Budget 2015: Savers, retirees hope for more TFSA room, lower RRIF minimum withdrawals

Finance Minister Joe Oliver (Department of Finance/Flickr)

By Jonathan Chevreau

Journalists and financial experts will be entering a “Lock-up” this morning in Ottawa, getting roughly a six-hour head start on the rest of us on the contents of the 2015 federal budget.

Even so, a combination of leaks and informed speculation give us a pretty good idea about the contents, which will gush forth within seconds of 4 pm, when the embargo is lifted.

Here at the Financial Independence Hub, we will be focusing on three main measures that if announced will do much to speed or improve our collective “Findependence.” Our hoped-for “trifecta” from Finance Minister Joe Oliver (pictured above) includes the much-delayed promise of a doubling of annual TFSA limits, a lowering of minimum withdrawal limits for RRIFs, and lower tax rates  for small business.

The Globe & Mail had at least two useful pieces today that suggest all these goodies should be ours to celebrate, in one form or another, later today. In The Budget and TFSAs: Is Ottawa admitting to ‘raw deal’ for savers?,  Bank of Montreal’s chief economist Douglas Porter wonders whether the long-awaited doubling of annual TFSA contribution limits may be a “sheepish admission” by the federal government that savers have been shafted on various fronts. One is the ultra-low level of interest rates on GICs, bonds and other cash-equivalent investments, a phenomenon dubbed “Financial Repression” and perpetrated by central banks around the world.

Adding insult to injury, these tiny yields are taxed like earned income unless they are held in registered accounts like RRSPs, RRIFs or TFSAs. That’s despite the fact income tax would have been paid on the original earnings in order to come up with the capital for the investment in the first place.  TFSAs at least prevent double taxation, although of course, consumers will ultimately be forced to pay GST or HST when the money is eventually spent on some good or service.

Fingers crossed then if the budget raises annual per-person TFSA contribution limits to $10,000 or $11,000 (depending whether you define the doubling as being based on the original $5,000 limit or the current $5,500 one). For couples, this could work out to a hefty $20,000 or $22,000 per year, which is quite a sum. Couples with large taxable portfolios will most likely start moving assets from them into TFSAs, even though this will trigger capital gains taxes in most cases: something that should please the “TFSAs are a sop to the rich” critics.

The other big source able to fund such massive TFSA contribution limits will likely be the large RRSPs or RRIFs of near-retirees and seniors. Again, these conversions will also create more taxable events for Ottawa, since withdrawals from either RRSPs or RRIFs are also taxable.

30% cut on minimum RRIF withdrawal limits?

In another Globe piece today — Tories to table tax-cut-heavy federal budget plan — the informed speculation is that seniors will be subject to lower forced annual (and taxable) withdrawals from RRIFs, or Registered Retirement Income Funds.

As we noted in a recent MoneySense column, the existing rules were crafted when interest rates were much higher. Those same “financially repressed” paltry interest rates affecting fixed-income investments coupled with much higher mandated RRIF minimum withdrawal rates puts seniors at risk of running out of money before they run out of life. The Globe says it has “learned” that the new RRIF formula will cut the required minimum withdrawal by about 30% in the first year and lesser amounts thereafter. That’s good news, although lobbyists like CARP have argued minimum withdrawal limits should be dropped altogether. Still, we’ll take what we can get.

Tax cuts for small business

The third measure that should interest readers of this site are expected tax cuts for small business.  The Encore Acts section of the Hub focuses on entrepreneurship and second careers, particularly for aging baby boomers who have voluntarily or involuntarily left employment in large corporations.  The Globe notes that the general corporate tax rate has since 2006 already been cut from 21% to 15% but that the tax rate for small businesses (firms with under $500,000 in taxable income) was cut only once: from 12% to 11% in 2008.  The Canadian Federation of Independent Business wants to see this cut further, to 9%, which would be in line with verbiage from the 2013 Throne Speech.

So that’s the hoped-for Financial Independence trifecta from Finance Minister Joe Oliver. Speaking of whom, there’s also a good commentary on today’s FP Comment page by Terence Corcoran that declares when it comes to deficits, “Oliver has it right.” 

Next updates after 4 pm

See you after 4 pm at moneysense.ca, where we will report on what was actually delivered.  For regular updates every few minutes after 4, you can also watch my Twitter feed (@JonChevreau), which also scrolls to the right of the front page here at the Hub) f


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