Thinking of making a $4,500 TFSA contribution right now? Read this first

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By Jonathan Chevreau,

Financial Independence Hub

Preamble: This is an expanded version of a blog originally posted late Wednesday. I’ve retained the original beginning after this preamble, since it concerns action we can now take with our expanded TFSAs. Or can we? As the second half of the revised blog recounts, the newspapers today are full of accounts about super sized TFSAs becoming a real political issue.

According to Tuesday’s federal budget, Canadians can now put an additional $4,500 into their Tax Free Savings Accounts (TFSAs), effective immediately. However, when I made inquiries at my friendly local financial institution, I was dissuaded from this course. You can  try if you want but it’s basically at your own risk until the proposal is formally enshrined in legislation later this summer.

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Jamie Golombek, CIBC Wealth

I checked with CIBC Wealth’s in-house tax guru, Jamie Golombek, who issued the following statement:

“We are awaiting a response from Finance and CRA — here is my official comment: The Budget included draft legislation that allows for an increased TFSA dollar amount for 2015 to a total of $10,000, up from $5500, the current 2015 TFSA dollar amount. On the expectation that this legislation will pass, clients may wish to contribute this additional amount to their TFSAs. In the event the legislation is not ultimately finalized, in my view, it is unlikely that the CRA would penalize taxpayers for acting on draft legislation: however, we expect CRA to comment on this over the next few days.”

Consider transfers in kind and taking a one-time tax hit

I might add that coming up with $4,500 may or may not be an issue right now, depending on whether you expect a tax refund or have to pay taxes for the looming tax filing deadline. Keep in mind that you don’t have to fund TFSAs with new cash: if you have significant non-registered investments you can “transfer them in kind” into the TFSA.

This may and probably will entail tax consequences (chiefly capital gains) for securities that have appreciated over time. Ironically, not crystallizing capital gains has been a sort of tax shelter of its own but to transfer them into a TFSA (or indeed an RRSP) it will be deemed a disposition for tax purposes. Ideally, you find securities that are close to their original purchase price, or find pairs of securities where gains in one offset losses in another.

The great thing, however, is that by taking that tax hit once, in the future the transferred securities will generate dividend and interest income that is almost totally tax free for the rest of your life.

TFSA lifetime caps and other threatened reversals shaping up as Election issue

As noted in the preamble, I’m updating this blog and reposting it to the top spot in the Hub queue as developments warrant. There’s lots of coverage in Thursday’s papers about the Opposition parties’ vows to reverse the TFSA expansion described above. In particular, Liberal leader Justin Trudeau has vowed to reverse it if he achieves power.  Read Garr Marr’s (@dustywallet on Twitter) piece on possible TFSA lifetime caps in the Financial Post.

Some of the “Double Trouble” reports in February talked about a lifetime $800,000 cap as a possible future measure but Garry’s piece mentions a much lower $100,000 cap, which would be ridiculous. Heck, once upon a time we had a $100,000 lifetime capital gains exemption which most Canadian baby boomers were deprived of just as they were starting to build non-registered wealth. And not to mention, the annual hassle of computing capital gains tax liability for preparing tax returns this time of year.

I once wrote an editorial in FP Comment (link to come) explaining how TFSAs really just eliminate double or even triple taxation (first, income tax to come up with the capital in the first place; then annual taxes on interest, dividends and capital gains associated with what’s left of that capital, and arguably a third round of tax called consumption taxes [HST] once the remaining money is eventually spent on goods or services.)

Remember, TFSAs are Tax PRE-PAID

Canadian Tax-Free Savings Account concept word cloudRemember, the original name for TFSAs was “Tax-PREPAID” Savings Plans. The Liberals and NDP don’t need to get voters riled up over the poor government being deprived of tax revenues for their wealth redistribution schemes. Ottawa gets its tax hit right upfront with TFSAs, and will eventually get a second whack when the money is spent. Seems good enough to me!

Also, remember that if — as outlined at the top of this blog — near-retirees and seniors start to convert non-registered savings in droves in order to fund these super-sized TFSAs, that will be a fantastic source of revenue for Ottawa. Every time you trigger a capital gain in order to move securities from taxable accounts to the TFSA, the cash register will ring in Ottawa.

Ottawa will also reap a tax bonanza as seniors start doing the same with their RRSPs and RRIFs. Justin Trudeau may say that “only the rich” have $10,000 lying around to fund TFSAs but seniors have much more than that in RRSPs, RRIFs and taxable accounts and need to move those funds into TFSAs just as soon as they are permitted to do so.

Why TFSAs upset the Left

But the piece I really think TFSA believers need to push today on social media is by the Post’s @KellyMcParland. My Twitter feed is full of this article, entitled Harper’s winning the wallet war.  I highlighted in particular the sentence below. (Kelly is a feisty guy: I used to play hockey with him and he was a tough customer in the corners, let me tell you!)

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Kelly McParland (National Post/Twitter.com)

“TFSAs upset the left because they violate the notion that governments are responsible for people, rather than the people themselves.” — Kelly McParland, National Post

Conclusion: contribute $4,500 now or not?

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Sheryl Smolkin

After the first version of this blog was published, I had an email and Facebook exchange with @SherylSmolkin of the RetirementRedux site. Sheryl said she and her husband plan to make a $4,500 additional TFSA contribution earlier than later. Here’s what she said on Facebook:

“Majority government. it will pass for sure. I say make the transfer now.”

Based on Jamie Golombek’s statement above, it appears that while possibly risky, the likelihood is minimal that Canadians will be  severely punished by the CRA in the event of the measure being revoked after an election.

It occurs to me that maybe we should all follow Sheryl’s lead and contribute the $4,500 NOW. Can you imagine the furor if the 10 million or so Canadians already with TFSAs are confronted with retroactive penalties and interest?

Feel free to comment on this blog below, or email me at jonathan@findependencehub.com for possible inclusion in further blogs or columns.

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