Time to get political on My Own Advisor. Who doesn’t like a little bit of controversy? This is hopefully a healthy debate, so let’s get into it. Our federal election is coming up and I think it’s time to make these financial issues election issues.
- Keep the Tax Free Savings Account (TFSA) contribution limit at $10,000
You might recall the Conservatives made good on their promise, they increased the annual TFSA contribution limit after the budget was balanced to $10,000 per account holder earlier this year. While this might seem only great news for wealthy Canadians looking to shelter more tax I also think it’s great for all Canadians regardless of income levels and ages. Increasing the TFSA contribution limit will allow Canadian investors to shelter more dividends, capital appreciation and interest income from taxation – providing a greater incentive for Canadians to save, invest and stay invested using this account. A higher TFSA limit might mean young adults don’t need to use Registered Retirement Savings Plans (RRSPs) altogether. Using the TFSA some Canadians may be able to curb “the tax headaches” associated with RRSP or RRIF withdrawals. Savings inside a TFSA can be withdrawn and these withdrawals do not affect the eligibility requirements associated with Old Age Security or Guaranteed Income Supplement programs. Lastly, it could eventually make the RRSP-Home Buyers’ Plan obsolete – removing more bureaucracy – which means saving us taxpayers money.
Recent interviews however with Liberal leader Justin Trudeau and NDP leader Tom Mulcair confirmed both leaders, if elected as prime minister, would roll back the annual TFSA contribution limit to $5,500 per year.
My advice to Justin and Tom, don’t do it. If you feel you must, you might not get my vote.
- Abolish the Registered Retirement Income Fund (RRIF) minimum withdrawal requirements
You might already know you need to collapse your Registered Retirement Savings Plan (RRSP) in the year you turn age 71. Moving RRSP assets into a RRIF is one popular option available to you. An RRIF is like an RRSP in that it is a vehicle for deferring tax on investments but the individual is not allowed to make contributions; starting the year after the RRIF is established a minimum amount must be withdrawn each year. If a person starts to withdraw money from the RRIF before age 71, the minimum annual withdrawal is calculated every year using a prescribed formula. If you’re confused, don’t be. Here is my point: abolish the RRIF minimums.
People are living longer, they should be able to manage their money as they please. This one popular argument in favour of removing RRIF minimum withdrawals I agree with. It also simplifies the tax code, so there is less waste in the tax system.
My advice to Stephen, Justin, Tom and Elizabeth, abolish the RRIF minimum withdrawal requirements and rid Canadian taxpayers of some ridiculous bureaucracy.
- Change the Old Age Security (OAS) program
Most Canadians are aware that Old Age Security (OAS) is a pension-like monthly payment available to most Canadians 65 years of age and older who meet residence requirements. This means employment history is not a factor. OAS payments (unlike Canada Pension Plan payments) come from general tax revenues. I’d like to see the OAS program changed from this key perspective, as controversial as it might be:
Stop OAS payments entirely to wealthy seniors over the existing “clawback” threshold.
Yes, I just wrote that…
The government imposes a “clawback” on your OAS payments if your net income for the year, in 2015, is over $72,809. The amount of the clawback is equal to your OAS payments or 15% of the amount by which your net income exceeds the threshold, whichever is less. The OAS benefit will be eliminated when your net income is just over $117,000. In my opinion, no senior making over $70,000 really needs taxpayer funded income security. To save money from general tax revenues I would suggest eliminating OAS payments entirely to individuals over the existing clawback threshold. We can use the money saved to manage our growing healthcare crisis. Going forward if a person’s net income exceeds the threshold (which I recommend is indexed to inflation) they would be ineligible for OAS.
My advice to Stephen, Justin, Tom and Elizabeth, change the OAS program and ensure these payments only go to those in financial need. Let the comments flow people…
“Simplicity is the ultimate sophistication.”
― Leonardo da Vinci
In summary, time to keep it simple government. Keep the $10,000 annual TFSA contribution room for everyone, abolish unnecessary RRIF rules to simplify the tax code and change the OAS program for those that really need it. Time to make these personal financial issues election issues in 2015.
What do you think?
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
I know my opinion is unpopular, but I think the RRIF minimums are a good idea. The government will get back its deferred taxes one way or another, either bit by bit over 30 years or so, or potentially, if you don’t need it during your lifetime, all at once when you die (or if you’re married, once your spouse dies). If you draw down those assets gradually, chances are you are going to be paying a lower percentage in taxes than if you delay taking it until later and are forced to make larger withdrawals. I have even read arguments in favour of drawing down your registered retirement money sooner than age 71 precisely in order to avoid excessive taxation.
To my mind, most likely the only people who are in a position to withdraw less than the minimum are those who have other sources of income to support themselves in their retirement years: for example, a company pension or investments in non-registered accounts. They had all these wonderful tax refunds during their working years and they simply can’t bear to pay taxes on that money in retirement. They’d rather die first.
I hear the argument that the government should just let people take the money out as they need it at their discretion, but the problem is that too often, people aren’t very smart about their money. They need tax incentives to save during their working years or they won’t do it, and they need guidelines to withdraw the money in their retirement years or they won’t do that either. Ignore the former and they can’t retire. Ignore the latter and they pay too much in taxes.
Hey Russ, yes, the government will get back its deferred taxes one way or another but wouldn’t it be easier for folks to manage withdrawals on their own terms? RRSPs have no minimum withdrawals? Same with TFSAs? Same with non-registered accounts?
You can still draw down assets gradually…
I would agree that most people aren’t smart with their money but with other accounts having no min. withdrawal criteria I’m not sure why this is a factor. Most Canadians should know by now the TFSA is an excellent retirement account but most people don’t care about that sadly and want to decrease the contribution limit.
Great post and ideas. When I read Tim’s comment I had to comment. Please it’s important to remember that despite the name, RRSP and RRIF have nothing to do with retirement, but rather ensure revenues to the government once you stop working.
It’s not semantics. The withdrawal minimums for RRIF is proof enough. But over the years enough retirees from the depts of Finance and Employment and Social Development (Whatever their name is now!) have confirmed this. The structure and limitations are clearly not there to help you retire.
TFSA is actually the way to go, simple to administer for the government, simple to use for individuals. Also It avoids politically motivated schemes like HBP which is a disaster. TFSA is actually the only retirement plan Canadians need. While I prefer the 10000$ limit I could live with a lower limit, especially if we were allowed to directly invest in other stock markets (other than Canada/US).
Instead of repeating the bank’s mantra that RRSP is for retirement, we might just accept that one way or another we all pay for everyone’s retirement (either through retirement plan or through more expensive social programs).
We should make it as easy as possible for everyone and cheap too. Increase CPP contributions and provide a proper retirement income. Once upon a time 12 000 was nice, not anymore. For those of us fortunate enough to be able to invest, the TFSA is there. If you need more invest in dividend-paying Canadian corporations. You won’t pay a penny in tax till you reach 50 000$ in dividends.
The RRIF minimums only benefit the government – nobody else. It’s insurance to ensure the government gets their money. However, I don’t think this helps retirement planning, it only makes things more difficult and confusing. It also increases the bureaucracy (again helping the government). It would be nice if the tax code was simplified but I know some folks don’t agree with me.
If the TFSA was kept to $10k per year, I would almost agree with you for 80% of Canadians. I’ve said this for years: The TFSA should be maxed out first for most Canadians. While I also prefer the $10k limit but I can’t see it continuing if the Libs or NDP gets in. That sucks…
I would vote in favour of increasing CPP contributions and provide a proper retirement income for most Canadians. We agree 🙂
Mark, yes, I agree that paying income support to high income seniors is bad policy. I would agree with starting and ending the phase-out at lower incomes.
Henry: my comment was about Mark’s proposal to eliminate the phase-out and just cut OAS off at the thresshold, not about the current system.
True Davis, the hard cut off date is a bit extreme on my part but it would certainly force folks to think about tax management.
Davis:
In 2015, as long as your taxable income is not over $71,592 one will receive the full OAS. If your taxable is over $71,592 than you must repay 15% of the difference. Once you reach $116,103 than you gent no OAS.
I agree that paying income support to wealthy seniors doesn’t make sense, but having a complete cut-off instead of a pgase-out oif OAS is a pretty bad idea. Under that plan, if if my income is $71,592, I get $6,765 from the government, so my total income is $78,357. My neighbour was foolish enough to invest an extra $50 in a 2% GIC, so her income is $71,593, and gets no OAS. She’s now $6,764 worse off than me, even though she started with a dollar more of income. Sounds pretty unfair to me. Gradual phase-outs are built into benefits programs to avoid these bizarrely unjust outcomes.
Thanks for the comment Davis. I could live with a lower threshold range, I can appreciate a hard cutoff would be tough for some folks to accept, but I hope you agree paying a senior OAS with $100K income for something called “income security” is nuts.
Agreed about the TFSA. You bring a good point about the OAS program. I’m not sure if I agree or not… Wealthy old people paid for it too so I’m sure a lot would disagree on “not getting what they paid and worked for”. But that’s something to think about.
On a financial level, Conservative are way ahead the other parties. Their budget makes sense and they brought some good things for Canadian families. I just totally disagree with its “environmental plan” that it just non existent! Oh well, still need to think! 😉
Cheers!
Mike
Wealthy old people paid for OAS but so do young, not so rich people, in the form of taxation. People need to realize OAS is not the same CPP whereby the latter is a contribution program.
I also just totally disagree with the Conservative “environmental plan” or lack thereof. The scientific muzzling is not good either.
I really like having $10K of TFSA room everyyear. It is going to make me a millionaire a lot quicker than if the room stayed at $5500. I know having Liberal elected will result less income taxes for me than having Conservative elected but TFSA room is just too fascinating for me to say no. Haha Thanks for sharing!
BSR
I’m struggling who to vote for. I really don’t know the lesser of all evils right now!
Mark: Could you please describe the amount of tax paid for the RRSPs RRIFS when the estate passes to children? I do not believe TFSA’s are hit he same way.
Hi Joanne,
I’m not tax expert…but this what I know….
Generally, the fair market value of an RRSP at the time of death is included in the deceased person’s income for that tax year. The RRSP assets can be transferred directly to the beneficiaries you designate (in the RRSP account documentation) bypassing your estate, or the assets can be designated to form part of your estate and distributed according to the instructions contained in your will.
I can’t tell the amount of tax to be paid since I don’t know the value of what you are talking about 😉
When you designate someone other than your spouse as the beneficiary of your RRSP, your RRSP investments will transfer automatically upon your death to that person. Those investments are withdrawn from your RRSP and transferred into the name of your beneficiary as non-registered investments. Your beneficiary receives and holds the transferred investments in a taxable environment. The RRSP assets cannot be transferred into your beneficiary’s registered account.
If your surviving spouse elects to transfer the RRSP assets directly into their RRSP plan, then your RRSP assets will retain their tax-deferred character inside your spouse’s registered account.
All this to say, lots of options and it’s best to talk to a financial professional when it comes to estate planning. I know have and will again.
There a many, probably most who currently cannot contribute the max. But under contributions carryforward allowing people to increase their contributions later.
I remember when my son-in-law gave up his job at a bank to take a real pay cut for a job he liked (and I thought was a deadend job). It took time but he’s worked his way up and now earns almost $100k. I was wrong, he’s happy and now can begin saving for his future.
The tfsa is the best method for people with limited income to invest, protect their savings and hopefully grow the fund without future limitations or taxes.
The TFSA is agreed, excellent for most people, if not all people. The TFSA is especially great for lower income Canadians as an emergency fund, retirement fund, other. I’ve written this for years on this site.
Congrats to your son-in-law on his good job. At the end of the day, if you do what you love and get paid well for it, that’s great. Those folks are in the minority. I like many aspects of my job but I certainly don’t love it.
I agree with Lloyd’s post. I did take advantage of the increased TFSA contribution limit, but that’s because I can afford to. Most people come nowhere near the limit. I have a relative who is making $25 bi-weekly contributions, which is all she can afford. Better than nothing, but she will never approach her limit. The argument against the increase is clear. It benefits too few people and erodes the tax base. In fact, your argument for cutting off OAS, which I agree with, provides the reason for limiting the increase in the TFSA.
As for the RRIF minimum withdrawals, I just don’t get the whining about this at all. A RRIF is effectively a self-funded retirement plan. It should be drawn out systematically during the course of your retirement (that’s what it’s intended for) and as you draw down the principal, it makes perfect mathematical sense that the percentage drawn down increase over time. RRSP/RRIFs are a tax-deferral program, not a tax avoidance program. Suck it up and pay your taxes, bit by bit and year by year.
I also took advantage of the increased TFSA limit but I won’t be terribly annoyed with the decrease. I mean, I’m not a fan of lowering the limit but we’ll find other means to invest our money for the future…
The thing is, most people don’t max out their RRSP but I don’t see people complaining about that?
The OAS is a good argument, I’m biased though 🙂
The government will get their money eventually via taxes on tax-deferred money or via estate taxes. RRSP or RRIF or LIF withdrawals should be the same. There is no min. withdrawal forced on RRSPs. Doing so with RRIFs or LIFs is simply tax bureaucracy. The government is not in the business of simplification. They are in the business of self-preservation at all costs including waste to the taxpayer.
Thanks for your comments Russ, always good to talk politics or religion to get people fired up on the blog!
I want the OAS. I paid heavy taxes all my life. Give me the OAS and I still pay taxes. You have people coming here to this country who never worked or paid into CPP. Fine. Then after so many years they are entitled to OAS. Go figure! Who paid for their medical or dental coverage.? We ALL did !!! I want whats mine. Sorry to be a little ruff with the staement, but thats how I feel.
No problem with your “ruff” statement… The thing is though, I feel we’re wasteful when it comes to OAS in that we’re providing “income security” to those that don’t need it. CPP is a contributory plan. OAS is a plan from general tax revenues. I am fine with people immigrating to Canada just not receiving OAS not over a threshold value. A subsidy for wealthy people is simply mismanagement of funds.
I think the truth of the matter is that NO party really cares about any of these issues. If they stumble on a talking point they simply utilize it to their own advantage in an attempt to get more votes. An example of this in local city elections a promise was made to give students a discount on bus passes. Many students simply cast a vote for this $0.20 cent a ride savings and ignored every other reason to elect one of the candidates especially when a $1000.00 disappears from their pocket another way that is not as visible. People are very shortsighted. I wish more people would/could focus on whats better for them over a 365 day period or longer, and not one or two selected issues. This confusion of “who is the middle class?” is also by design each trying to gain votes from a portion of the base but no party is really genuine when they discuss the point.
I think everyone has heard the average family pays 42% in taxes every year and its our biggest cost. Some like myself maybe higher then that amount when you factor in property taxes, services taxes, gas taxes and various licenses etc. Someone tell me, how much more should we pay? Food inflation is out of control this year. How do we make sure most Canadians find good jobs, get educated for them properly and keep them long term? I would like to vote for the party that would best control how much tax I pay overall and does not waste money like we have all witnessed in recent years. One that creates the environment for job creation, not for multitudes of handouts which in the long term is destructive.
Well, politicians are the masters of spin – for sure Paul.
Whatever gets them votes (and keeps their job) is right….
“The middle class” is a challenging label. Is this gross income? Net income? What’s the range?
I suspect when you add it all up, you’re probably paying more taxes that you think, consumption taxes, income taxes, property taxes, the list goes on.
This is partly why I wrote this post. I think the government that can better manage tax treatment to Canadians will get my vote. Unfortunately I’m not clear who can.
Kinda sad when the first thing politics dredges up is controversy. Also sad that it’s the best we have. 🙁
Yup, lots of things need to be altered and/or discarded. In the same vein as the OAS for high income seniors, my example would’ve the National Child Benefit Supplement (NCBS). That program is based upon income, not net worth. Thus, someone like Derek Foster (The Idiot Millionaire) can have 5 or 6 kids, a million dollars in the bank, low income (via dividends), and still collect the subsidy.
It is the government, not overly famous for broadly or deeply thinking things through to the end, so hopefully things will evolve for the better.
I’ve never looked into the NCBS but I can see your point. Governments unfortunately have a very short-term focus. This doesn’t help those of us who are thinking long-term. I worry about the Libs running a 3-year deficit. Sure, we need infrastructure spending but isn’t there a way to fund that? I’d be in favour or raising the HST/GST again by 1% if it means our government is not sinking in more debt long-term. It is simply not good economics.
I am not in favour of this increase in the TFSA. The original plan with the indexation was fine, this increase is political. It should also have a lifetime cap and should be included as income for the purpose of the OAS clawback.
I am not in favour of completely changing the rules for RRIFs for already invested money. We all invested in our RRSPs knowing the rules when we did so. Minimum withdrawals will result in some people having the OAS clawback triggered. It is not fair that a person with substantial funds be collecting full or any OAS with these substantial assets.
OAS clawback minimum should be lowered slightly, the range for full clawback should be tightened and all income should be considered for clawback. IMO, OAS is basically seniors welfare and I for one would be happy to have mine all clawed back.
Having said all that, I can live with the rules as they are and none of the political promises concerning these items are a major voting issue to moi.
I was also fine with the TFSA indexed to inflation. The new limit was a nice bonus. I could see a lifetime cap coming Lloyd.
I’m a huge fan of simplifying our tax code and abolishing RRIF minimum withdrawals would do that.
OAS by design is for income security. Wealthy seniors don’t need income security because they are wealthy. 🙂 They have likely worked hard for that and good on them but OAS is not for them.
What are you election issues? Thanks for your comments.
There is evidently a form you can get to say, “Don’t even send me the OAS”, at least I think there is, as my parents filled one in. OAS is a good program for lower income seniors, but don’t give it to me, I know I am not going to receive it.
Wish they’d talk about CPI a bit too. Food prices continue to increase at twice the “Inflation” numbers, but no one seems to care.
If we save enough I’m hopeful we don’t get OAS. No OAS is a good problem to have 🙂
Food prices are skyrocketing for sure. You need to be selective when shopping these days. I care!
I really hope the TFSA limit stays at 10k. If the Liberals and NDP end up reducing the amount I wonder if that’ll impact this year’s 10k limit too, especially for those that haven’t made the full contribution.
My sense is if the TFSA is rolled back that new limit will be in effect going-forward for 2016 or 2017. Making it retroactive would be nightmare. These are politicians however 🙂
Long time lurker, first time commenter. I’m tired of the more successful people in our society wanting to get more when it’s not needed. My family (myself, wife, child) do very well for ourselves (190000), and I feel we are getting selfish. Tfsa is a joke, we need to eliminate it. We need people to focus on retirement by making rrsps a priority. I saw an interesting idea thrown out there of just putting a cap of 75000 on tfsa in your lifetime, I would agree with this. It can act as a home buyers plan which I would also eliminate. I want the safety net when I or my family need it, not when I’m in my prime. Also on the tfsa I have friends with wealthy parents who max these out for themselves or for their kids to buy a house
Thanks for the comment Tim, good to hear from you.
Personally, I consider the TFSA a retirement account. It’s not a savings account for me so I use the TFSA and RRSP in combination.
As for the “successful people in our society” while I would like the TFSA to stay around, if I had a choice between that or better healthcare, better education, better economy, etc. I would certainly be willing to give up the TFSA. The problem is I don’t see / feel how anyone can guarantee anything. This means the bet on the future is the future we can control through savings, investing and keeping our taxes modest. The TFSA certainly helps in that regard.
Sure, we need people to focus on retirement but that doesn’t mean RRSPs are the answer for everyone.
I could see a lifetime contribution room cap for the TFSA coming. My guess is $100,000.
All good from my viewpoint too.
1. There is much evidence the TFSA benefits people across all income levels. Since unused contributions carry forward it is very flexible in meeting peoples needs as their savings habits or incomes change. I also agree about the homebuyers RRSP plan. This has turned a retirement plan into a home buyers plan and is actually at conflict in this way, and of course adds bureaucracy/cost as you mentioned.
2. RRIF age and minimum withdrawals places too many restrictions on people that need maximum flexibility-retirees, and causes the government to regularly review the rules relating to age demographics and market conditions ( should be unnecessary). The government is still guaranteed to get its taxes- be it through withdrawals or after settling an estate.
3. OAS – this is a good idea that may help the longevity of this benefit, although I don’t know the extent of clawback revenues and not sure it is significant.
I also suggest while we’re at these tax changes we should overhaul the whole tax system to make it much simpler.
Hey my friend – I couldn’t agree more – simplify the tax system. I read somewhere that the tax code now stretches up to 5 football fields in length. That is simply stupid. Imagine the overhead involved in managing that? What a waste.
Hey mark, another great article and I agree with your points… even just increasimg the cutback on oas. The fact you can get it up until $117000 is a bit ridiculous. More imoortant things we can put that money towarda
I’m sure many wealthy seniors have worked hard to earn their $100k + retirement income but taxpayer funded “social security” payments from our government to these seniors simply doesn’t make any sense. That money should go to other causes. I suspect not all seniors will agree with me though!
I was suggesting that the dividend amount should NOT be grossed up. If one can split the dividends with a spouse it lessens the effect, but for a single person it makes a big difference.
Gotcha Henry. Just confirming my friend 🙂
You got my vote Mark! All valid points. I particularly like the ideas of simplification and channelling funds more appropriately.
Thanks for your vote 🙂
I don’t agree that tfsa only benefits the wealthy, everyone can invest as much as they can afford. As their earnings grow they can increase their cpntribution, as under funding from prior years carryforwards.
As for rrif, the recent lowering of withdrawal rates really makes a difference. I doubt any gov’t would eliminate a min.
Oas is great and I don’t feel the clawback is bad, nor do I think they need to lower it. The only thing I think could be changed is the grossing up of dividends in the calculation.
Henry, you’re a bright guy….I also don’t agree that tfsa only benefits the wealthy.
As for the RRIF, absolutely, the mins should abolished. This is only a cash gap for our gov’t.
As for OAS, ok, but you want the dividend gross up to be higher? That implies the corp. taxes are higher. You think that’s good policy long-term in a slower, lower, older, world economy? Tell me your insight 🙂