TFSAs, or: Your Hair’s on Fire, Why?

I would have loved to start with “dontcha love it when a good plan comes together?”, but instead I face a mind-numbing barrage of social-media faux outrage as a result of Joe Oliver’s ‘bozo outburst’. Nothing quite like it to distract from the message and feed the chattering classes, but the fact is: he is correct. Politically incorrect for sure, but spot on.

Kicking the can – A commonly paraphrased Keynes quote goes ‘when the facts change, I change my mind’, which is to say in the context of the Oliver kerfuffle, that when we get to that bridge, we will cross it. The argument that doubling the TFSA is a bad idea because it chokes off future government revenues is specious as it assumes that government, when faced with a shifting landscape, is incapable of adjusting.

One could easily have made the same argument with any of our universal benefits: ‘we’ll never be able to fund CPP should the working class shrink.’ Really? Because government would never consider raising our contribution limit to allow for a growing senior demographic? Right. The 1965 rate was set at 1.8%. Today it sits at 9.9% after the most recent 65% bump. You may not like your elected officials, but do not assume that they surround themselves with idiots.

Applying today’s ill-considered rhetoric to history, we’d likely still be discussing and analysing the merits and inherent risks to Pearson’s CPP. Analysis paralysis.

Tomorrow is another day – I suspect what outrages me so, is that the present Opposition representing ‘hard-working Canadians’ – a class which apparently I am excluded from – cannot conceive a world in which those selfsame Canadians improve their lots in life with the tools provided. That they, instead, require a caring, nurturing government to improve them. That they require a mosaic of programs and institutions to support them in their ‘hard-working’ ways. Of course that mosaic requires revenues, tax dollars, and annual drive-by ad hominems on the so-called wealthy.

RollofBillsCould we instead envision a future where I do not live hand-to-mouth on CPP handouts? Consider the benefits: I have disposable cash. That cash gets spent on Goods and Services and it gets taxed in a fair and progressive manner. It feeds an economy increasingly reliant on aging boomers. Goods and Services keep people employed. Employed people pay taxes and so on. In macroeconomics this is referred to as a virtuous circle. The other future has me subsisting on minimum government subsidies, with the bulk of my disposable cash going to food and shelter, neither of which are taxed, neither of which contribute to the economy. A net drain.

“Only the rich can maximize their $10,000 TFSA limit” rage the distributionistas. As if maximizing your tools is the goal, and failure to do so is a failure of the program. Who has maximized their RRSP? Very, very few, and I’d venture their success depended on greater disposable income than mine. I do not disparage them as ‘the rich’ and I have not heard anyone else do so; maybe they planned financial affairs better then me. OK, considering I have an unused $133K of RRSP headroom, they likely did, but my point is, I have yet to hear the hue and cry over a program that requires 18%(!) of gross income to be saved, set aside and generates an additional income in the form of a ‘tax return’ from your government. Now there’s a program for the rich, don’t you think?

But circle back to my original argument – that governments will do what they have to in response to changing conditions – let’s say tomorrow is here; there is a vast pool of funds locked in TFSAs not attributable to income. Is it unreasonable to have my pensions means-tested? Seems fair to me. Seems like a reasonable way to stretch funds, to support those in real need. Perhaps as my contributions grew, the actuaries determined a lifetime cap, a limit at which I can still support myself and support an economy. I can live with that too.

People, TFSAs can benefit so many. Let’s stop setting our hair on fire. Me improving my lot in dotage, should not be the cause of so much over-heated rhetoric.

UPDATE – 04/25/15

I came across this analysis shortly after pressing ‘publish’ and knew I’d have to include it. Entitled “A world with TFSAs vs without: Guess which one can help a middle-class couple save $1.1 million?” it compares to lives of Joe and Mary – each earning $80K a year – with and without TFSAs.

Without TFSAs

Joe passes away at 79. Now everything changes. The newly widowed Mary is going to be fine financially, but her tax bill has just shot up.

Joe’s RRIF now passes to Mary, and she has a $2 million RRIF (in future dollars), no ability to split income, and even with lower forced RRIF withdrawals, will likely not only lose her husband’s Canada Pension Plan and Old Age Security, but also her own OAS.

When Mary passes away at 89, there is still over $1 million in the RRIF, and this will get taxed at an average rate of around 47 per cent.

The upshot

Joe and Mary paid total cumulative income tax of $2,359,000: the amount they paid each year, plus the payout on Mary’s terminal tax return.

They were able to pass along an estate, after tax, of $4,519,000, in future dollars. In today’s dollars at a 2.2 per cent inflation rate, that would be about $1.5 million – much of which came from their house where they stayed until the end.

With TFSAs

…at 79, Joe passes away. Fortunately for Mary, her financial picture doesn’t suddenly get meaningfully worse, as it does in the RRSP scenario. Now, Joe’s TFSA rolls into Mary’s TFSA, without any tax consequences whatsoever. Whether Mary draws $200,000 or $10,000 out of her TFSA, she still won’t pay tax.

When Mary passes away 10 years later at 89, she owns a house worth $4 million that has no capital gains because it is her principal residence. She has a TFSA worth over $1.1 million that has no tax issues. Other than probate fees on the estate, there are almost no taxes on her final tax bill.

I urge you to take a minute, read the entire piece.

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