Tax Free Savings Accounts - TFSAs

[August1991]

It does have to do with the TFSA when several analysts say that lowering the income tax would be the fairest way to deliver tax relief.

You're back to your anonymous experts line, Dobbin. Who are the "several analysts"?

Look, a TFSA is not really a tax cut. TFSAs (like RRSPs) remove a pernicious form of double taxation. Peopel who save are taxed twice: once when they earn the money and again when the saved money is taxed. This falsely encourages people to spend now rather than save. This false incentive is costly to the Canadian economy.

The idea of a general tax cut should be separated from TFSAs. Let's remove distortions from our tax system; let's also cut taxes (and reduce government spending).

My point was that if you raise the exemption by $5000, a person who has say $20,000 taxable at the highest rate will now have only $15,000 taxable at that rate and will benefit more than someone who's maximum taxable income is at a lower rate.

The personal exemption is now converted to a tax credit at the same, single lowest marginal rate for everyone. If the Basic Personal Exemption (BPE) were to rise to $15,000, it would amount to the same dollar reduction in everyone's income tax.

The single mom who saves $50/mo in a TFSA will not have to pay tax on ~$6,338 in investment return over 20 years of contributions (using a 4% investment rate and inflation is ignored for simplicity).

My wife and I, OTOH, can each put $11,500 into a RRSP to create the $5,000 in tax savings to put into a TFSA over the next 20 years.

The benefit to us? ~$48,900 each in tax free investment returns assuming the 4% rate of return and no inflation for simplicity.

That's an outrageous comparison. Your single mom is saving $600/year and you are saving $33,000/year. You earn much more and you save much more. You will pay more taxes when you withdraw the RRSP and you will pay more taxes before you save in a TFSA. Why? Well, heck, you have more money than the single mom.

So you would rather have that single mother who managed to put money into savings have her OAS clawed back in retirement, because she managed to save a little?

This is an extremely good point. One reason low income people don't save is because any RRSP savings will be clawed back through reduced GAINS or OAP.

This talk of an increase in the BPE strikes me as theoretical nonsense. In the real world, a TFSA is here and now and politically possible. It makes it possible for poor people to save and to benefit from their savings.

It's quite obvious from your condescending comments that you haven't had to visit a food bank or soup kitchen in the last little while. I do deal with these poor unfortunate people on a daily basis, and when these people say we have no money, they actually mean they have no money.

I'd be the first to argue that Canada is a poor country (compared to what it could be). But most Canadians do not need soup kitchens. Over 60% of Canadians between 18-34 have RRSPs.

The Left in Canada looks foolish when it imitates Charles Dickens or Victor Hugo describing poverty. The so-called poor in Canada in the 21st century is different than 19th century. (The Left pretends to be progressive but in fact it's old-fashioned.)

Why would you want people to "consume later"? What benefit to the economy is it if people "consume later"?

What benefit is it to an "economy" to consume at all? (Hint: Do we work for the "economy"? Do "people" exist?) Edited March 3, 2008 by August1991

[msj]

Sorry used the wrong name. I do know the difference the OAS claw back starts at $60,000 of gross income, the GIS claw back is ment to keep retirees to stay in the work force longer.

Given that the clawback on the GIS is essentially you lose 50% for every dollar you earn then even this statement makes little sense.

If anything, the GIS claw back encourages seniors to evade taxes.

I know one senior who finally came to me and fessed up about renting out part of her home. She never declared the income because the claw back of her GIS is like a 50% tax (she was not taxable otherwise due to the many tax credits available to her - being a senior and all).

[msj]

That's an outrageous comparison. Your single mom is saving $600/year and you are saving $33,000/year. You earn much more and you save much more. You will pay more taxes when you withdraw the RRSP and you will pay more taxes before you save in a TFSA. Why? Well, heck, you have more money than the single mom.

This is an extremely good point. One reason low income people don't save is because any RRSP savings will be clawed back through reduced GAINS or OAP.

My number for tax saving ~$19-21k each is only in reference to our savings from the TFSA.

The point is simple - my wife and I don't need this savings. The money would be better used in helping single parents or those seniors who are truly in need.

As for OAP claw back, well, it seems like people are really getting this confused.

OAS claw back kicks in around $62,000 of net income. With pension splitting now in effect it is laughable to claim that poor people are going to get their OAS clawed back. The rate of claw back is 15% but the amount of the OAS clawed back is deducted from income in the determination of taxable income (which means that for most people the equivalent marginal tax rate, including the OAS claw back, is around 43%).

The GIS (guaranteed income supplement) claw back is the pension that the TFSA will help alleviate for people who are truly poor (but still capable of saving). The rate of claw back is 50%.

Can we at least get this terminology right?

Thank you.

[August1991]

Given that you don't know the difference between the OAS and the GIS I don't think you should be making any references to fools nor money.

And given that you don't seem to understand the difference between an income tax and a consumption tax, then perhaps you shouldn't pronounce on tax policy.

In general, many public debates involve moral questions and expertise helps to understand the questions - but common sense is best to decide what is right. Everyone here is entitled to a moral opinion and no one has a superior moral judgment.

Canada's current tax system creates an incentive for people to spend rather than save. That's bad for people and bad for Canada. TFSAs fix to some degree this problem in the tax system, in particular for people with low incomes.

At the same time, I too agree that we should raise the BPE to perhaps $15,000 so that many Canadians do not have to pay any income tax at all.

[Alta4ever]

Given that the clawback on the GIS is essentially you lose 50% for every dollar you earn then even this statement makes little sense.

If anything, the GIS claw back encourages seniors to evade taxes.

I know one senior who finally came to me and fessed up about renting out part of her home. She never declared the income because the claw back of her GIS is like a 50% tax (she was not taxable otherwise due to the many tax credits available to her - being a senior and all).

You're right. I'm not sure what I was thinking, must be the cold meds.

[msj]

And given that you don't seem to understand the difference between an income tax and a consumption tax, then perhaps you shouldn't pronounce on tax policy.

How is this even relevant to what I have put forward?

Of course it is not relevant for the reasons outlined below.

In general, many public debates involve moral questions and expertise helps to understand the questions - but common sense is best to decide what is right. Everyone here is entitled to a moral opinion and no one has a superior moral judgment.

People are entitled to their opinions - but informed opinions make one look less like a fool.

Which is why you are trying the tactic of changing the subject per your above irrelevant comment regarding consumption and income taxes.

Canada's current tax system creates an incentive for people to spend rather than save. That's bad for people and bad for Canada. TFSAs fix to some degree this problem in the tax system, in particular for people with low incomes.

Maybe if the CPC's didn't lower the GST rate and, rather, reduced marginal tax rates then we would be going somewhere.

Raising the basic exemption, adjusting the GIS and CTB claw back mechanisms, and lowering marginal tax rates and/or raising tax brackets would do more for these people than providing them with an after tax savings account (i.e. you've got to earn the money, pay tax on it, and be able to create savings with the net amount, before you can even consider opening up a TFSA).

[August1991]

Which is why you are trying the tactic of changing the subject per your above irrelevant comment regarding consumption and income taxes.

The difference between a consumption tax and an income tax is critical to understanding the logic of the TFSA. Do you understand this difference?

----

BTW, the clawback provisions of the TFSA were candy added to make them popular, and these provisions will work. The Tories wanted a popular measure and they wanted a measure seen to be popular. Finally, TFSAs will make it difficult for future governments to tax.

msj, why are you opposed to TFSAs?

Edited March 3, 2008 by August1991

[msj]

The difference between a consumption tax and an income tax is critical to understanding the logic of the TFSA. Do you understand this difference?

I am not going to take this thread off on a tangent because you are too embarrassed to admit that you screwed up with respect to the OAS/GIS terminology which has made you look almost as foolish as the Alt guy.

[August1991]

I am not going to take this thread off on a tangent because you are too embarrassed to admit that you screwed up with respect to the OAS/GIS terminology which has made you look almost as foolish as the Alt guy.

It's not a tangent at all.

The difference between an income tax and a consumption tax is at the heart of TFSAs. Income taxes are costly because they distort economic decisions. TFSAs correct in part this distortion.

---

The difference between the OAP (OAS?) and GAINS (GIS?) is a bureaucratic distinction and in Quebec, it doesn't exist exactly. I am sorry if I'm in error how these transfers are treated now in the rest of Canada. Each province is different.

The difference between a consumption tax and an income tax is fundamental and has implications for a society at large. In that sense, the introduction of TFSAs is a major change in Canada's economy. In the next year, many Canadians are going to change what they do because TFSAs exist.

Edited March 3, 2008 by August1991

[msj]

It's not a tangent at all.

The difference between an income tax and a consumption tax is at the heart of TFSAs. Income taxes are costly because they distort economic decisions. TFSAs correct in part this distortion.

Umm, hate to tell you this but if you really want to address this distortion then you shouldn't be lowering the GST and you should be lowering the marginal tax rates and adjusting the tax brackets (including basic exemption) higher.

Gee, I seem to recall myself advocating these things over the past year or so.....

[August1991]

Umm, hate to tell you this but if you really want to address this distortion then you shouldn't be lowering the GST and you should be lowering the marginal tax rates and adjusting the tax brackets (including basic exemption) higher.

Gee, I seem to recall myself advocating these things over the past year or so.....

Lower the GST? That was a political gesture. The Liberals promised it but never delivered.

Stephen Harper promised it and did it.

Lowering marginal tax rates? I would prefer cutting federal government spending. But I'll wait.

In the meantime, I like the idea of fixing a distortion, making it possible for low income people to save and locking in future tax cuts. And I also like the idea of a practical policy that will make Tories popular. Ordinary Canadians will like TFSAs. (Watch the upcoming Quebec budget to see that it will fall in line.)

[jdobbin]

You're back to your anonymous experts line, Dobbin. Who are the "several analysts"?

Look, a TFSA is not really a tax cut. TFSAs (like RRSPs) remove a pernicious form of double taxation. Peopel who save are taxed twice: once when they earn the money and again when the saved money is taxed. This falsely encourages people to spend now rather than save. This false incentive is costly to the Canadian economy.

The idea of a general tax cut should be separated from TFSAs. Let's remove distortions from our tax system; let's also cut taxes (and reduce government spending).

I have given you several of these analysts in other posts but you keep ignoring them or think they are wrong.

The TFSA is a tax cut for those that use it. Show me the citation that it isn't. Show me the citation that spending now hurts the Canadian economy. How? If that was the case, why was the GST cut? The CTF on their webpage said that this was the distortion since it was used to increase spending. That is why they said they preferred a general income tax cut to the GST cut.

He is what Pricewaterhouse had to say:

http://www.edmontonsun.com/News/Canada/200...879370-sun.html

"If you have a limited amount of money, where do you put it?" asked Donald Carson of PricewaterhouseCoopers, referring to other tax shelters, such as RRSPs and Registered Education Savings Plans. "Or do you pay down your mortgage?"

Then there is Dundee:

"Canadians don't fully utilize their RRSP contributions now," said Terry Pizio of Dundee Private Investors Inc., noting that, on average, taxpayers are carrying forward between $50,000 and $70,000 in unused RRSP capacity.

'SMOKE AND MIRRORS'

Flaherty "hasn't reinvented the wheel here," Pizio said. "It is smoke and mirrors."

Here is what another analyst said:

http://www.cbc.ca/money/story/2008/02/26/b...ax.html?ref=rss

Analysts said TFSAs make the most sense for people who can keep them open for many years.

"I'd say 10, 15, 20 years or more," accountant Tim Cestnick of The Waterstreet Group told CBC News. "It's the tax-free compounding over that period of time where you're really going to benefit."

How is that better for some people who don't use up the room in their RRSP now? A general tax cut is better.

You say it will end the distortion. How? Has it done so for countries that have this in place?

John Williamson has repeatedly said the TFSA is not for everyone and is not as good as a general tax cut. What do you say about that? How broad-based is that?

http://canadianpress.google.com/article/AL...LZ7Hp39Hj2FYO4w

John Williamson of the Canadian Taxpayers Federation suggests it could be nearly everyone.

"I think you're going to find people up and down the income ladder who take advantage of it," he said.

For modest-income Canadians drowning in debt, the opportunity to set aside up to $5,000 annually may ring hollow. But advocates for the working poor say the plan does open a rare window for those Canadians with the discipline and foresight to use it.

However, as many people keeping pointing, between 30 and 40% of people in Canada don't buy RRSPs regularly or don't pay the maximum into them. The reason cited: They don't have the money to do it. One reason they don't have the money is because they pay too much tax now.

This is a change in taxation for people who are savers. It doesn't help people who need the money now. It is therefore not as broad-based as a general tax cut would be.

You said a general tax cut will create a deficit but the TFSA won't. How? Where is your evidence?

Jim Rubin said there will be a lot of disappointment again over the broken Conservative promise on capital gains.

http://ca.news.yahoo.com/s/capress/flaherty

"Tax-free savings accounts will be limited to a maximum $5,000 contribution per year, and the inability to apply any capital losses incurred in the account against other investment income will limit the attractiveness of this vehicle to investors," CIBC World Markets chief economist Jeff Rubin said in a note to clients.

I find it hard to believe that the right wing is not in support of broad based income tax cuts. This is not as broad based as even your own figures show. Nor is it something they campaigned on. It is because they have broken their promise on capital gains tax and on not taxing income trusts. The promise they did keep on the GST created the very distortion you disagree with.

Edited March 3, 2008 by jdobbin

[jdobbin]

In the meantime, I like the idea of fixing a distortion, making it possible for low income people to save and locking in future tax cuts. And I also like the idea of a practical policy that will make Tories popular. Ordinary Canadians will like TFSAs. (Watch the upcoming Quebec budget to see that it will fall in line.)

If you want to end the distortion, you shouldn't have supported the GST cut. Even the CTF said that was a mistake compared to a general tax cut.

[Wilber]

I find it hard to believe that the right wing is not in support of broad based income tax cuts. This is not as broad based as even your own figures show. Nor is it something they campaigned on. It is because they have broken their promise on capital gains tax and on not taxing income trusts. The promise they did keep on the GST created the very distortion you disagree with.

The Liberals are claiming that the government is getting close to deficit. How do you propose they make broad based tax cuts without doing so? This is a deferred cut. The government gets its money up front and you get a guaranty of relief in the future. A savings plan which has tax implications opposite of an RRSP. It's nothing more than that. Pay them now or pay them later or both, your choice.

[jdobbin]

The Liberals are claiming that the government is getting close to deficit. How do you propose they make broad based tax cuts without doing so?

By cutting spending. Cancel the $600 million to Via that the Tories restored. Cancel the re-opening of the military college that the Liberals closed. The Tories have easily breezed past Liberal government in the past on spending. The government's own figures show that.

http://www.taxpayer.com/main/news.php?news_id=2730

This is a deferred cut. The government gets its money up front and you get a guaranty of relief in the future. A savings plan which has tax implications opposite of an RRSP. It's nothing more than that. Pay them now or pay them later or both, your choice.

And like I said, it is not broad-based. Another half percent reduction in income tax would affect everyone, stimulate the economy and put money into people's hands now.

This is being sold as a savings plan with no evidence that any other country that uses it actually increases their savings rate.

If the Tories believe there is a distortion in the tax, they should reverse the GST cut. Income tax cuts would have a greater impact.

[Wilber]

This is being sold as a savings plan with no evidence that any other country that uses it actually increases their savings rate.

Well if it doesn't it won't cost them anything.

[Oleg Bach]

By cutting spending. Cancel the $600 million to Via that the Tories restored. Cancel the re-opening of the military college that the Liberals closed. The Tories have easily breezed past Liberal government in the past on spending. The government's own figures show that.

http://www.taxpayer.com/main/news.php?news_id=2730

And like I said, it is not broad-based. Another half percent reduction in income tax would affect everyone, stimulate the economy and put money into people's hands now.

This is being sold as a savings plan with no evidence that any other country that uses it actually increases their savings rate.

If the Tories believe there is a distortion in the tax, they should reverse the GST cut. Income tax cuts would have a greater impact.

When you make the money you are taxed. That should be it! I did not know that I had an RRSP with the actors union...then I found out there was a few thousand bucks sitting in there. I removed the money immediately and to my dismay...I was taxed on the amount...It was a nasty bit of work on the part of the feds....I assumed that if I was a little old lady with the classic life savings in the bank that it was my money...apparently not in full...savings is savings and people do not save on behalf of the government. It's not their savings account nor is it a common public purse that belongs to all..savings are totally private funds!

This taxing or "claw back" as it is incorrectly called is crooked on the part of the feds..in order to claw something BACK...it would have had to belong to the government to begin with for them to make legal claim..seeing it is my savings - they do not have any right to even a small portion of it. Same sort of illegal taxing takes place in the form of sales tax..you buy a new car and you pay a sales tax - that car is sold as a used car - the buyer pays a second sales tax. This is illegal because the tax on the item has already been paid once - to have persons pay the tax twice is a theft.

General taxes such as sales tax and forms of excise tax are enough to run and maintain the infrastructure...INCOME TAX for the most part does not go back into the system to maintain that system - it is handed over to those corporates to maintain their wealth...much like the electrical bills of most corporate towers they get electricity for half the domestic rate - which means that the common home owner - is actually paying for the corporate tower power. Why should we pay to keep the talentless and rich - rich!?

The Americans fought a revolution on the idea of Taxation without representation..in other words when you pay into the common purse..you got something back for your money....walking down an icey side walk then stepping out into the road way...carrying a table - I slipped and hurt my chest..probably broke a rib or two...where was the product in the form of a snow cleared street or and iceless side walk? Where is the representative value of the tax dollar? Someone is absorbing the wealth taken in the form of income tax...and it is not you or I - who's got the money and where is what we pay for? I don't see it.

[jdobbin]

Well if it doesn't it won't cost them anything.

Just $5 billion in tax money with no indication that it creates a higher savings rate overall.

[Wilber]

Just $5 billion in tax money with no indication that it creates a higher savings rate overall.

If it is going to cost 5 billion it must mean people are going to save.

[jdobbin]

If it is going to cost 5 billion it must mean people are going to save.

But not increasing the saving rate overall. As one economist said, it is all smoke and mirrors and and a diversion from their broken promise on capital gains.

[Wilber]

But not increasing the saving rate overall. As one economist said, it is all smoke and mirrors and and a diversion from their broken promise on capital gains.

One economist eh. Well if you put the 5k in stocks you have a capital gains exemption.

[jdobbin]

One economist eh. Well if you put the 5k in stocks you have a capital gains exemption.

Too limiting for people who were promised by Flaherty to have a much larger capital gains exemption in the election. That is why both the Globe and Mail and National Post said the TFSA was a far cry from a capital gains change. The National Post said they liked the TFSA but would have liked a income tax reduction and a capital gains change even more.

I think Jeff Rubin is right.

"Tax-free savings accounts will be limited to a maximum $5,000 contribution per year, and the inability to apply any capital losses incurred in the account against other investment income will limit the attractiveness of this vehicle to investors," CIBC World Markets chief economist Jeff Rubin said in a note to clients.

Flaherty said a capital gains change is not happening for some time to come.

Are you saying that you prefer the TFSA instead of an income tax cut or change to capital gains?

Edited March 4, 2008 by jdobbin

[Dog]

I am not surprised that those on the left hate the TFSA but i think its great . My wife and i have already decided it is perfect for us and will put $ 90 a week each into an account which will allow us to pretty much max out on the plan . Kudos to the Conservatives for doing something for the middle class .

Edited March 4, 2008 by Dog

[August1991]

I am not surprised that those on the left hate the TFSA but i think its great .

That's the interesting point. Why are Leftists against this idea?

I reckon they don't understand it or are jealous that they didn't do it. Some Canadians just don't like anything new that requires a bit of effort to understand.

TFSAs will only show their worth in several years and only for those who save assiduously.

[socred]

And given that you don't seem to understand the difference between an income tax and a consumption tax, then perhaps you shouldn't pronounce on tax policy.

In general, many public debates involve moral questions and expertise helps to understand the questions - but common sense is best to decide what is right. Everyone here is entitled to a moral opinion and no one has a superior moral judgment.

Canada's current tax system creates an incentive for people to spend rather than save. That's bad for people and bad for Canada. TFSAs fix to some degree this problem in the tax system, in particular for people with low incomes.

At the same time, I too agree that we should raise the BPE to perhaps $15,000 so that many Canadians do not have to pay any income tax at all.

How is creating an incentive to spend rather than save "bad" for Canada?

"The persistence of the idea that monetary saving has a physical counterpart in physical accumulation will no doubt exercise the attention of historians of the present period. Since money is normally distributable only through the agency of wages, salaries and dividends, it being assumed that the interest on Government loans is provided by taxation, the whole of these wages, salaries and dividends must have appeared in the cost, and consequently in the price of articles produced. It does not appear to need any elaborate demonstration to see that any saving of these wages , salaries and dividends means that a proportion of the goods in the prices of which they appear must remain unsold within the credit area in which they are produced and are therefore, in the economic sense wasted. The investment of the funds so saved means the reappearance of the same sum of money in a fresh set of prices, so that on each occasion that a given sum of money is reinvested, a fresh set of price values is created without the creation of fresh purchasing power." (C.H. Douglas, evidence submitted before the MacMillan Committe on Finance and Industry reprined in The Monopoly of Credit 4th edition page 143-144)

Edited March 4, 2008 by socred