Making TFSA room retroactive to make up for 2008 losses

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.

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.

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.

Jon Chevreau said:

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

Click to expand...

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.

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.

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.