Jonathan Chevreau waded into the current debate on TFSAs and made a case in favour of Tax-Free Savings Accounts. While others debate whether TFSAs allow the wealthy to shelter too much income from taxes, Chevreau’s main argument is that “TFSAs merely eliminate double and triple taxation.” This just isn’t true.
Chevreau goes on to explain “When you invest in non-registered or taxable accounts, not only does the capital you invest come after being subject to income tax, but all dividends, interest and capital gains generated from that capital will be further taxed each and every year.”
This so-called double and triple taxation is actually the first-time taxation of new income in taxable accounts. Your original capital is not taxed again. When your already-taxed money earns interest or dividends, only the new income gets taxed, not the original capital.
When you sell an investment, you only pay capital gains taxes on the growth in value, not the original principal. Once again, it is only the new gains that are taxed. In fact, only 50% of the new capital gains get taxed. So, wealthy Canadians are not only free from double taxation, but they pay no taxes at all on a significant portion of their returns.
An argument that actually makes some sense, but Chevreau didn’t make, is that when you view your finances after accounting for inflation, the parts of capital gains that are just keeping up with inflation do get double-taxed, in a sense. However, the 50% capital gains tax exemption more than remedies this problem.
I’m not in any hurry to pay more tax than I have to. I’m in a position to benefit greatly if TFSA limits get raised. But we shouldn’t try to justify giving more tax breaks to the wealthy with a bogus argument about double taxation.
Bring on TFSA contribution increases. I have some, not much, non-reg. investments and I will gladly move those assets into the TFSA in 2016.
ReplyDelete@Mark: Increasing the TSFA contribution limit would benefit me too. But are you prepared to pay higher taxes in other areas to compensate, because that's what will have to happen down the road.
DeleteSo you say - Capital gains taxes account for a miniscule amount of government revenue and act to discourage the public from saving and, ironically depending on the government for their welfare in retirement.
DeleteIf we have more people saving for retirement because we increase the incentives to do so, there is less burden on the government when they do retire as we will have more people that are self sufficient.
@Anonymous: People who don't save are the way they are because they make short-term decisions; it has nothing to do with capital gains tax disincentives. The only people who significantly benefit from reduced or eliminated capital gains taxes are people whose income is high enough that they can fill both the RRSP and TFSA and still have significant savings left over. Your argument makes no sense.
DeleteAlthough I personally benefit from the TFSA, they should cap the lifetime contributions ($5000 per year up to $50000) because they have often been presented as a vehicle for emergeny savings and not an investment vehicle. Also, most Canadians probably wouldn't be able to reach that amount. Or TFSA contributions should shrink your RRSP room at an amount based on your tax rate.
ReplyDeleteThe tax code has enough loop holes that help people with large amounts of money shrink their tax obligations.
@Anonymous: Interestingly, there are people on the other side of this argument who also want to cap lifetime contributions, but they want a much higher cap than $50,000, and they want the whole cap amount to be available right away. This would benefit wealthy older people greatly instead of having to wait years to put in only $5500 each year.
DeleteIronically, TFSA's benefit low income people proportionally more than they do the wealthy.
Delete@Anonymous: Almost all programs benefit low income people proportionately more than the wealthy. If I give $10 to a poor man and $1000 to a rich man, I've benefited the poor man proportionately more. A TFSA limit increase would benefit the wealthy more than it would benefit low income people.
Delete@MJ
DeleteSince this discussion continues...
I still have difficulty understanding your definition of wealthy. Lets take a hypothetical frugal family averaging $45,000.00 a year. This would amount to apx $8000.00 RRSP contribution a year (to max it out). And say They somehow they ate beans every day and in 2009 decided maxing out their TFSA with the tax return and some additional cash was also important to them.
The same people could not afford a house and rented for 25 years.
If they they invested $200,000 over their 25 years, starting from $0.00 @ 6% estimated annual return using mutual funds with a 2.4% MER they would have $300,000 saved after fees but before taxes when they withdraw it? Lets face it, most people still are stuck in high cost mutual funds...
How is that person wealthy? Just because they maxed out their RRSP and their TFSA but trusted that guy at IG or Edward Jones who put them in high fee funds? Wealthy starts for me when that couple / single who has + 1 million tucked away and their house paid off maxes out their accounts. Then again If they paid +50% of their earnings in taxes already to get there, is it fair to tax them even more and deny them that little extra $5000.00 tfsa shelter?
@Paul: Feel free to substitute whatever word you prefer in place of "wealthy." We are just identifying people who have significant non-registered savings because they are the only people who have to pay taxes on their capital gains, dividends, and interest.
DeleteI read the recent PBO report in its entirety. I personally use, benefit from, and would stand to benefit even more from increased TFSA room. That being said, after reading the report, I can't help but find the agreeing that the current structure is overall regressive and not really a good way to "spend" government revenue. I'd vote for change/caps/modifications.
ReplyDelete@Anonymous: I'd be happy to leave it as it is (i.e., no doubling of contribution room). That said, I understand the arguments for caps, etc.
DeleteI agree with the sentiment there's enough contribution room per year already. Some comments on a Globe & Mail story complained the government is restricting how much money people can save. Not so, it just limits how much we can shelter from taxes.
ReplyDeleteMy, people start complaining so quickly. The TFSA has only been around for about seven years, and people are already saying it's not enough. I propose we should be grateful it's not zero. If the TFSA stays in effect for her whole life, my daughter will be able to shelter hundreds of thousands of dollars.
@Gene: Good points. Under the current TSFA and RRSP rules, most people have no reason to save in non-registered accounts.
Delete@MJ
DeleteI have reason to save in a non-registered account.
1) I max out my RRSP and TFSA limits so I can not put any more there
2) At current rates from the bank(s) prime plus 1% or 3.85% it is paying me to maximise my HELOC credit to invest in equities paying me more than that. The interest is deductible on the HELOC because it is for investment purposes and there is enough left over to pay down some of the principle every month. I have managed to built my non-registered account to approx $14K of dividends (taxed at a lower rate) and approx $3K of interest charges. I do not see anything wrong with that kind of indebtedness.
As to the TFSA, as I have said before, when your daughter will have those hundreds of thousands of dollars sitting out of the CRA's reach some finance minister will be salivating at the mouth to claw some of it back through reduced OAS or reduced CPP.
My opinion, SO take it while you can, We may be the lucky ones because we will get to utilize it before there is too much droop on the floor.
RICARDO
@Ricardo: I have non-registered savings as well because I've maxed out my RRSP and TFSA. But we are part of a fairly small minority who do this. The main thing to think about with your HELOC strategy is will you be OK if you lose your job and equities fall 40%? For some the answer is yes, but for others it is no.
DeleteHi Michael.
DeleteHave you ever written a post on how to do what Ricardo does in his point 2? (Leveraging a manageable portion of your investments) I would be interested in in how it would work with a hypothetical $50K, and the steps of how you claim your borrowing interest on your taxes and the savings advantage you get by doing that vs for example using savings and buying a lump amount in cash?
I am exactly in this position as well. TFSA /RRSP maxed and no way to create more room as long as I work where I do. (The PP at work puts away the full 18%, so on one hand that's great, on the other, no more RRSP room growth and no tax return $ for me every year)
What is that next step into non sheltered and what is the best way to pay the least amount of taxes and take advantage of legal rules and regs? I think that would make a nice topic for you to write about in your direct straightforward easy to understand way. :)
@Paul: I've chosen not to use leverage myself to limit risk. I think leverage can be right for some people, but I'd be concerned about encouraging people to take risks they don't fully understand. I've asked the question above, but rarely get an answer (will you be OK paying off your leverage debt if stocks drop 40% and you lose your job?).
DeleteI'd suggest searching Million Dollar Journey for information on how to use leverage effectively.
Hi Michael.
ReplyDeleteThis will be one of the few times I disagree with you. I'm not sure about you but between all the taxes I pay at source, property taxes, gas taxes, 13% on everything you buy with money (that has already been taxed), various licenses, insurance, all the tax on my homes utilities and so on... I really feel we already pay too much tax.
Coupled with the waste and mismanagement by our layers of government (which should be more efficient and reduced in size) You easily giving more then half of your gross earnings away. I really don't feel that is fair. Also the recent attempts at shaming even mildly successful people and businesses is wrong IMO. Really - who set's the bar at what an actual fair rate of tax is? Look at France who tried that 75% tax rate on "the rich" and had to roll it back. It was an insane idea from the start. But this is the kind of crazy thinking out there. Is it a wonder companies hide their money around the world?
Bring on the doubling of the TFSA cap Room please! I would like to retire a little early I have worked pretty hard to get where I am today. No guarantees anyone makes it to 65. Be nice to live from a Tax free income stream that I worked for + paid taxes on already, put in my TFSA which when tap into later will still pay for the above things I mentioned and be taxed then anyway... It's not like that money won't be taxed at all...
@Paul: I'm with you on government waste. There are great people working in government, but there are too many who can't or won't do their jobs as well. I cringe every time I deal with government and they ask me to send a fax. I have this image of so much work still being done on paper.
DeleteWe may differ on what the appropriate tax level should be, but I'm sticking to my main point here that there is no double taxation.
@ MJ
DeleteFaxes are good. At least they have to physically throw it away so you have a better chance that they just might read it.
As to waste in all levels of government, well unfortunately that seems to the the norm. And then they say to not work for cash (under the table). I don't think anyone would mind paying taxes if they could see the proper management of their hard earned tax dollars. But when you see waste then is it not logical to give them less to waste?
RICARDO
@ Paul;
DeleteI agree with you that we are at the very least double taxed.
Just think about it. Is tax free day not some time in July? Not quite sure myself. At any rate we earn our money and pay Fed tax and Prov tax right off the top. Plus a little extra for being employed and contributions to our CPP/QPP. Oh and a little for medicare. Actually I have nothing against these deductions from our hard earned salary. But it doesn't stop there. You want to buy something. Well guess what? GST and PST. Didn't we already pay th eFeds and Provs some up front taxes?, Except for Alberta, but that may change soon as they are on the slippery slope of dropping oil prices and therefore revenue for the AB coffers. HMM! I wonder if they do institute a prov sales tax will they eliminate it if the price of crude goes up. What do you think? Just one guess. LOL
Was that not the premise to the Federal income tax to pay of the WW1 debt? Must have been one hell of a loan because we are still paying Fed income tax.
And then to keep on we have excise tax at the gas pump and in the case of Montreal a little bit extra to pay for the transportation system.
If it wasn't for the waste that is blatently visible we would happily pay it to have better lives.
It is just sickening to see the waste that occurs and is just ho hummed away as though nothing happened.
The Charbonneau commission in Quebec showed the graff that occurs in just one segment of government. What has become of it. Lots of Oh my! How coul dthis happen? Some head nods and wrist slapping to obtain a commitment that it will not heppen again and away we go. How many millions spent for nothing?
As I said, it is really frustrating.
My Rant for today. Sorry my fingers ran away with the keyboard
RICARDO
@Ricardo: I'm sympathetic to the ideas that taxes are high and government waste is frustrating, but this is different from the discussion we're having here about double-taxation. Keep in mind that if we give out tax breaks to wealthier Canadians, then governments will make up for it with higher taxes elsewhere, which will likely affect everyone.
DeleteOk
DeleteSo I have re read this. I see we are talking about two different things and you are right. Your post describes the gains in a non registered account are taxed not the money you started with.
I think me and Ricardo are complaining about our "progressive" tax. In the sense if I am taxed 30% taken from my paycheck that I never see, I am purchasing everything theoretically with 70% of my original purchasing power. So that creates a tax multiplier. Or a double tax. Then you buy many other items and pay more taxes. So we are off topic. My bad.
However I would like to ask what net worth in your opinion that you would consider wealthy? I would say I'm better off then many people that I know personally, but would never dream of calling myself wealthy. Plus I have worked and saved with not a huge yearly income and refrained from buying that corvette to get here. I also remember reading that if we took all the money away from the 1%'ers. It would not even budge the needle on the debts owed by nations? They usually also pay far more tax already. So that's why I question what is a fair place to set the bar on taxes? I think when one analyses the facts, I feel that the wealthy are just easy targets for politicians to pick on to get votes.
@Paul: I suspect that the three of us would find common ground in our frustration about high taxes. I'm quite happy to help the less fortunate, but we're actually not doing that great a job of helping the less fortunate in Canada. At least we're better than the U.S. The frustrating thing to me is the massive government waste. This includes employing some people who can't do their jobs, generally overpaying many people, and wasted work. I'd like more money to help people with mental illness and less for government workers who retire before they're 60.
DeleteFor the purposes of this article, wealthy is roughly defined as anyone who can fill up their RRSP and TFSA and then have significant non-registered savings left over. I'm in this category and many others are as well, but the overall percentage of people in Canada in this situation is fairly low.
@ Mike Paul
DeleteI also consider myself lucky to be able to max out my RRSP, TFSA and run a HELOC for investment (non-registered) purposes. Not all that long ago I tried to put at least $1K in to my RRSP just to not lose the habit of saving something even though it was miniscule.
Mortage payments, child support and just paying the other bills left me with little extra dinaro. Not complaining about that, that is just the way it was.
I consider myself very lucky to have come through that with three great kids who are doing well and a nice nest egg ($50K in divs last year- - mostly in RRSP &TFSA)
It is just when you see the waste or mis-management of our taxes because of what I believe is the mis-conception by many administering the money that it is the "governments" money and it will just keep on flowing in. It is frustrating and it leads to the ordinary "honest" tax payer looking for as many possible ways to minimize their tax load.
I am fast approaching retirement (every day I am a day closer - LOL) and I am hoping to pull the income supplement in addition to the CPP/QPP & OAS. Some people will berate me as this not being ethical but 1) the rich have no qualms about it and neither do the welfare recipients. So why should I as a middle class tax payer not be intitled to it if I can work the system like them?
At any rate, I am all for employment insurance and the money I pay for it as it helps those that just lose their jobs and can not turn around with another job right away.
I am all for welfare for those that have been dealt a bad hand and need our support.
Just don't throw money at them. The bars are full on welfare pay day and too many families are on the second if not the third generation of welfare recipientes. Not one of those could find work?
I gotta stop. I am really getting off topic.
RICARDO
Maybe taxes wouldn't be so high if people who didn't need the GIS weren't playing the system to find ways to qualify for it.
ReplyDelete@Anonymous: I doubt that GIS payments to those well off amounts to much right now, but it may increase in the future if the rules don't change. I don't see much point in blaming individuals, though. If the rules permit me to reduce my taxes legally, then I probably will. The tax rules are the problem, not the taxpayers.
DeleteIt would be nice if they changed the TFSA rules to make the account limits equal for everyone. Right now if you have large gains in the account and withdraw the money you can increase your limit by the withdrawal. I have heard of people with TFSA limits of over 150, but no one talks about that. I do believe it is unfair to shelter that much income from tax. When you think of sheltering 5500 a year it doesn't seem like much, but there are people out there using these accounts like day trading accounts sheltering a lot of income.
ReplyDelete@Anonymous: For every day trader who who has grown his TFSA by a factor of 10, there are probably 100 day traders who have lost almost all of their TFSA contributions. The media like to make a big deal about the few who've managed to grow large TFSAs, but this isn't a big problem. So, far, the government has shut down swap strategies designed to shift assets into TFSAs and they're now going after those who act like professional traders. I don't see much need to set a cap on TFSA balance, but it may happen eventually anyway.
Delete@MJ
DeleteI agree with you on the media. If they came up with storied about people who lost their TFSA funds trading them we would jsut say that they learned their lesson the hard way. Much more news "worthy" to show people who playe dtheir cards well and got ahead. Same as Las Vegas. We only hear of the winners, not the thousands of losers
RICARDO