History of the TFSA
Within the 2008 Federal budget was an ambitious plan to reduce taxes and raise Canadians’ standard of living in an effort to foster overall economic growth. Called the “Tax-Free Savings Account—A Savings Plan for All Canadians”, the plan was intended to be an incentive for ordinary Canadians to invest more in their future.
The TFSA officially came into effect on January 1, 2009. Many people were 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 cracked down on this practice as they deemed 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 remains 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 only 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 3/4 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 1/3 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 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 perhaps it’s just sour grapes on the CRA’s part that investors are using innovative ways to increase their personal wealth?
The Conservatives officially announce that the TFSA limit has increased to $10,000 for 2015. After the Liberals win a majority government in 2015 however, they roll this back to $5,500 for 2016.
2017 and 2018 both have a contribution limit of $5,500.
2019 sees the annual contribution limit raised to $6,000, as interest rates are slowly starting to rise, and is based on an indexed-to-inflation annual contribution limit which is adjusted in increments of $500.
For 2020 – 2022, the annual contribution room remains at $6,000.
In 2023, the annual contribution room was raised to $6,500.