By: Larry MacDonald
In my column on the Tax Free Saving Account (TFSA), I ranted on about i) fees charged by TFSA providers, ii) growing complexity of the government’s registered savings plans system, and iii) the cost of the bureaucracy needed to administer the plethora of plans. Just give us a simpler tax system with lower tax rates, I opined, and let us save without having to funnel money through registered plans. As index-fund guru John Bogle has said in another context, cut out the middlemen when it comes to saving and investing. A lot of direct and hidden costs can be removed — like the fees financial advisors charge (directly or indirectly via mutual-fund levies) to help us navigate through the intracacies of the programs.
Other complaints could have been raised. Two are what economists call “perverse incentives” and “regulatory risk.”
Perverse incentives refer to the fact government initiatives often come with unintended consequences. For example, many economists say the OAS, GIS and other income-support programs for elderly persons reduce the incentive for those in their working-age years to work, save and generally be a productive member of society. You can always rely upon government support programs for at least a minimum standard of living in your old age. Or if you want a bit more, you can save but keep it under the amount that would claw back old-age benefits. And if you have saved too much, retire or semi-retire in your 40s or 50s and melt down your registered plans until you don’t face any clawbacks or the prospect of receiving retirement income in the higher tax brackets after 65.
The TFSA adds another plank to the edifice from which such unintended effects come. Ironically, one of the primary reasons for its creation was to address the disincentive to save for retirement, especially in the case of low-wage earners. Perhaps in time we will see how the TFSA creates its own set of unwanted side-effects and requires yet another government program to patch up the leaks. The cost of the bureaucracy seems to just keep feeding on itself, taking an ever greater cut from our savings.
Regulatory risk begins with people and companies undertaking actions on the assumption government rules and regulations continue unchanged into the future. That doesn’t always happen. Governments, for various reasons, often end up changing the rules of the game in midstream or just before the waterfall comes into view.
With registered plans such as RRSPs, RESPs, and TFSAs, this risk is ever present. Take the decision to contribute to an RRSP. High income persons may see it as worthwhile because their tax rate in retirement will likely be lower — assuming tax rates stay the same. Fifteen years from now when they retire, rates could be higher and wipe out much of the value to deferring taxes.
Many persons will now plow money into the TFSA believing they no longer have to worry about clawbacks or taxes in their old age. But some retirement experts say the loss of tax revenues from the TFSA could become significant in a few years and prompt the government to introduce changes to recoup revenues. Who knows, maybe the changes could include legislation that decrees taxation of some percentage of the amount withdrawn annually from a TFSA.
4 Responses to “ More TFSA-related ranting ”
Following is an issue that is ‘lo-o-ong’ overdue for redress ..
and quite frankly, I cannot understand why the media and politicians are afraid to address this.
the Issue: Should Canadians be paying their fair share as Taxes-on-Income OR consumption taxes
I think that wanna-be government (of whatever stripe) should alternatively, instead of buying votes and promising to ‘give’ me something, seriously first consider that.. “INCOME TAXES are a fee for working and a penalty for success” and let’s get something done to immediately address this outrageous issue that is keeping the low-income worker poor and, encouraging those on income assistance to remain non-productive.
in my OPINION:
1. I have no problem with being taxed on consumption.. but I am very annoyed, and insulted, that I am taxed on my incentive and my productivity.
2. Income taxes on annual incomes of less than $18,000 are a dis-incentive for those on welfare, income-assistance, minimum wages, and/or those just entering the workforce. Note that current tax-due on income of $15,000 is approximately $1,120.
3. The working person should have the opportunity to earn the basic-cost-of-living, approximately $20,000 per year per person (about $1,600 per month), before they are ‘taxed’ on their income (ie. penalized-for-working).
4. Benefits to reduction of income taxes;
* immediate reduction of unemployed across Canada
* immediate reduction of those (capable) on-welfare or income-assisted recipients as it becomes ‘worthwhile’ to join/re-join the workforce
* a reduced demand for wage increase(s) across all-sectors and,
* last-but-not-least.. a likely reduction in petty crime.
5. Welfare and Income Assistance ‘programs’ ;
* the estimated ‘cost’ to the taxpayer (combined federal and provincial) is in the order of $5,000 per month for each man, woman, and child on ‘welfare’ or some other form of ‘income assistance’ PLUS, you can add other non-addressed costs-of-administration.. likely another $2,500 per person/month (see Stats Canada information at http://www.statcan.ca/bsolc/english/bsolc?catno=11F0019M2005246 and use your calculator)
* related reduction of the taxpayer funded ‘welfare industry’ with re-assignment of those government employees to becoming productive in building Canada.
The BOTTOM LINE.. It’s not how much you make – it’s how much you take home!
Note to politicos: everyone talks about the ‘working poor’ – NOW here’s your opportunity to do something constructive for everyone in this over-taxed country.
I am sincerely hopeful the above will become a part of ALL PARTIES’ election platform..
Basic Personal Exemption Petition
To the federal Finance Minister:
The basic personal income tax exemption (BPE) in 2005 for Canadian taxpayers is $8,148. This means that only the first $8,148 of income is tax free. Canada’s BPE is one of the stingiest in the industrialized world. A minimum wage employee pays tax on almost half of their income! This punitive BPE punishes all Canadians, but especially low-wage earners and those just entering the workforce. We the undersigned demand that:
* The federal government immediately introduce a plan to raise the BPE to $15,000 and change the name of this measure to the Basic Standard of Living Credit; and
* The federal government also raise the spousal exemption to $15,000.
This represents good fiscal policy and good social policy and would amount to a $28 billion tax cut for all Canadian taxpayers and permanently remove over 1.8 million people from the tax rolls. With the federal government increasing spending by $15 billion over the next two years alone, the federal government has the fiscal capacity to allow Canadians to keep more of their hard earned money.
Note: the above can be found at Canadian Taxpayers Federation website (www.taxpayer.com).
By L Abraham on Jan 17, 2009
Nobody yet has found the perfect tax systems that provides us all with well-funded social programs, eliminates the ability to take advantage of such programs, and leave as much income as possible with the earner.
The bottom line is all this stuff has to be paid for, and our high tax rates are representative of how much this stuff costs.
Since wealth tends to be a pyramid, with the rich at the narrow top and the poorer at the wide bottom, the poor en masse will always demand more benefits from what they pay for, and the rich will always receive less benefit for what they pay for.
Politicians simply do not have the power to truly do what’s best for the economy because the correct choice is hard work and sacrifice, and that will always be unpopular. Thus, politicians have to set fiscal policy that tries to balance what they SHOULD be doing with what popular (often non-wealthy) voters want.
Our society generally swings somewhere around a stable point. It’s not the optimal point, but the reason it is like what it is, is because of that stabilty.
By Steve on Jan 19, 2009
We’ve posted the research Diana has done, and there are now two tables listing banks, mutual funds, brokerage, and insurance co. information regarding TFSA administration fees, TFSA withdrawal fees, TFSA minimum investments, as well as a chart of TFSA incentives.
http://www.taxfreesavingscanada.ca/fees.main.html
By Tim Robertson on Jan 23, 2009