Renaming the TFSA: TFSP
Two common misconceptions about Tax-Free Savings Accounts (TFSAs) are that they can only hold cash like a savings account and that they can be treated like a savings account with an arbitrary number of deposits and withdrawals. I suggest a subtle name change to counter these misconceptions: Tax-Free Savings Plans (TFSPs).
Part of the motivation for this suggested name change is to make the TFSA name closer to RRSP. The idea is to help people understand that TFSAs can hold anything an RRSP can hold including stocks, bonds, mutual funds, and many other investments. The other idea is to help people understand that there are rules governing deposits and withdrawals.
It turns out that the “savings account” part of the name has misled Canadians. I’m sure that the people who chose the name had no intention of misleading people, but the evidence suggests that Canadians have been confused by the name.
It’s true that TFSAs are more flexible than RRSPs when it comes to deposits and withdrawals. If you make a standard withdrawal from an RRSP, the contribution room is gone forever. If you make a withdrawal from a TFSA, you get the room back, but not until the next calendar year. Tens of thousands of Canadians missed this subtlety and faced penalties. I think changing the last word in the name to “Plan” instead of “Account” may help.
Another potential side benefit of the name change is to change the U.S. view of TFSAs. Currently, the U.S. does not view TFSAs as retirement savings and they apply a 15% withholding tax on dividends. It may be too late now to change this ruling, but it couldn’t hurt to change the name and try to change their minds.
So, I call on our government who gave us this great savings vehicle, the TFSA, to change its name to “Tax-Free Savings Plan” to help Canadians use it for more than just cash savings, to help them avoid penalties, and maybe avoid U.S. dividend withholding taxes. Good timing for the name change would be to announce it at the same time as an increase in the contribution room each year.
Part of the motivation for this suggested name change is to make the TFSA name closer to RRSP. The idea is to help people understand that TFSAs can hold anything an RRSP can hold including stocks, bonds, mutual funds, and many other investments. The other idea is to help people understand that there are rules governing deposits and withdrawals.
It turns out that the “savings account” part of the name has misled Canadians. I’m sure that the people who chose the name had no intention of misleading people, but the evidence suggests that Canadians have been confused by the name.
It’s true that TFSAs are more flexible than RRSPs when it comes to deposits and withdrawals. If you make a standard withdrawal from an RRSP, the contribution room is gone forever. If you make a withdrawal from a TFSA, you get the room back, but not until the next calendar year. Tens of thousands of Canadians missed this subtlety and faced penalties. I think changing the last word in the name to “Plan” instead of “Account” may help.
Another potential side benefit of the name change is to change the U.S. view of TFSAs. Currently, the U.S. does not view TFSAs as retirement savings and they apply a 15% withholding tax on dividends. It may be too late now to change this ruling, but it couldn’t hurt to change the name and try to change their minds.
So, I call on our government who gave us this great savings vehicle, the TFSA, to change its name to “Tax-Free Savings Plan” to help Canadians use it for more than just cash savings, to help them avoid penalties, and maybe avoid U.S. dividend withholding taxes. Good timing for the name change would be to announce it at the same time as an increase in the contribution room each year.
I agree, the naming is misleading. How about calling it the TSIA (Tax Free Investment Account)?
ReplyDelete@Paul T: I could get behind your suggested name as well. I like mine because it looks closer to RRSP, but adding "investment" is a good idea too. Maybe "Tax-Free Retirement Investment Plan"?
DeleteTRIP. I like it!
ReplyDeleteActually that's a really good idea. It seems like it would make more sense that way.
ReplyDeleteI'd rather see them give back contribution room immediately. It makes zero sense to wait until the next calendar year.
ReplyDelete@Patrick: My initial reaction was the same as yours. However, I wonder if this restriction cuts down on some sort of abuse. For example, if you can manipulate the price of some illiquid security, you could repeatedly swap it in and out with the swaps in at a slightly lower price than the swaps out. The net result would be to create a massive amount of TFSA room after many swaps.
Delete