Within the 2008 Federal budget is an ambitious plan to reduce taxes and raise Canadian’s standards of living in an effort to foster overall economic growth. Called the “Tax-Free Savings Account—A Savings Plan for All Canadians”, this item is intended as an incentive for ordinary Canadians to invest more in their future.
The TFSA officially comes into effect on January 1. Many people are curious about this new government program and just under 5 million people (19% of tax filers) open accounts. Many, but not all, use up their maximum contribution room of $5000 for the year.
Sharp investors begin using “swap transactions” to balloon their TFSA’s initial value to over $300,000! Late in 2009 the CRA cracks down on this practice as they deem it a non-permissible advantage which is not allowed under CRA rules.
After the success of the 2009 program Canada sees 6.7 million people with TFSAs, a big increase from its debut year. The contribution limit remains at $5000 per year, and in fact is to remain there for several more years.
After 72,000 investors receive notices of over-contributions from the CRA and the subsequent outcry over confusing rules, the CRA relents and waives the penalty taxes for many Canadians. The CRA notes this leniency will be applied on a case-by-case basis and is not a blanket policy.
The TFSA is 2 years old by now and Canadians are starting to enjoy the fruits of their tax-free money. About ¾ of TFSA holders are reporting positive investment income; many are withdrawing money to finance homes or other large expenses. By the end of this year, over 8 million Canadians (almost ⅓ of tax filers) have opened a TFSA with a combined value of 62 billion dollars.
Despite an information blitz by the CRA, 103,000 investors are being penalized for over-contributing. The CRA reports it will once again waive penalty taxes, provided investors can prove non-malicious intent and genuine confusion about the rules.
As part of an election promise, Prime Minister Stephen Harper vows to increase the annual contribution limit to $10,000 once the Federal Budget is balanced.
The TFSA is 3 years old and many of its spin-off benefits are becoming obvious. Relatives of deceased TFSA holders are getting a surprise tax-free windfall. As people age and begin drawing upon government retirement programs, they realize their OAS and GIS payments are unaffected by a TFSA. News about successful investing stories spur others to finally join the TFSA bandwagon.
Four years of inflation means it’s time to increase the TFSA’s contribution limit to $5500, as per the original conditions set out in the 2008 Budget. Investors are delighted and take the opportunity to invest even more in their TFSA, some quite aggressively. Investor income continues to compound annually tax-free and comprises an increasingly greater portion of their private savings.
The CRA begins to take notice of people with unusually large gains in their TFSAs, despite the closure of the swap-transaction loophole in 2009. Due to investor savvy and a lack of relevant legal precedents, additional “gray areas” of the TFSA rules are being exploited to great effect. Or is this just sour grapes on the CRA’s part that investors are using innovative ways to increase their personal wealth?
The Conservatives officially announced that the TFSA limit increased to $10,000 for 2015. After the Liberals won a majority government in 2015 however, they rolled this back to $5,500 for 2016. 2017 and 2018 both have a contribution limit of $5,500. As interest rates are slowly starting to rise, it is rumoured that the 2019 limit may increase to $6,000, as the annual contribution limit is indexed to inflation (though in increments of $500).