[Jon Chevreau]

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/blogs/wealthyboomer/default.aspx

 

[OhGreatGuru]

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]

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]

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]

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]

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]

... 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]

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]

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/personal-finance/wealthy-boomer/index.html

 

[Jon Chevreau]

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/...entially-larger-tfsa-room-for-older-folk.aspx

 

[Jon Chevreau]

On my blog, Malcolm Hamilton has responded to Jon Kesselman's request on how the mechanics of retroactive TFSA contributions would work. I think the argument is pretty convincing:

http://network.nationalpost.com/np/...elaborates-on-retroactive-tfsa-mechanics.aspx

Also, this followup column appeared in various Canwest dailies, under the headline Retroactive TFSA idea strikes a chord:

http://www.thestarphoenix.com/Retroactive+TFSA+idea+strikes+chord/1839621/story.html

Note reference to this forum at end!

 

[CanadianCapitalist]

I read with interest the debate surrounding boosting TFSA contribution room retroactively. While I think Mr. Hamilton's suggestion seems fair, I do have some concerns:

1. I'd like to see some numbers on how many Canadians 55 and over will benefit from this proposal. My understanding is most Canadians have a lot of RRSP contribution room left. The folks who have maximized their contributions are a small segment of the population. If they have been maximizing their RRSP contributions all these years, they have a tidy amount of capital accumulated already.
2. Where does this end? A few years back, many investors, especially seniors, wanted some sort of compensation for their losses in income trusts. Now, due to a bear market, they are supporting boosting TFSA contribution room. What happens if there is another bear market and a precedent of Government ameliorating market losses is established now?

I'm also not convinced that investor portfolios are in a bad shape at today's market values. Take my own RRSP portfolio. I've been investing since 2000 and it has hardly been the best of times for stock investors. However, my RRSP market value is about 10% more than my contributions. This is despite my poor investing behaviour in the early days and having an allocation of 80 to 100 percent in stocks. It is hard to believe that older investors who should have a higher proportion in fixed income are doing worse.

PS: Jon, thanks for mentioning CMF in your column.

 

[Jon Chevreau]

This isn't really compensation. The idea isn't to GIVE people the money they lost in their RRSPs, via taxpayers. To contribute $150,000 or so retroactively to a TFSA would still require you to come up with the money, post-tax I might add. That is if you earned $200,000 and paid 25% income tax to get it, then you could contribute the $150,000 to the TFSA. Not exactly a free lunch and as you point out not that many people may have that kind of money, in which case it's not going to cost the government much in deferred taxes on investment income.

 

[CanadianCapitalist]

This isn't really compensation. The idea isn't to GIVE people the money they lost in their RRSPs, via taxpayers. To contribute $150,000 or so retroactively to a TFSA would still require you to come up with the money, post-tax I might add. That is if you earned $200,000 and paid 25% income tax to get it, then you could contribute the $150,000 to the TFSA. Not exactly a free lunch and as you point out not that many people may have that kind of money, in which case it's not going to cost the government much in deferred taxes on investment income.

Yes, I agree that it is not a true compensation for market losses. However, by boosting TFSA room retroactively, the Government is losing some future taxes and hence it is a cost to the taxpayer -- maybe not today but certainly in future years.

Let's say that I have $150,000 in a taxable portfolio. If I'm paying 1% tax on the dividend stream from the portfolio and I'm able to shelter it in a TFSA, there is a loss of $1,500 of tax income. It is a cost to the taxpayer.

If the Government were running a surplus, I'd be more enthusiastic of this proposal. But the reality is we are in a deficit situation today. Where is the money going to come from to pay for the costs of this proposal?

 

[Jon Chevreau]

Remember the original name for the TFSA idea was TPSP or Tax PrePaid Savings Plan. So in this $150,000 example, you ALREADY paid the government $50,000 in income tax. Surely that's enough? The TFSA is just making it possible to build wealth tax effectively by removing double taxation: or triple taxation when you think about it, since when you do spend the funds ultimately you'll be paying GST and HST. So even under this retroactive plan, the government gets the initial income tax on the earnings to come up with the TFSA savings, and it gets another tax whack on ultimate consumption. I'd argue that's plenty of tax revenue -- remember too that unlike the RRSP, the government does not have to provide a tax deduction on the TFSA.

 

[MoneyGal]

My problem with this is not how much tax is paid / has already been paid and whether that is "enough" (I personally feel that I've already paid enough taxes. Where's my retroactive re-instatement of, oh, I dunno, the lifetime GCE?) -- it is that this is a proposal that would very clearly benefit only a small proportion of the overall population.

I would vastly, vastly, vastly prefer lower overall taxes than this "pick and choose" let's reward another demographic approach. Boomers are so much more numerically dominant than my demographic, though, that I suspect we will continue to see these kinds of proposals.

Also: the "my RRSP lost x%" argument always seems to be predicated on peak values. There's a lot of ways to value investment gains / losses but I doubt marking to the peak accurately describes most peoples' portfolio returns. Finally, those who stayed the course are within 10% of peak values now. So now we are rewarding people for behavioural blips? I dunno.

 

[steve41]

When you run the numbers (using the actual tax formulation with indexed brackets, clawbacks etc) there is no discernible advantage for the retiree with only RRSP/LIF capital. For the retiree with a sizable chunk of savings outside his RRSP, then the advantage is much more pronounced.

It seems to me that the penalized retiree will be the middle to low net worther who has religiously saved to his rrsp only. Those HNW-ers who have managed to save additionally outside their RRSP will be advantaged unfairly, IMHO.

 

[MoneyGal]

Coming back to this to note that the reason I am peeved by it is precisely because I am *not* in the affected demographic (I just mean people within 10 years of retirement on either side, not HNW'ers).

That is: it is difficult for me to put myself in their shoes, so to speak. Maybe I'd see things differently if I was 25 years older. But from where I stand, I'm still grouchy.

 

[CanadianCapitalist]

My problem with this is not how much tax is paid / has already been paid and whether that is "enough" (I personally feel that I've already paid enough taxes. Where's my retroactive re-instatement of, oh, I dunno, the lifetime GCE?) -- it is that this is a proposal that would very clearly benefit only a small proportion of the overall population.

To me foregone taxes are an important part of the equation. Money to pay for this has to come from somewhere and there is only one taxpayer. So, the cost of a proposal that benefits a small segment of the population would be borne by the majority -- you and I and future taxpayers.

 

[CanadianCapitalist]

Coming back to this to note that the reason I am peeved by it is precisely because I am *not* in the affected demographic (I just mean people within 10 years of retirement on either side, not HNW'ers).

That is: it is difficult for me to put myself in their shoes, so to speak. Maybe I'd see things differently if I was 25 years older. But from where I stand, I'm still grouchy.

Though I'm not in the affected demographic, the way the proposal is worded by Malcolm Hamilton would benefit even younger Canadians. Say you are 36 years old this year. This proposal would mean that your TFSA contribution room is bumped up to $90,000 next year. ($5,000 for the 17 years since age 18 plus $5000 for 2010). So, if you are a younger Canadian with no RRSP room and significant taxable portfolio, you would benefit. However, it doesn't seem fair to me that all Canadians should bear this cost.