In move that had been widely anticipated, the Conservative government proposed doubling the maximum annual contribution for the tax-free savings account (TFSA) to $10,000 in Tuesday’s 2015 federal budget.
The curveball may come in the fact that the government decided to use $5,000 as its base. This was the TFSA’s original contribution limit when the account was introduced in the 2008 budget. Many media reports were predicting the government would use this budget to increase the limit to $11,000 from its current $5,500.
However, the current change is consistent with the Conservative Party’s promise in the 2011 federal election campaign to double the contribution amount, says Debbie Pearl-Weinberg, executive director of tax and estate planning, wealth advisory services, with Canadian Imperial Bank of Commerce in Toronto. At that time, the contribution limit was $5,000.
The budget says that the annual limit will not be indexed to inflation as it was on Jan. 1, 2013, when the TFSA contribution limit was increased to $5,500 from $5,000. The new limit of $10,000 will be effective for the 2015 and subsequent taxation years.
That is not to say the TFSA contribution limit will not experience another increase, Pearl-Weinburg says: “If there is another increase, it will have to come from a legislative amendment rather than an automatic increase based on inflation rates.”
The increase is welcome news for Canadians saving for retirement, says Ian Russell, president and CEO of the Investment Industry Association of Canada, “TFSAs are one of the most popular savings vehicles for a number of reasons. The new contribution amount will be a shot in the arm for many Canadians looking to build their retirement savings.”
This also represents opportunities for Canada’s investment community, Russell says. On the one hand, many clients of investment dealers will be seeking further advice from their advisors while on the other, many individuals who have not yet sought advice will now be doing so.
The government estimates that this change will reduce federal revenue by approximately $1.1 billion over the 2015-16 to 2019-20 period. The government also projected what this increase will cost the federal coffers in the future.
“In 20 years, it is estimated that, relative to the size of today’s economy, the annual federal revenue cost of increasing the TFSA limit to $10,000 and not indexing the new limit to inflation will be in the range of $650 million, or 0.03% of gross domestic product (GDP),” according to the budget document.
The government touts this increase as a move that will benefit Canadians of all ages and all income levels.
In 2013, the age group that took the most advantage of the TFSA by contributing the maximum amount included individuals between the ages of 55-64, with approximately 24% doing so. Less than 5% of TFSA holders between the ages of 18 and 24 contributed the maximum amount to their accounts, according to information provided by the Department of Finance Canada.
Canadians earning between $20,000 and $40,000 were the largest income group that contributed the maximum allowable amount to their TFSA in 2013, with approximately 24% able to do so. Almost 15% of individuals earning less than $20,000 made the maximum contribution limit in 2013. Canadians that took the least advantage of the TFSA that year were those earning between $150,000 and $200,000, with less than 5% contributing to the maximum amount to their TFSA.
At the end of 2013, almost 11 million people had opened a TFSA and the total value of assets held in those accounts was about $120 billion, according to the budget document.