Making TFSA room retroactive to make up for 2008 losses

Jon Chevreau · 07-27-2009, 12:11 PM

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

http://network.nationalpost.com/np/b...r/default.aspx

OhGreatGuru · 07-27-2009, 01:52 PM

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

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

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

Jon Chevreau · 07-27-2009, 02:32 PM

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

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

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

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

CanadianCapitalist · 07-27-2009, 02:36 PM

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

Jon Chevreau · 07-27-2009, 03:10 PM

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

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

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

Cal · 07-27-2009, 03:56 PM

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

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

OhGreatGuru · 07-27-2009, 07:34 PM

Quote:

Originally Posted by Jon Chevreau

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

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

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

DAvid · 07-28-2009, 12:13 AM

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

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

Jon Chevreau · 07-28-2009, 09:30 AM

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

http://www.financialpost.com/persona...mer/index.html

Jon Chevreau · 07-28-2009, 02:47 PM

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

Full details on my latest blog entry, just posted:

http://network.nationalpost.com/np/b...lder-folk.aspx

07-27-2009, 12:11 PM	#1
Jon Chevreau Senior Member Join Date: Apr 2009 Location: Long Branch, Ont. Posts: 203	Making TFSA room retroactive to make up for 2008 losses Just posted a blog entry that contains link to Saturday column where Mercer's actuary Malcolm Hamilton suggests Ottawa should make Tax Free Savings Accounts contribution room retroactive to age 18 in order to help retirees and near-retirees make up for lost tax-sheltering room in their RRSPs, RRIFs and DC pension plans. http://network.nationalpost.com/np/b...r/default.aspx

07-27-2009, 02:36 PM	#4
CanadianCapitalist Administrator Join Date: Mar 2009 Location: Ottawa, Ontario Posts: 886	While I understand the motivation behind the suggestion to allow extra TFSA room, I'm worried that in the future, it could work in reverse. Does it mean that if stock markets provide good returns, the Government would have the option to cut back on contribution room? __________________ Canadian Capitalist -- A Canadian Personal Finance Blog

07-28-2009, 12:13 AM	#8
DAvid Member Join Date: Apr 2009 Posts: 73	Since most in DB plans have not sheltered all they might (unless they have bought RRSP in addition to their DB contributions) this proposal benefits those who have already consumed their entire RRSP room, and have extra cash on hand to shelter in this manner. The only reason the DB recipients have the ability to contribute more to make up the "losses" due to the market slump is because they are not fully contributed. If the employee or employer contribute more in any given year the employee's RSP deduction limit decreases. Like Guru says -- this is pandering to a particular segment of the population. __________________ DAvid "Workin' for a livin'"

Thread Tools
Show Printable Version Email this Page
Display Modes
Linear Mode Switch to Hybrid Mode Switch to Threaded Mode

07-27-2009, 01:52 PM	#2
OhGreatGuru Senior Member Join Date: May 2009 Posts: 517	I had read the article, and it doesn't make any sense, other than to curry favour with a particular segment of the electorate. Retirees and near-retirees have not "lost tax-sheltering room" as a result of the market fall. They have lost asset value in their retirement funds, but this should only be temporary. The only way they "lose room" is by making withdrawals. In the case of RRSPs this is not news, and is why most people should not withdraw RRRSP money early. In the case of RRRIF & DC plans, it is true they are having to draw down their tax-sheltered assets faster than they would like as part of their retirement income stream. But if they are withdrawing a large percentage their retirement assets in one year, there is something wrong with their retirement plan that is unrelated to the market situation. And they are acquiring $5K/yr in TFSA room to put away any retiement income that is excess to their needs. (65-18) x $5K = $235,000. I have difficulty finding sympathy for a "poor retiree" who has that much spare cash to hide from the tax man, to "compensate" him for the fact that his registered portfolio dropped in value this past year, like everyone else's. I think the author is simply lobbying for a change in government policy that will help investment advisors attract more business.

07-27-2009, 02:32 PM	#3
Jon Chevreau Senior Member Join Date: Apr 2009 Location: Long Branch, Ont. Posts: 203	The author, if by that you mean Hamilton, is not an investment advisor and has no reason to suggest something that would benefit advisors. He's a pension consultant and actuary. And I'm not an advisor either. What we do have in common is we're both baby boomers in our mid to late 50s, so-called "near retirees" who have been affected by the financial crisis. To the extent many of the forum members here are a decade or two younger, naturally your perspective may be a bit different -- other threads here build TFSA projections into their plans and the younger you are the bigger role the TFSA can play. It's not like the TFSA is totally tax-free: remember that when CD Howe originally described the idea, it was a TPSP: Tax Pre Paid Savings Plan. That is, when you come up with $5,000 for a TFSA contribution, odds are you had to earn $6,500 or so to get it; paying $1,500 of income tax. So Ottawa has already gotten its pound of flesh on TFSA contributions: it just doesn't get to apply a second level of taxation on the subsequent investment income. In fact, the same Hamilton has previously described non-registered savings as "futile," particularly if you try to hold "safe" fixed income investments in non-registered plans. As you know, interest income is taxed at the top marginal rate: say 46% in Ontario. And remember you already paid income tax at the top rate on earned income in order to come up with such non-registered investments in the first place. Also remember that the Tories came up with the TFSA as a sop to the many who elected them on the much bigger promise of a tax-free capital gains rollover on securities held for several months. That for many would have involved numbers in the 100s of 1000s, just as with the retroactive TFSA idea.

07-27-2009, 03:10 PM	#5
Jon Chevreau Senior Member Join Date: Apr 2009 Location: Long Branch, Ont. Posts: 203	I doubt that, CC! Though maybe investors could give themselves a "contribution" holiday if stocks really did well, and divert spending to consumption, thereby boosting the economy. But if stocks did soar, the government would eventually "claw back" OAS benefits for RRSPs or RRIFs that grew too large. That wouldn't happen for a TFSA of course. But going back to "Guru's" $235,000 figure of TFSA room for a 65 year old retroactive to age 18, while it may seem like a big number it really isn't. Remember this is all about fair and equal tax treatment of Defined Benefit plans for DC plans and RRSPs. Arguably the average government worker inflation-indexed DB plan that is in effect backed by all us taxpayers is worth at least $1 million if that's the amount of capital required to generate a $50,000 per annum pension (figuring a 5% return from bonds or a bond-heavy balanced portfolio). Really top-level mandarins hauling down a $100,000 pension have the equivalent of $2 million in capital to generate such a pension. Seen thus, $235,000 for retroactive TFSA contribution room doesn't seem so out of line, does it? Remember, there are people out there with $1 million RRSPs that were wacked down to $600,000. So even the retroactive room would not be making them whole on tax-sheltered room. And remember too no one is saying the government is being asked to make up the actual losses. No, it's still up to the investor to come up with the money, which again is after-income-tax money.

07-27-2009, 03:56 PM	#6
Cal Senior Member Join Date: Jun 2009 Posts: 471	As much as I would love this to come into effect. I just can't see the gov't taking a pass on taxing whatever $235,000 of equity a 65 year olds investment wealth would create in gains for any given year. Too much wealth and too many 65 years olds. Haha. (I just stuck w the 65 year old example)

07-28-2009, 09:30 AM	#9
Jon Chevreau Senior Member Join Date: Apr 2009 Location: Long Branch, Ont. Posts: 203	The second video interview with Malcolm Hamilton was published today: this is the one where he makes the TFSA retroactivity suggestion so you can get it straight from the horse's mouth: http://www.financialpost.com/persona...mer/index.html

07-28-2009, 02:47 PM	#10
Jon Chevreau Senior Member Join Date: Apr 2009 Location: Long Branch, Ont. Posts: 203	Simon Fraser's Jon Kesselman -- an early proponent of what were then called TPSPs or Tax-Prepaid Savings Plans -- sees some issues with how Hamilton's idea would actually be implemented. But he does see plenty of scope for tinkering with the TFSA which is, after all, still in its infancy. In particular, he agrees with Hamilton that there should be "higher annual TFSA contribution limits for older cohorts over an extended transition period." Full details on my latest blog entry, just posted: http://network.nationalpost.com/np/b...lder-folk.aspx