government lost in potential revenue. Compounding has an amazing effect with time.


*shrug* - this assumes no mistakes, not having a bunch in cash or GICs and steady compounding.

BTW, at $5K a year of TFSA contribution room, the "millions" in gains is coming out of $200K in contributions ... which IMO doesn't leave much room for mistakes or down markets or shifting to a new investment just before a big gain.


In any case - during the fifth year of existence for the TFSA, only half of Canadians have one, one in ten know what can be held in a TFSA and BMO's study indicated more than 2/3 of TFSA funds are in low return/low risk investments such as cash or GICs.

Plus for those less sophisticated, there's the confusion of articles such as "Are TFSAs a bad investment for the average Canadian?".


Cheers


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## Four Pillars

savvybuck said:


> Note that we are only 4 years into the TFSA.
> Personally, I am at 20%, $37.5K from $31K limit... not the greatest.
> 
> How about 10 years later? Your contribution limit would be 52K. I am bullish of the economy and perhaps the market will soar and TFSA would be $100K.
> 
> How about 40 years later? Your potential tax free gain would be in the millions. That's millions that the government lost in potential revenue.


No, they actually haven't lost any revenue.

I don't have time to get into details - maybe Steve41 will set the story straight (once again).


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## Eclectic12

Four Pillars said:


> http://www.moneysmartsblog.com/esta...ry-successor-holder-tax-free-savings-account/


So it seems the special designation is required for the TFSA ... is it for the RRSP?


Cheers


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## Four Pillars

Eclectic12 said:


> So it seems the special designation is required for the TFSA ... is it for the RRSP?
> 
> 
> Cheers


No. It's a bit of an odd situation. For the RRSP, if you die - the money gets cashed in or transferred to a new account (with new owner). With the TFSA, the money can get cashed in, transferred to a new account OR the account itself can be changed to have a new owner (ie keep the same account number) which would be the former successor holder.

I'm not 100% sure of all the logic behind all that, (and I could be dead (pardon the pun) wrong) but it seems like the feature of keeping the same account number is the main purpose behind the successor holder designation being separate from a regular beneficiary like for an RRSP.

Or maybe the government wanted it to be clearer that the potential beneficiary has spousal benefits? Not really sure.


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## Xoron

Four Pillars said:


> No. It's a bit of an odd situation. For the RRSP, if you die - the money gets cashed in or transferred to a new account (with new owner). With the TFSA, the money can get cashed in, transferred to a new account OR the account itself can be changed to have a new owner (ie keep the same account number) which would be the former successor holder.
> 
> I'm not 100% sure of all the logic behind all that, (and I could be dead (pardon the pun) wrong) but it seems like the feature of keeping the same account number is the main purpose behind the successor holder designation being separate from a regular beneficiary like for an RRSP.
> 
> Or maybe the government wanted it to be clearer that the potential beneficiary has spousal benefits? Not really sure.


When my FIL passed away, we just assumed that his TFSA account no longer existed *as* a TFSA account. Now, the account still existed, but any gains / losses from the date of death to when the account was liquidated were accounted for like it was a cash account. So capital gains / dividends were taxable to the estate after his death.

We did the same thing with his RRIF (no surviving spouse or dependent child).

And it can take *MONTHS* to get accounts closed, even with a will and uncontested estate. All around, dying sucks for the people left behind.


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## bgc_fan

Eclectic12 said:


> In fact, eligible dividend income is the worst from a clawback perspective as something like $1.38 is reported for the income test versus $1 of received dividends.


Dividend income gross-up is one of the more "interesting" tax issues. While most people are too late in the game to completely finance their retirement with TFSAs, who's to say in the future as the contribution limits increase. I don't think there's any provision for a maximum limit, though I could imagine a max limit at some point in time, i.e. no more than the RRSP limit.



Eclectic12 said:


> Without the PA, those with a pension would be able to tax deferr more money than those with only an RRSP.


I'm not saying there's an issue with the PA concept, I'm just saying that TFSAs allows for a greater opportunity to differ taxes. While some pensions are more stable than others, you do have the example of Nortel with underfunded pensions and the retirees left holding the bag. TFSAs would give another option and flexibility for retirement.



Eclectic12 said:


> Maybe ... it varies.


That's why I said may not be. Everyone's situation is different. Maybe someone is a wizard investor (or really lucky) and ended up with a large RRSP account. There is not too much flexibility to minimize taxes, whereas for a TFSA it wouldn't be an issue. Of course, that's a problem I'm sure everyone would like to have and not too common. :tongue-new:



Eclectic12 said:


> Then too, the pensions I have belongs to are only paying out 2% per year worked so even if one has been around twenty years - that's only 40% of current income. I'm pretty sure CPP isn't going to make that up.


The consideration would be that most of your large expenses are no longer an issue (saving for retirement, mortgage is paid off, less tax to pay due to lower income). As for CPP, well, some government pensions (or is it only RCMP and military?) have a claw-back so their pension is reduced by the same amount as what you should be receiving from CPP.


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## Barwelle

GoldStone said:


> Four Pillars wins the thread:
> 
> 
> 
> It's very common to underestimate how good of a deal RRSPs are.
> 
> 1. you enjoy tax free compounding.
> 2. you often get a contribution match from your employer.
> 3. you have a chance to play the tax arbitrage game, if your MTR on withdrawals is lower than MTR on employment income.
> 4. investing pre-tax money is akin to an interest-free margin loan from the government, with no chance of a margin call until you turn 71.
> 
> 1: RRSP/TFSA tie
> 2, 3, 4: advantage RRSP
> 
> Think long and hard about point #4. It's amazing.


I have issue with a couple of these points. First, #1 isn't really correct... it's more like tax-deferred compounding. TFSAs have tax free compounding, not RRSPs. (I'm nitpicking)

I don't think #4 is as good of a deal relative to TFSA as you think it is. It really depends on the assumption that #3 will happen for you. If your MTRs are the same, it's equal.

You've probably seen this worked out before, but in case you haven't:

Assumptions:
You have $1,000 pre-tax lump sum to invest.
Your MTR is 40% when you invest and when you withdraw, say 10 years later.
So your after-tax lump sum is $600.
Annual gains are 5%.

So your RRSP starts at $1,000, and 10 years later is at $1,628.89.
Your TFSA starts at $600, and 10 years later is at $977.34.

Looks great for the RRSP... but if you take 40% off $1,628.89, you're left with $977.33.

So yea... _it really depends on the "If" of #3 happening_. It also relies on people contributing that tax refund into their RRSP... which anecdotally is something a lot of people don't do.



Xoron said:


> All around, dying sucks for the people left behind.


That's why I don't plan on sticking around when I die :stupid:


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## Barwelle

So really, they are fairly on par with each other, they accomplish the same thing in different ways.

Though TFSAs have an advantage, at least for now, since as others have pointed out, they don't count towards clawbacks.

Edit, forgot about your point #2, which is an advantage for RRSPs for sure... (Wish my employer had an RRSP matching program!)


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## Four Pillars

Barwelle said:


> Though TFSAs have an advantage, at least for now, since as others have pointed out, they don't count towards clawbacks.


I'd argue that the flexibility of TFSAs is an advantage. You can put short term money in a TFSA and you can also contribute long term money to a TFSA - leave it there or take it out and put some in an RRSP if it makes sense later on.

With an RRSP - once it's in there - it's in there.

Of course, for a lot of people - having the money "locked-in" to an RRSP is a psychological advantage so they don't spend it all.

Whatevs - they can both be useful accounts in the right situation.


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## cainvest

Barwelle said:


> It also relies on people contributing that tax refund into their RRSP... which anecdotally is something a lot of people don't do.


But what happens when they do invest the refund into their RRSP?


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## Barwelle

cainvest, then TFSA = RRSP as per my example...

What I mean is, my example works only if people contribute, to their RRSP, $1000 of pretax income. If they would contribute $600 of after-tax income to their TFSA.

If you contribute $600 to your TFSA, then to contribute the equivalent to your RRSP, then you should send $1000 - of which $600 is after tax income, and $400 is the amount of income tax that is/will be refunded to you. 

(That $400 was deducted at source but is refunded to you when you tell the CRA via your tax return that you made a $1000 RRSP contribution, because RRSP contributions reduce your pre-tax income).

Does that make sense?


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## Four Pillars

If they don't reinvest the tax refund (assuming there is one), then they are investing different amounts in the TFSA vs RRSP and the comparison isn't valid.

If that is the case, they should invest less in the TFSA to make up for it.

IE Invest $8,333.33 into the RRSP (this is post-tax money at a 40% rate), spend the refund on beer and compare that to investing $5,000 into a TFSA.

Barwelle - good illustration that RRSP = TFSA.


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## cainvest

lol, my bad ... not enough sleep last night.


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## Barwelle

You know what, I just realized a flaw in my calculations, Goldstone, maybe you realized this before and that was what you were referring to...

You get a tax refund based on your marginal tax rate when contributing ... but when you pull money out in your retirement, even if you're MTR is still 40%, only part of your money is taxed at 40%, so your average tax rate is going to be lower, and that's really the number you have to consider.

Hmm. I guess this is where I eat my foot. [edit:] well, maybe not... it really depends of course. If all your income is from RRSP, then your average tax rate on RRSP withdrawals is much lower than your MTR. But if you have a significant amount of other income, then the tax rate on your RRSP withdrawals will be closer to your MTR.

Four Pillars, I agree on both your points - there are pros and cons to the flexibility of the TFSA.


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## cainvest

Barwelle said:


> You get a tax refund based on your marginal tax rate when contributing ... but when you pull money out in your retirement, even if you're MTR is still 40%, only part of your money is taxed at 40%, so your average tax rate is going to be lower, and that's really the number you have to consider.


A extreme example (I've had a coffee now so thinking "should" be good) is putting money away at a 40% tax rate and extracting at an amount below your basic exemption during retirement (0% taxed). Of course the vast majority with go up through the tax brackets as the withdrawls with be more than the basic exemption.


----------



## Eclectic12

bgc_fan said:


> Dividend income gross-up is one of the more "interesting" tax issues. While most people are too late in the game to completely finance their retirement with TFSAs, who's to say in the future as the contribution limits increase.


 ... for someone who was 18 in 2009 and wants to retire at 60, based on what's available today - they currently would get something like $235K of TFSA contribution room. If they can use it all up and can make it fund their retirement, that's great.

But unless inflation runs rampant (are they really ahead in that situation?) or the gov't increases the yearly amount - their only source of this fully funded retirement from their TFSA is a really good investing record.




bgc_fan said:


> I'm not saying there's an issue with the PA concept, I'm just saying that TFSAs allows for a greater opportunity to differ taxes.


Your original statement made it sounds like PAs are a source of trouble that TFSA contributions are a good alternative that fix the issue. Trouble is for most people with pensions - the only way to do anything about it is to quit both the job and the pension. 

With the majority of people having pensions that the PA reduces RRSP room on a 1:1 ratio - I'm not clear that this is a problem or how quiting the job & pension is going to help.




bgc_fan said:


> While some pensions are more stable than others, you do have the example of Nortel with underfunded pensions and the retirees left holding the bag. TFSAs would give another option and flexibility for retirement.


Assuming the pensioner has the money, puts into the TFSA and has a reasonable investment strategy - sure. 

In the case of the pension is underfunded pension - then the pensioner is not likely to have problems with tax arbitrage on the funds from their RRSP as they are receiving a reduced pension, correct?




bgc_fan said:


> That's why I said may not be. Everyone's situation is different. Maybe someone is a wizard investor (or really lucky) and ended up with a large RRSP account. There is not too much flexibility to minimize taxes, whereas for a TFSA it wouldn't be an issue. Of course, that's a problem I'm sure everyone would like to have and not too common. :tongue-new:


Yes ... YMMV ... those who have retired early, deferred their CPP and are draining their RRSP aren't likely to be worried about it. Those who didn't pay attention or didn't understand will have definitely prefer the TFSA. 

At the end of the day - this is the problem with those who aren't thinking it through and are latching onto what's written without making sure the assumptions match up to their situation.

I seem to recall a poster about a year back who had latched onto the idea that OAS might be clawed back to them and wanted to liquidate their RRSP. It became a bit of a no-brainer when the numbers were run to show that the contributions were being made at the $110K level and the estimated income in retirement was going to be $43K. 




bgc_fan said:


> The consideration would be that most of your large expenses are no longer an issue (saving for retirement, mortgage is paid off, less tax to pay due to lower income).


 ... not sure what smaller living expenses has to do with the point that a pension paying 40% of current income likely means the tax levels are much lower.


Cheers


----------



## Taraz

I see no major downside to TFSA's. (Except that the contribution limit isn't high enough! :encouragement 

With RRSP's you pay higher tax on your investments; instead of capital gains tax or dividend tax, you pay income tax. 

Since many people on this forum will probably retire quite wealthy, it doesn't make as much sense to defer your income, as you could potentially be in a much higher tax bracket when you start to draw out the income. 

RRSPs can be very useful if you want to take a year off (for travel, babies, education, etc.) as a way to more evenly spread out your income, but they aren't necessarily the best retirement vehicle, depending on your situation.


----------



## steve41

Taraz said:


> Since many people on this forum will probably retire quite wealthy, it doesn't make as much sense to defer your income, as you could potentially be in a much higher tax bracket when you start to draw out the income.


I see a LOT of financial plans, and the situation where the subject goes into a higher tax bracket on retirement is extremely rare.


----------



## bgc_fan

Eclectic12 said:


> But unless inflation runs rampant (are they really ahead in that situation?) or the gov't increases the yearly amount - their only source of this fully funded retirement from their TFSA is a really good investing record.


Well, throwing in the numbers of $5K annual contributions at 4% annual return would give $550K at age 60 when done on web retirement calculator. 4% seems to be somewhat modest returns.



Eclectic12 said:


> Your original statement made it sounds like PAs are a source of trouble that TFSA contributions are a good alternative that fix the issue.


I didn't mean it that way, or maybe I did. I just meant that TFSAs give an option for tax-free growth to those who have pensions.



Eclectic12 said:


> In the case of the pension is underfunded pension - then the pensioner is not likely to have problems with tax arbitrage on the funds from their RRSP as they are receiving a reduced pension, correct?


Tax arbitrage isn't an issue at that point, rather the loss of income would be the issue. As the PA will reduce RRSP contributions, there is little opportunity to make up any difference. Another example would be the change with the PS having to pay an increased share of their health care plan. It's an issue for those who retired and had already budgeted their pension to account for the original costs. Now that the costs are to double, they'll have to find some other way to pay for it.



Eclectic12 said:


> ... not sure what smaller living expenses has to do with the point that a pension paying 40% of current income likely means the tax levels are much lower.


Yeah, I don't know what my thought process was on that one.


----------



## techcrium

How come in every TFSA thread or RRSP thread, it ends up being a comparison of 1 vs the other?

You guys do understand that they are not mutually exclusive right?

This year, I contributed $5,500 to TFSA and $5000 to RRSP.

That's about $10,000 of tax-free compounding and capital gains.


----------



## Eclectic12

bgc_fan said:


> Well, throwing in the numbers of $5K annual contributions at 4% annual return would give $550K at age 60 when done on web retirement calculator. 4% seems to be somewhat modest returns.


For someone with a proven record ... probably not .... but I've talked to many co-workers who thought they had a good method and ended up with negatives returns in a rising market.




bgc_fan said:


> I didn't mean it that way, or maybe I did. I just meant that TFSAs give an option for tax-free growth to those who have pensions.


As a supplement ... maybe. 

If one knows that the main source of income the company pension is set to pay out 40% of current income - a full $1 compounding tax deferred may beat the $0.60 compounding tax free. Then too, consider where one is contributing to a spousal RRSP so that on withdrawal, the withdrawal is being added to 10% of the original contributer's income level.

Like so much in the world and investing/taxes in particular - there's no hard and fast rule so checking it out is important.


Cheers


----------



## Eclectic12

techcrium said:


> How come in every TFSA thread or RRSP thread, it ends up being a comparison of 1 vs the other?
> You guys do understand that they are not mutually exclusive right?


Probably because there's always a group that wants one or the other, where it's worded like this applies to everyone. 

Yes ... that's why I contributed to both as well ... though ...



techcrium said:


> That's about $10,000 of tax-free compounding and capital gains.


Technically it's $5.5K of tax-free compounding/gains with an addition $5k of tax deferred compounding/gains.


Cheers


----------



## Barwelle

techcrium said:


> How come in every TFSA thread or RRSP thread, it ends up being a comparison of 1 vs the other?
> 
> You guys do understand that they are not mutually exclusive right?
> 
> This year, I contributed $5,500 to TFSA and $5000 to RRSP.
> 
> That's about $10,000 of tax-free compounding and capital gains.


That's nice for you... but not everyone has enough spare dough to max out both their TFSA and RRSP. So it's good to know the pros and cons of each so you can figure out which one will be better off for you, if you're in a situation where you have to choose.

Nobody is saying that you should _only_ use _either_ TFSA or RRSP.

And since with all the rules and different tax rates and different situations people are in... it's a complex system that can be discussed a lot!


----------



## peterk

I should probably know this since I just made a RRSP deduction from my 2013 taxes... but hey, I didn't pay attention to the forms when I filled them out!

Does the deduction for the RRSP contribution come off your income before or after dividends/capital gains are applied? Is it the marginal rate for your total income or for your employment income that we're talking about here?


----------



## Synergy

^ It's based on your total income - employment, self employment, investments, etc.


----------



## GoldStone

techcrium said:


> How come in every TFSA thread or RRSP thread, it ends up being a comparison of 1 vs the other?


Remember the premise of this thread. Here's the opening salvo by OP in post #1:



> I love the TFSA, but there's no way it can be allowed to continue forever...
> 
> If an upper class 18 year old contributes $5,000 per year until 65 and assuming 7-9% growth rate, he would have a million by 65 and whatever gains from that portfolio would be tax free.


The comparison to RRSP helps to put the above statement in the right perspective.

RRSP contribution limits are much higher.
RRSP have been available forever.
RRSP average balances are pathetic.
Million dollar RRSP balances are rare.

No one says: "there's no way RRSPs can be allowed to continue forever". I see no reason to think that TFSAs will be dramatically different.


----------



## Eclectic12

GoldStone said:


> Remember the premise of this thread. Here's the opening salvo by OP in post #1


Good point.





GoldStone said:


> The comparison to RRSP helps to put the above statement in the right perspective.
> 
> RRSP contribution limits are much higher.


YMMV ... for someone making $30K of earned income, 18% is $5400, which is lower than the TFSA at $5500.

Then too, for someone with a high income in a DB pension, from an RRSP contribution room versus TFSA comparison they could have as low as $600 of RRSP room.





GoldStone said:


> RRSP have been available forever.
> RRSP average balances are pathetic.
> Million dollar RRSP balances are rare.


I know 1957 seems like forever but it's not quite that long.

As for balances, that's correct as this article says a BMO survey listed 53% as having $75K or less in their RRSP and less than 1% with a million or more (though 15% did not say). 

Some big RRSP holders are estimated to have $250 million (only known to have $30 million through insider trader records in 2008), two that have over $30 million and one somewhere over $10 million.

http://www.globeadvisor.com/servlet/ArticleNews/story/gam/20130227/GIMEGARRSPS0226ATL


Cheers

*PS*

For the RRSP info update this year, 2/3 were making RRSP contributions where the average contribution was $3,518 down about $26 from the year before. There's about $500 billion in unused RRSP contribution room.
http://www.thestar.com/business/201...bution_up_slightly_from_last_year_survey.html


----------



## GoldStone

Eclectic12 said:


> YMMV ... for someone making $30K of earned income, 18% is $5400, which is lower than the TFSA at $5500.


Median income per couple family was $79.5K in 2011.
http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil108b-eng.htm

18% is $14.3K per couple. $3300 more than their combined TFSA room.



Eclectic12 said:


> There's about $500 billion in unused RRSP contribution room.


That's the most telling number to refute OP's contention (_"I love the TFSA, but there's no way it can be allowed to continue forever..."_)


----------



## Latito

I was working out just how much a TFSA would realistically hold if someone invests the max each year and gets reasonable returns. I also made the assumption that the government will raise the TFSA limit in $500 increments indexed to inflation.

Assuming a person started at age 18 in 2009 with inflation at 3% and a rate of return of 7% (pre inflation) they would have the following by age 65:
-An account valued at 2.8m (equal to 1.23m in 2009 dollars)
-They would be able to withdraw the equivalent of 49k per year of 2009 dollars in perpetuity. This is effectively (7% - 3%) of the 1.23m inflation adjusted balance.
-TFSA contribution room would be 20k per year (per person) in the year 2056)

If this person had a spouse who did the same thing the couple would be receiving 98k per year tax-free. They would still get CPP and OAS. If they had contributed a small amount to an RRSP they could also be pulling that out while staying under their personal exemption. That's a decent bit of purchasing power for a retired couple.


RRSP matching is excellent for those who have it and shouldn't be ignored. For those who don't have that option, I wouldn't just want to assume that my MTR is lower in retirement than it is now (even if you assume inflation adjusted income is lower, laws can change). Going the TFSA route definitely has this really nice advantage though of not counting as income in retirement. Perhaps the way to go is putting the first ~2k a year into an RRSP to use up ones personal exemption then the rest into a TFSA (to the max allowed) and then any additional funds into an RRSP.


----------



## cainvest

Barwelle said:


> You get a tax refund based on your marginal tax rate when contributing ... but when you pull money out in your retirement, even if you're MTR is still 40%, only part of your money is taxed at 40%, so your average tax rate is going to be lower, and that's really the number you have to consider.


Is there any quick way to see how much of a tax savings there is due to this? 
Maybe try to keep the calc somewhat simple, individual making $60k/yr that saved 10k/yr into RRSP. Let's assume they will receive average CPP/OAS (~16000/yr right?) and no other sources of income. So how much money are they saving on taxes if they retire now (I guess assume equal tax rates for previous years) compared to their MTR when working?


----------



## liquidfinance

cainvest said:


> Is there any quick way to see how much of a tax savings there is due to this?
> Maybe try to keep the calc somewhat simple, individual making $60k/yr that saved 10k/yr into RRSP. Let's assume they will receive average CPP/OAS (~16000/yr right?) and no other sources of income. So how much money are they saving on taxes if they retire now (I guess assume equal tax rates for previous years) compared to their MTR when working?


We also have to consider that when withdrawing from the RRSP you are paying that full tax rate on Canadian Dividends and capital gains.


----------



## Guban

GoldStone said:


> Median income per couple family was $79.5K in 2011.
> http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil108b-eng.htm
> 
> 18% is $14.3K per couple. $3300 more than their combined TFSA room.
> 
> 
> That's the most telling number to refute OP's contention (_"I love the TFSA, but there's no way it can be allowed to continue forever..."_)


The unused RRSP number does nothing to refute the possibility of future changes to TFSAs. Two more important numbers would be the amounts contributed to RRSPs and TFSAs. The use of RRSPs only defers taxation, and the government's revenue. The use of TFSAs eliminates that revenue. If Canadians embrace TFSAs like we have RRSPs, this means the permanent loss of revenue. As the TFSA contribution limit continues to increase, this loss of revenue increases too.


----------



## GoldStone

Guban said:


> The use of RRSPs only defers taxation, and the government's revenue. The use of TFSAs eliminates that revenue.


It's not that simple. 

TFSA contributions = after tax money. Govt gets their revenue upfront. TFSA = pay me now. RRSP = pay me later.


----------



## liquidfinance

GoldStone said:


> It's not that simple.
> 
> TFSA contributions = after tax money. Govt gets their revenue upfront. TFSA = pay me now. RRSP = pay me later.


Also pay me more now as we in theory have higher marginal rates now than we have in retirement.


----------



## cainvest

liquidfinance said:


> We also have to consider that when withdrawing from the RRSP you are paying that full tax rate on Canadian Dividends and capital gains.


That's true and should be considered in your asset location, providing you are saving to both TFSA and RRSP.

Ran a quick calculation on the tax savings up to the tax bracket where it becomes equal again. The tax difference (Fed + MB) works out to be a savings of $3354 on the $27800 withdrawn from RRSP, if my calculations are correct.


----------



## techcrium

Barwelle said:


> That's nice for you... but not everyone has enough spare dough to max out both their TFSA and RRSP. So it's good to know the pros and cons of each so you can figure out which one will be better off for you, if you're in a situation where you have to choose.
> 
> Nobody is saying that you should _only_ use _either_ TFSA or RRSP.
> 
> And since with all the rules and different tax rates and different situations people are in... it's a complex system that can be discussed a lot!


I assumed that this was a financially frugal and savvy forum where we have mid 20 year olds with $200,000+ portfolios in the money diary subsection.

Thus, I assume most of are aware that it is not a TFSA VS RRSP but a TFSA *AND* RRSP


----------



## techcrium

GoldStone said:


> Remember the premise of this thread. Here's the opening salvo by OP in post #1:
> 
> The comparison to RRSP helps to put the above statement in the right perspective.
> 
> RRSP contribution limits are much higher.
> RRSP have been available forever.
> RRSP average balances are pathetic.
> Million dollar RRSP balances are rare.
> 
> No one says: "there's no way RRSPs can be allowed to continue forever". I see no reason to think that TFSAs will be dramatically different.


OP made no mention of RRSP so how is this a TFSA vs RRSP?

I personally contributed 10,500 into registered accounts. Each year that's 10,500 of potential tax free growth.

After 40 years, if continuous contribution, it would be north of $10 million* of tax free growth

or 8 million if you take into account steady RRSP withdrawal.


----------



## GoldStone

techcrium said:


> OP made no mention of RRSP so how is this a TFSA vs RRSP?


OP claimed that TFSA program is too generous and has to be curbed. RRSP comparison is helpful. It helps to dispel the OP's claim.


----------



## Eclectic12

GoldStone said:


> Median income per couple family was $79.5K in 2011.
> http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil108b-eng.htm ...


We seem to be talking about slightly different things as I see this data confirming my point.

I interpreted "... much higher" as meaning the lion's share. The media suggests at first glance something on the order of 40% or better having more TFSA room. 

Then too - I can think of several examples of couples that are above the media who will have less RRSP room (one partner makes most of the income while in a DB pension, both partners are in generous DB pensions, manager/executives who have a larger PA due to supplemental pensions etc.).


Cheers


----------



## fraser

I think that it will depend more on the polls at the time (our Governments seem to base their actions on polls vs good management), whether we have a minority or majority Government, and how far away we are from the next election (so people will forget).


----------



## Guban

GoldStone said:


> It's not that simple.
> 
> TFSA contributions = after tax money. Govt gets their revenue upfront. TFSA = pay me now. RRSP = pay me later.


I understand this. You should understand that the TFSA is an account that reduces a taxpayer's tax liability. This represents a loss of income to the government. The OP was noting that the larger the TFSA limit, the larger the loss of government revenue. This is indisputable. 

It sounds like you think that people are perhaps making the wrong choice and using TFSAs instead of RRSPs. This is debatable, but think of it this way. Before there were TFSAs, most people were still not maxing out their RRSPs, and the government was collecting taxes on investments. TFSAs can eliminate these taxes, and larger contribution limits can eliminate more investment taxes. As these limits increase, the loss of government revenue increases too. It seems logical that the government, in their need for money, will look to stem the tide of these losses. Income on $5,000, at first, was a negligible loss. At $31,500, it becomes more significant. On hundreds of thousands, this loss of potential tax revenue may become a target of the government.

Personally, I hope that I am wrong.


----------



## CanadianCapitalist

Guban said:


> I understand this. You should understand that the TFSA is an account that reduces a taxpayer's tax liability. This represents a loss of income to the government. The OP was noting that the larger the TFSA limit, the larger the loss of government revenue. This is indisputable.
> 
> Personally, I hope that I am wrong.


I agree that there is revenue leakage from TFSAs. When the TFSA was first proposed, Finance estimated the revenue loss from introduction of TFSA. See page 82 in this document. 

http://www.budget.gc.ca/2008/pdf/plan-eng.pdf

As of 2012, Canadians have $66B in TFSA accounts. At 2 percent, the value of income sheltered is $1.32 billion. Let's say the lost tax revenue is about $400 million. 

That sounds like a big number but in the context of the budget it is not. Over the 20 year period from introduction, Finance pegs annual revenue loss from TFSAs at $2 billion in 2008 dollars. That's about a third of the revenue loss from a cut to the GST. Of course, things could change but adverse changes to the TFSA are not very likely. Also, keep in mind that with the budget close to be balanced, chances are the next budget will increase TFSA limits.


----------



## andrewf

The TFSA is a very questionable tax expenditure. I doubt it does much to modify saving behaviour. Those who use it to its full extent likely would have saved as much without the TFSA. Increasing the contribution limit of the TFSA is even more questionable, given the low uptake so of the existing limits. To the extent that cost of the change is low, all those benefits will tend to accrue to those with high incomes. It is a regressive tax expenditure.


----------



## peterk

Guban said:


> It sounds like you think that people are perhaps making the wrong choice and using TFSAs instead of RRSPs. This is debatable, but think of it this way. * Before there were TFSAs, most people were still not maxing out their RRSPs, and the government was collecting taxes on investments.* TFSAs can eliminate these taxes, and larger contribution limits can eliminate more investment taxes. As these limits increase, the loss of government revenue increases too. It seems logical that the government, in their need for money, will look to stem the tide of these losses. Income on $5,000, at first, was a negligible loss. At $31,500, it becomes more significant. On hundreds of thousands, this loss of potential tax revenue may become a target of the government.
> 
> Personally, I hope that I am wrong.


Why would any significant number of people who don't have their RRSP maxed have unregistered investments of any significant amount? And why would these people who are making a (arguably) poor financial choice by not using their RRSP suddenly smarten up and start using the TFSA?

Also, I would think that a small minority of people max out both their RRSP and TFSA. So for the typical citizen it's a choice between the two. A good chunk will now be using the TFSA _instead_ of the RRSP, and as a result will be giving the government tax money up front.


Wasn't the original point of the RRSP to defer the tax payable for a large cohort of boomers who would be retiring in 2010-2030 and stop paying taxes from employment income? The TFSA rather smartly reverses that now with the demographic shift, and should help smooth things out by collecting upfront revenues from the (fewer) employed people compared to if the TFSA didn't exist.


----------



## savvybuck

andrewf said:


> The TFSA is a very questionable tax expenditure. I doubt it does much to modify saving behaviour. Those who use it to its full extent likely would have saved as much without the TFSA. Increasing the contribution limit of the TFSA is even more questionable, given the low uptake so of the existing limits. To the extent that cost of the change is low, all those benefits will tend to accrue to those with high incomes. It is a regressive tax expenditure.


I have temporarily paused my plans to purchase a house in favor of contributing to TFSA and RRSP.

Only when my Non Registered Account Size is large enough and my monthly cashflow still allows me to max out both TFSA and RRSP will I consider buying a house.


----------



## andrewf

You are in a tiny minority. Most Canadians don't even have an account set up.


----------



## Four Pillars

I think where the TFSA comes in handy for an 'average' person,is that they can tax-shelter short term money (ie saving for a house) which saves some tax.

Another area would be a lower income earner who might not benefit from an RRSP, can now save in a tax sheltered account which is more appropriate to their situation.

I think both of those uses are worthwhile as far as the government trying to help certain types of people.

As some have pointed out - richer people who have maxed out the rrsp and now can move some of their non-reg money into the TFSA will save money. This in my opinion isn't so worthwhile.

Most of the people who invest money into a TFSA instead of the RRSP are not costing the government anything.


----------



## the-royal-mail

peterk, I fit the description in your question in post #78. The answer is because I find the RRSP very restrictive in that in an emergency the money is more difficult to access and I have to pay tax on it. I don't like that. I will pay the tax upfront (the anti-TFSA crowd omits to mention that TFSAs are funded with taxed, net income) and use a TFSA and then the money can easily be accessed at any time with little to no additional fees or amounts payable. However, once the TFSA is maxed out ($31K is not a lot of money for someone holding a tiered emergency savings plan plus saving for a house DP, for example) I do indeed go to non-reg accounts. I have lots of RRSP room available but prefer the accessibility in my money in TFSA and non-reg accounts. I have given this a lot of thought and in my own circumstances this works best. I do feel there are others who feel this way.


----------



## andrewf

TRM, I think you have a good point for TFSA as it stands now. $30k is not a lot. But over time, TFSA will become a lot of money. No one (I hope) is going to have a $300k emergency fund sitting in a savings account, but a couple will get that much contribution room by the time they are 32/33 if the limit is doubled to $11k per person as planned.


----------



## cjk2

peterk said:


> Wasn't the original point of the RRSP to defer the tax payable for a large cohort of boomers who would be retiring in 2010-2030 and stop paying taxes from employment income? The TFSA rather smartly reverses that now with the demographic shift, and should help smooth things out by collecting upfront revenues from the (fewer) employed people compared to if the TFSA didn't exist.


That's a really interesting perspective, and makes a lot of sense! I never thought about it that way...



savvybuck said:


> I have temporarily paused my plans to purchase a house in favor of contributing to TFSA and RRSP.
> 
> Only when my Non Registered Account Size is large enough and my monthly cashflow still allows me to max out both TFSA and RRSP will I consider buying a house.


Huh, that's a pretty good strategy--make sure your retirement funds are set before buying a house. I myself have been debating how much I should let my investment portfolio grow before withdrawing a significant chunk for a house down-payment. Given that I'm not really in any rush to buy real estate (it won't really give me any lifestyle upgrade), I think I'll go with this strategy.


----------



## GoldStone

Guban said:


> It sounds like you think that people are perhaps making the wrong choice and using TFSAs instead of RRSPs.


No, I don't think so at all. It really depends on the situations. High income earners should favour RRSPs over TFSAs, although they are in a fortunate position to maximize both. Low income earners should favour TFSAs over RRSPs. Middle income earners should crunch the numbers. 



Guban said:


> This is debatable, but think of it this way. Before there were TFSAs, most people were still not maxing out their RRSPs, and the government was collecting taxes on investments. TFSAs can eliminate these taxes, and larger contribution limits can eliminate more investment taxes.


I am sorry, but this scenario defies common sense. See peterk's response in post #78.


----------



## Eclectic12

Guban said:


> ... The OP was noting that the larger the TFSA limit, the larger the loss of government revenue. This is indisputable.


Correct ... the sticking point is figuring what it really costs.




Guban said:


> ... TFSAs can eliminate these taxes, and larger contribution limits can eliminate more investment taxes. As these limits increase, the loss of government revenue increases too. ... Income on $5,000, at first, was a negligible loss. At $31,500, it becomes more significant. On hundreds of thousands, this loss of potential tax revenue may become a target of the government.


It can ... but several things would have to change first ... with over 70% of TFSA's being invested in cash or cash equivalents, even with a $31.5k limit, it's not a lot of tax revenue (ex. $31.5K x 2% = $630 of lost taxable interest income). The same report was indicating the 2013 average TFSA contribution was going to something like $3.4K so it seems clear there is significant unused TFSA contribution room.

Until interest rates are up significantly, more max out their TFSA contribution room and/or the TFSA holders shift to other investments that are making money - it's not a lot.


Then too ... with something like five years in, there are more Canadians without a TFSA than with one or more.


Cheers


----------



## Eclectic12

peterk said:


> Why would any significant number of people who don't have their RRSP maxed have unregistered investments of any significant amount?
> 
> And why would these people who are making a (arguably) poor financial choice by not using their RRSP suddenly smarten up and start using the TFSA?


Based on the posts I've seen here on CMF as well as talking to co-workers, the two themes are:

a) "the gov't could raise the tax rates in the future so it's better to be paying the cheapest taxes on investments now". I heard this for the first time in 1995 or so, where RRSP contributions were skipped in favour of a taxable investment.

b) "I'm afraid I have too much in my RRSP so that the OAS clawback will hit me so I want to drain my RRSP with fifteen years to go to retirement and max out my TFSA".

I'm sure there are others reasons. For the threads here - it was clear the poster did not understand RRSPs when they bought them and couldn't accept that maxing their taxes now to max a TFSA might not be a great idea, financially.




peterk said:


> ... Wasn't the original point of the RRSP to defer the tax payable for a large cohort of boomers who would be retiring in 2010-2030 and stop paying taxes from employment income?


Apparently not as ...


> RRSPs ... were introduced in 1957 to promote savings for retirement by employees and self-employed people ...
> a Canadian economist and two American tax papers on the American equivalent account ... provide a model and the math proofs that the tax deduction on contribution is not a benefit, there is no benefit from tax deferrals and that profits are not taxed on withdrawal.


http://en.wikipedia.org/wiki/Registered_Retirement_Savings_Plan


Cheers


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## sags

Like the union used to tell those members who didn't use their full vacation time or other benefits,............ use them or lose them.

If so few people have so little in their TFSA..........there wouldn't be much of a public outcry if they were eliminated.

Just saying..............if nobody cares..........nobody cares.

Harper could introduce income splitting for spouses and eliminate the TFSA.......and most people wouldn't know the difference.


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## Eclectic12

the-royal-mail said:


> peterk, I fit the description in your question in post #78. The answer is because I find the RRSP very restrictive in that in an emergency the money is more difficult to access and I have to pay tax on it.


I can see the tax part but I don't believe an RRSP withdrawal is that much more different than a TFSA withdrawal for the same investment types.




the-royal-mail said:


> ... (the anti-TFSA crowd omits to mention that TFSAs are funded with taxed, net income) ...


Maybe on other boards but there's been lots of "TFSA is after tax so that it is less than a $1 versus the RRSP being before tax so that it is a full $1", which usually spawns the "if the RRSP contributor does not put in the refund, it's not true" fallacy follow-on discussion. 



Cheers


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## Eclectic12

GoldStone said:


> I am sorry, but this scenario defies common sense. See peterk's response in post #78.


 Sense or no sense ... I know people who are so worried about future tax rates as they know tax rates never go down that they chose putting money into a taxable investment over an RRSP. All based on "the devil I know now versus the unknown but sure to be higher devil later".


Cheers

*PS*

If people used common sense for financial decisions - there wouldn't be 19% CC being used by people who have alternatives. :biggrin:


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## Eclectic12

sags said:


> Like the union used to tell those members who didn't use their full vacation time or other benefits,............ use them or lose them.


Are you sure the union was driving this?

I haven't been in a union for twenty years and different sets of non-union management has dictated "any hours over ## for the month are lost", "use vacation by Dec 31st or lose them" and "use them or in Jan they will be paid as cash".





sags said:


> If so few people have so little in their TFSA..........there wouldn't be much of a public outcry if they were eliminated ... Harper could introduce income splitting for spouses and eliminate the TFSA.......and most people wouldn't know the difference.


So all the singles who just lost the TFSA wouldn't notice or say anything?


Cheers


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## sags

Union wasn't driving it........just reminding people that at negotiations when the union asked for an increase in vacation time or benefits.........it was standard practice for the company to plunk the previously prepared, corresponding chart on the table showing employees weren't using their full entitlement anyways.......and ask why give them more of something they aren't using?

Every year, the company had to "force" people to take the last two weeks of December off work..........to meet the Ontario government vacation requirements of 2 weeks holidays.

Lots of people entitled to 5 weeks of vacation pay, only took the minimum 2 weeks off and worked the other 3 weeks for the money.

In a way.........the company did have a point, but you can't negotiate a contract for everyone.....based on what some people do.


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## gwcanuck

savvybuck said:


> I love the TFSA, but there's no way it can be allowed to continue forever...
> 
> If an upper class 18 year old contributes $5,000 per year until 65 and assuming 7-9% growth rate, he would have a million by 65 and whatever gains from that portfolio would be tax free.
> 
> 
> Or even those who gambled on penny stocks and now they are sitting on $200-300K portfolios can redistribute to index funds and let that grow tax free


Never.


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## janus10

When my wife and I retire we will downsize our house and partially fund our retirement from the difference between the values of the current and new home. While we will only have about 10% of that difference able to be placed into our TFSAs because we aren't likely to have much room, imagine some future couples who have 20 years of room down the road.


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## pwm

Good article in today's Financial Post by Jamie Golombek: http://business.financialpost.com/2014/03/21/jim-flaherty-may-be-gone-but-tfsas-will-live-on/


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## HaroldCrump

It's ironic that the subject of unions comes up in a discussion of taxes/RRSPs/TFSAs :biggrin:

Anyhow, there is a whole subsection of people that are baying for the blood of the TFSA.
They want it gone, killed, murdered, and buried so that the govt. can "recover" "lost" tax revenue.
There is nothing in the TFSA or any tax shelter program that causes govt. to "lose" tax revenue.

As long as income tax rates are below 100%, govt. is "losing" tax revenue.

Anyhow, I agree with OGG that the program will stay in its current form until the Harper administration is in office.
If or when they are ousted from office, all bets are off.
That may (or may not) happen before the limit is doubled to $10K.

But it is almost certain that future administrations will not increase the limits beyond the inflation indexation already built into it.

I agree as well that TFSA withdrawals should be included for calculation of govt. pension benefits (GIS and OAS).
Not doing so is a huge and unfair tax subsidy for the retirees vis-à-vis the current generation of workers.


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## Eclectic12

HaroldCrump said:


> ... Anyhow, there is a whole subsection of people that are baying for the blood of the TFSA ...
> 
> If or when they are ousted from office, all bets are off.


 ... not sure why so negative ... is this any different from those over the last thirty years that have warned "the next gov't is going to kill RRSPs"?




HaroldCrump said:


> ... But it is almost certain that future administrations will not increase the limits beyond the inflation indexation already built into it.
> 
> I agree as well that TFSA withdrawals should be included for calculation of govt. pension benefits (GIS and OAS).


 ... +1.



HaroldCrump said:


> ... Not doing so is a huge and unfair tax subsidy for the retirees vis-à-vis the current generation of workers.


This I'll have to think about ... I'm thinking more of those who don't need it being able to tax shelter more money.

But then again, I'm one of what seems to be the few that sees these programs as for those who need it and am not going to sweat avoiding clawbacks all that much.


Cheers


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## andrewf

I doubt the liberals would kill the TFSA. At most, I would expect them to reverse any expansion (the proposed doubling) since it benefits very few anyway.


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## fraser

I suspect that a future Government may cap it, but not eliminate the TFSA. Especially a minority Government.

We love it. More please!

I cannot imagine any Government factoring in TFSA withdrawals in OAS entitlement unless they had the ability to distinguish between contributed capital (which is after tax dollars) and subsequent gains (which has not attracted income tax).


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## Four Pillars

fraser said:


> I cannot imagine any Government factoring in TFSA withdrawals in OAS entitlement unless they had the ability to distinguish between contributed capital (which is after tax dollars) and subsequent gains (which has not attracted income tax).


That's a very good point.

The government does keep track of contributions and withdrawals, so this could be done.


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## bgc_fan

I'm not sure how keeping track of withdrawals can differentiate contributions vs growth, I.e. I contribute $20K, it grows to $30k, and I withdraw $5k. How is the government supposed to tell what colour of money is that?


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## Four Pillars

bgc_fan said:


> I'm not sure how keeping track of withdrawals can differentiate contributions vs growth, I.e. I contribute $20K, it grows to $30k, and I withdraw $5k. How is the government supposed to tell what colour of money is that?


That's where it gets tricky.

In RESP accounts, the contributions and growth (any money that isn't a contribution) are tracked separately. Any withdrawals have to be designated as coming from the contribution amount or the growth amount.

In your example (if it was an RESP), the account would have $30k total, $20k contributions and $10k growth. If you withdraw money, you would determine which pot the money comes from. Or you could split it ie $2500 from contribution, $2500 from growth.

All of which is tracked and all of it gets rather complicated, which I'm guessing is why they wanted to avoid that for the TFSA. However, Fraser's point about how withdrawal of previously taxed contribution money shouldn't be counted against GIS combined with a desire from the government to avoid another complicated account (like the RESP) is probably why withdrawals from TFSA don't count against GIS, even though some of it should.

Life is a compromise I guess.


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## andrewf

I think rather than tracking withdrawals, it's likelier that GIS will be asset tested in addition to income tested. OAS probably needs to be redesigned/phased out longer term.


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## sags

The government says............you pays me now............or you pays me later.............but you are going to pays me.


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## HaroldCrump

OAS phase out, while prudent from a fiscal stand-point, will be an extremely hot potato political issue, which is likely to meet with serious resistance from CARP and other retiree lobby groups.
It is unlikely to happen under any administration involving the NDP or the Liberals.

From a tax-payers perspective, any changes in the clawback rules or gradual phase out of OAS must be accompanied by similar and equivalent clawbacks and phase out of govt. defined benefit pension plans at all 3 levels of govt.
You can't have non govt. employees retiring at 78 with minimal GIS pensions, while govt. fatcats retire at 52 with full defined benefit pensions.


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## Four Pillars

andrewf said:


> it's likelier that GIS will be asset tested in addition to income tested.


Not a chance in hell. Now you start getting into house values etc - not going to happen.


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## martinv

I personally like the TFSA a lot and hope it stays. It is after all funded with your own after tax dollars. And the government knows that the moment you take any money out and spend it they will start receiving taxes on it, GST, PST, HST etc.
During my working years I always felt that RRSP was unfair. If I lived frugally and saved hard, I still couldn't put the "limit" in as it was calculated as a percentage of income. In other words, those who made more could contribute more to their RRSP.
TFSA is the equalizer, the contribution limit is $5,500 whether you make $30,000 or $30,000,000.


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## fraser

I cannot imagine why you would want to phase out Gov't defined benefit pensions or even think of clawing them back (which would not stand up in any court). Why not just make the appropriate changes to how they are funded and calculated. New Brunswick could be an example, as could to a certain extent Alberta. DB funding levels have bounced back. Now is the time to modify them a little to reflect risk and extended life spans. It would be very difficult to say to someone who has had as much as 12 percent deducted from their salary that it is going to be taken away. I wish I had a Gov't pension but I certainly do not begrudge it to those that do. But I would like to see them changed to increase employee contributions, decrease Gov't contributions and thus reducing the benefits. Alas, it can only be done on a go forward basis. Pension entitlements earned to date would be protected.


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## HaroldCrump

fraser said:


> I cannot imagine why you would want to phase out Gov't defined benefit pensions or even think of clawing them back (which would not stand up in any court). Why not just make the appropriate changes to how they are funded and calculated.


You and I said the same thing.
I should have been clearer.
When I said clawed back, I did not mean that existing pension payouts reduced.
I meant the future tax payer liability should be reduced.
This can be done in several ways, such as by removing (or reducing) the inflation indexation, by removing early retirement provisions and bridge benefits, by increasing employee contributions (as you said yourself), etc.
The implicit govt. guarantees and backstops must also be removed through legislation.

The point is that tax payers cannot be asked to fund grossly over-generous benefits for public sector employees, while seeing their own "entitlements" clawed back or phased out completely.

If the phasing out of OAS is not backed by a concomitant across the board cut in income tax rates, then it is effectively a transfer of wealth from one section of retirees (the non govt. workers) to another set of retirees (the pensioned govt. workers).



> But I would like to see them changed to increase employee contributions, decrease Gov't contributions and thus reducing the benefits.


Yup, all that and more.
In the end, for a tax-payer it is all one and the same thing.
Tax money goes towards funding OAS as well as public sector compensation.
Cutting OAS (which they are, essentially) without concomitant cut to public sector pension plans is a surreptitious transfer of wealth.


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## fraser

I expect that by the time I am OAS eligible, in a few years, that the OAS claw back will be more aggressive. I do not mind that-especially if they give more to those at the bottom of the income scale, notwithstanding GIS rates.


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## HaroldCrump

I don't know your age, but let's say in ~ 30 years or so, OAS age will be 71 at least.
In the recent report by the Fraser Institute (is that you, by any chance  LOL), they recommend that the right longevity adjusted rate from the 1960s till now is 74, not 67.

My point is that this is grossly unfair vis-à-vis public pensions funded by the same tax payers (the employer portion, that is).
Tax payer contributions to public pensions are enabling retirement ages for public sector workers in the early 50s, not to mention highly generous income replacement %s and inflation indexation.

For the same bureaucrats (_rats_, for short) to then turn around and say that OAS eligibility age will be raised and/or clawback income levels reduced and/or the entire program will be phased out is not right.
For every reduction in OAS entitlement of the general population, there should be a concomitant reduction in tax payer contributions to public sector pension plans.


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## sags

Four Pillars said:


> Not a chance in hell. Now you start getting into house values etc - not going to happen.


In Ontario, qualifications for welfare are already asset based, including real estate.

"_There are limits on the amount of assets you can have. Assets are anything that can be turned into cash. This includes investments, RRSPs, real estate, and money in a bank account. If you have too many assets, you may not qualify for OW because you are expected to use them to pay for your basic needs (food and shelter). If you use your assets to pay for your basic needs, you can reapply for OW once you are below the asset limit. If you have assets and you get rid of them so you will qualify for OW, you may be rejected, unless you can show why you got rid of your assets._"

http://owjn.org/owjn_2009/jasons-test-submenu-page/65

I would not be surprised to see changes to GIS implemented, if people owning million dollar homes start collecting benefits.

OAS is a different program with different qualifications, and would likely remain unchanged.


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## Eclectic12

martinv said:


> ... During my working years I always felt that RRSP was unfair.
> 
> If I lived frugally and saved hard, I still couldn't put the "limit" in as it was calculated as a percentage of income. In other words, those who made more could contribute more to their RRSP.


IMO, you need to add "made more and lived within their means" ... the couple my sister worked with made something north of $160K but were not putting anything into their RRSP either as they couldn't make the payments on their debt load (i.e. two new cars plus house plus dinners out etc. etc.). 




martinv said:


> ... TFSA is the equalizer, the contribution limit is $5,500 whether you make $30,000 or $30,000,000.


Hmmm ... more balanced ... but where one is like my brother and does not have the cash flow (or other assets) to contribute - having the same amount of TFSA room granted as someone making $100K isn't changing much.





HaroldCrump said:


> ... The implicit govt. guarantees and backstops must also be removed through legislation.


So what you are really saying is to convert to a DC pension.
The employer guaranteeing the benefit is a key part of what makes the pension a defined benefit pension.




HaroldCrump said:


> ... Cutting OAS (which they are, essentially) without concomitant cut to public sector pension plans is a surreptitious transfer of wealth.


Last I read on CMF, employee contribution rates were going up and benefits changed so while one can argue as to how effective it is, it would seem clear that it's not only OAS ... unless maybe you are referring to the politician's pensions? 


Cheers


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## andrewf

Four Pillars said:


> Not a chance in hell. Now you start getting into house values etc - not going to happen.


It would not be the only program that requires net worth declarations. As I recall, OSAP required you to declare your financial and non-financial NW to help determine your eligibility.


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## andrewf

HaroldCrump said:


> OAS phase out, while prudent from a fiscal stand-point, will be an extremely hot potato political issue, which is likely to meet with serious resistance from CARP and other retiree lobby groups.
> It is unlikely to happen under any administration involving the NDP or the Liberals.
> 
> From a tax-payers perspective, any changes in the clawback rules or gradual phase out of OAS must be accompanied by similar and equivalent clawbacks and phase out of govt. defined benefit pension plans at all 3 levels of govt.
> You can't have non govt. employees retiring at 78 with minimal GIS pensions, while govt. fatcats retire at 52 with full defined benefit pensions.


I was thinking an expanded CPP and beefed up GIS would largely replace OAS. OAS is very costly and of dubious merit as a social program. Why the feds have to give pensions to couples earning $150k in retirement is beyond me. CPP should be to guarantee that workers save a minimum amount of their working income to not be a burden on society in retirement. I think public sector employee pensions are a problem regardless of what happens to OAS.


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## HaroldCrump

andrewf said:


> I was thinking an expanded CPP and beefed up GIS would largely replace OAS. OAS is very costly and of dubious merit as a social program. Why the feds have to give pensions to couples earning $150k in retirement is beyond me.


Of course, it is fiscal insanity.
This is what is known as a "welfare state", or an "entitlement state".



> CPP should be to guarantee that workers save a minimum amount of their working income to not be a burden on society in retirement. I think public sector employee pensions are a problem regardless of what happens to OAS.


It is all part and parcel of the same underlying ideology - an over-bloated, over-entitled welfare state.
Your statement - _CPP should be to guarantee that workers save a minimum amount of their working income to not be a burden on society in retirement_ should apply universally to all working Canadians.
It makes all kinds of tax payer funded defined benefit pension plans redundant.

Let's define what the income replacement rate needs to be, and what contributions are required to achieve that.
Then all workers and employers (public and private) contribute to that equally.

Retirement needs over and above that can be funded via personal RRSPs, TFSAs, deferred annuities, and tools already available.


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## andrewf

I don't disagree. I think the moral hazard of governments offering DB pensions to workers (and conveniently underpricing the value of the pension) should be dealt with by prohibiting them. Public sector workers could still be offered DC pensions or by contributing to privately provided pensions/annuities offered by insurers with no guarantee provided. 

Jurisdictions like California shows what can happen if politicians and public sector workers collude to misprice pension promises to vastly inflate total compensation in exchange for votes or labour peace without having to recognize the expense in the budget.

But that's a topic for another thread...


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## fraser

I do not think the problem is DB pensions. DB pensions, properly structured, have been proven to work and work well.

They just need to be properly funded, properly structured to share costs and risks, properly regulated, and Governments need to allow employers to build up excess pension funds in good times and enjoy the tax write offs. Eliminating DB plans and/or migrating them to DC plans is not a great answer to the challenge. It is a go forward challenge. You cannot alter the DB pension benefits earned to day....you can only make changes to future entitlements. Some public sector employers in Canada are making the requisite changes-others are not.


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## andrewf

Governments will always have an incentive to fudge accounting for DB plans to reduce the expense that has to be recognized currently. CD Howe just released a report estimating that federal pensions are being valued at only half their fair value, providing a 4.1% guaranteed real return.


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