Stop punishing people who save and invest their money

Dear Government,

With the upcoming federal budget, based on what I’m reading and hearing, it includes significant changes regarding the taxation of capital gains.  It’s going up.  I urge you to re-consider.

TFSAs 101

As you know, the Tax Free Savings Account (TFSA) offers Canadians a great way to save, invest and grow their money – tax free.

  • The Tax Free Savings Account (TFSA) is a misnomer.  Read why here.  A TFSA can be much more than a cash savings account.
  • The TFSA is an account, not a mutual fund.
  • Contributions to your TFSA are not tax deductible, so you cannotuse contributions to reduce your taxable income.
  • TFSAs are highly effective for every Canadian regardless of their tax bracket.  You can read more about your rules in a post called TFSAs 101 here.

I believe using the TFSA is a smart thing to do, regardless of your income, to avoid future taxation.  I use this blog to inform people to leverage this account to the extent possible.

RRSPs 101

The Registered Retirement Savings Plan (RRSP) is a great way to grow money tax-deferred.

  • The RRSP is an account, not an investment itself.
  • Contributions to an RRSP are tax deductible, so you can use these tax deductions to reduce your taxable income.
  • Some Canadians shouldn’t use an RRSP (their income may not be high enough (yet) to reap the key benefits of this account).
  • RRSPs are highly effective for Canadians who will be in a lower tax bracket in retirement versus their contribution years.

You can read more about the account you set up about 60 years ago here – in a post called RRSPs 101.  I encourage Canadians to consider using this account on my when and where it makes sense for their financial well-being.

There are of course other accounts you have set-up, such as Registered Education Savings Plans (RESPs) and Registered Disability Savings Plans (RDSPs) that depending upon the circumstance, are arguably more important that the registered plans I wrote about above.

However, if you have exhausted your registered accounts then you are largely left with a taxable account to invest in.

Doing so has been rather tax-efficient for the most part.  You have offered diligent savers and investors who have maxed out their registered accounts a tax-friendly opportunity to keep investing.  This includes use of the Canadian dividend tax credit.  I admit though, maybe you were too generous prior to 1972.

You first introduced capital gains taxes in 1972.  (Prior to that time, all capital gains were tax-free.)  Since 1972, you have taken on numerous tax system changes – the taxation on capital gains included.  There was a time in the mid-80s where you told each Canadian they did not have to pay any tax on capital gains up to a lifetime maximum of $100,000.  That didn’t last though, although you have kept some healthy capital gains exemptions for small business corporation shares, farm property, and fishing property.

From 1972 to 1988, Canadians paid 50% tax on their capital gains.  In the late 80s you increased the capital gains tax inclusion rate to 66.67%.  In 1990, it was jacked up to 75%.  In 2000, it got ping-ponged back to 66.67%.  Now it’s a reasonable 50%.  I often wonder what the cost involved is in constantly proposing, changing and updating yet again our convoluted tax system.  I think it’s a beast.

Punishing Savers

I suspect billions of dollars could have been saved over time if the system was simplified.

Back to my point, increasing the taxation on capital gains (while increasing revenue for you) will punish savers and investors who have worked hard to save and invest beyond their registered accounts, in a taxable account.  If you move ahead with this, I wonder what tax rules will apply next – and more costs to do so in the process.  Are you going to put a lifetime cap on TFSA contributions?  Maybe you’ll start taxing capital gains on our principle residences?  I wouldn’t put anything past you.  Without putting any new clamps on our housing market, you’ve essentially priced out a portion of Canada from owning a home in Toronto or Vancouver.  Only the lucky paper millionaires who own their home in either city have been rewarded.

Raising the taxation on capital gains would be a clear signal you’re eager to heavily tax investment income.  I believe this is not in the best interests of Canadians who are striving to take care of their own financial future.  You are leaving us with fewer and fewer options to invest.  It will mean you’re willing to put the some of financial burden back on you.  That could be even more costly in the future.

What concerns do you have with our upcoming federal budget?

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. 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.

38 Responses to "Stop punishing people who save and invest their money"

  1. I would just say to you and the commenters who agreed with your post, remember this when you vote in the fall of 2019.

    (and 2018 as well, if you happen to be in Ontario).

  2. Mark, Judging by the number of responses it seems you have hit a nerve. I think you and your readers have a good sense of the economic implications of imposing these taxes, but no one has raised the issue of unfairness. When a company earns income it pays taxes. If it puts the after tax money in the bank, the value of the company has gone up by that amount (capital gain). Years later when you withdraw that money it will now be taxed again. That is double taxation.

    There is also an inflation component to it. Paying taxes on inflation?

    I can see a case for taxing short term capital gains as ordinary income because people who actively trade in and out of the market are engaging in speculation, not investing. It is their job.

    1. You raise an interesting point about trading. I could make a case that those who are successful enough to constantly trade (and win, therefore achieving capital gains; very few are) should be subject to the same rules as a long-time investor. At least this would be an incentive to invest (although as you point out trading is not investing).

      I have little problem with the 50% rule now. It seems rather fair, although lower would be better, as in 25%. I do take issue with the increase.

  3. I have a somewhat different opinion. I’m fine with the TFSA at 5.5K with indexing. The increase to 10K was targeted to the wealthy and better off seniors. Average folks would have a difficult time saving 10K/year. I’d also support some kind of life-time cap on contributions. I’m also for changing the principle residence rules to extend the time necessary to achieve the tax free capital gain. Currently it is 1 year. I’d be in favour of extending that to five years for full tax free and prorated for 2-4 years. People flip houses as a business these days and should be taxed as such.

    I’m also for a change to the OAS rules. TFSA income should count towards the claw back and the OAS claw back should begin at 50K and be completely clawed back at 75K. The savings should go towards improving the GIS. Many of the boutique tax credits should be eliminated. Governments should cease and desist from pandering to sectors without 100% proof that they need support via the tax system. As a start, the tax credit for political donations should be eliminated or at least reduced to what we get for charitable donations.

    As a Boomer, I recognize that the bulk of the debt incurred by governments were during our watch. Boomers have to step up now and pay for some of the great times we have and had. Having said that, the government has an obligation to spend wisely on things that are good for the country as opposed to what is good for them politically.

  4. As a senior in my late sixties the raising of capital gains taxes would really put a monkey wrench in my plans, I’ve retired at age sixty with a non indexed pension that is adequate at the present time, I’ve lived trough 21% interest rates, owned 19% CSB and paid over 16% on a variable mortgage and don’t believe what experts say, the same expert were telling everyone in the early nineties that 10% mortgage were a thing all the past never to be seen again, things can change quickly and the future is unknown but not to plan for what it could be is foolish, I’ve been investing my CPP and now my OAS for the years that my pension will have to be supplemented because of inflation and medical needs, don’t want to depend on government subsidised nursing home for my later years, I save money now so that I can have better options in the future. I don’t have a RRSP but my TFSA is maxed out and have a taxable account that I plan to use for my needs, increasing taxes on capital gains would really hurt people in my position, there are lots of people my age that worked in the construction industry and have non indexed pension and would face the same problems

  5. “Stop punishing people who save and invest their money”

    You could say people who save and invest their money are being punished indirectly by those who don’t.

  6. Hello all,

    Having cash inside an unregistered account suggests that the individual has maxed out his TFSA and RRSP. That’s 5500$ + up to 25 370$. Combine with a partner (61 740$ – best case scenario) and doing this for 12 years @ 5% return gives an investment portfolio over 1 million. By adding 8 more years, it’s at 2 million. So, theoretically speaking, a couple can achieve early retirement or financial independence regardless of what the government is doing (unless he changes TFSA + RRSP rules).

    I’m having a hard time understanding the concerns of people.

    1. Thanks for your comment. Both TFSAs have only been around for less than a decade – but maxing them out is important and we do.

      RRSPs, depends. Contribution room can be less if you have a pension. This is a good problem to have but you can’t live off a pension until you are 55 or so, with major penalties.

      I have concerns because for many Canadians, who aspire to invest and save on their own, you are getting aggressively taxed without looking at other ways to deploy tax revenues. For example, if you have concerns about the wealthy then why have OAS at all for anyone in “retirement” making over $73k per year?

      Does any senior really need a government subsidy for making $73k per year?

      This is one simple example of a program costing us hundreds of millions of dollars per year. Let’s simply things for people vs. taxing them too much first.

    2. I don’t think this example has much relevance. Baby boomers retiring today had no TFSA and RRSP limits were much lower. Even for investors starting their investing lives today, life invariably gets in the way – divorce, illness, job loss, human error etc. To ignore those issues makes no sense. Many people need a taxable account to help make up for these things.

  7. There is another less reported aspect of this. T2 as Garth the Great calls Trudeau, the evenually taxation of the principal residence. Starting this year when you sell your house you have to declare it on your tax return. Currently it’s tax free but for how long.

      1. Yeah exactly!

        Interesting tibit but under German law property, principle residence or an investment unit remain tax free if keep longer than 10 years.

        Another tax law, all stock bought before 2007 (I think) capital gains remained tax free, including stock you inherit directly, something I didn’t know till after I sold everything ? oh well

  8. Articles like this are like wetting your pants in a dark suit … It gives you a warm feeling but no one notices.

    This budget was cast in stone at least six weeks ago and nothing that we say or do now will make any difference.

    What we need to do is flood our MPs with communications that detail what we feel are “Sacred Cows” that form the pillars of our personal investment strategies so that we can plan for our retirement with some certainty that they will not pull the rug out from under us.

    I am still trying to recover from the Halloween Massacre when Jim Flaherty killed the Income Trust option after assuring Canadians that they would not touch them.

    1. Thanks for writing. I will probably write my MP this week. I’m annoyed. It would be nice to plan with some certainly, we’re all small CEOs of our personal finances – all businesses need some stability for planning.

      Constant changes to our convoluted tax system are not helping this either. So much waste. Sad and pathetic.

      BTW – I liked your analogy: “…like wetting your pants in a dark suit … It gives you a warm feeling but no one notices.” LOL.

  9. Mark, I agree with you 100%. But I don’t think it’s going to happen. I can’t believe the government will be so stupid as to raise taxes on capital gains at a time the US is cutting taxes. If they do, it will discourage investment, depress the stock market and the $. The irony is that the Liberals claim to be wanting to help the middle class, yet middle class baby boomers now entering retirement and needing to slowly sell off their stocks and bonds to live on will be dinged by an increase in the capital gains tax. It’s the “rich”, who have enough to live off solely dividends that will less affected by a capital gains tax increase.

    1. Stupid is right Grant.

      Just bad policy all around. The ability to live off just dividends in a non-reg. account would make you rather wealthy for sure but I still don’t get the changes – it’s so counter intuitive to what T2 should be promoting, incentives to save, invest and less reliance on the government for your financial well-being. Pathetic.

      Might as well sell my assets soon, blow my money on nice cars at 0% financing. Everyone else is doing it…must be the right thing to do.

  10. Mark –

    Though I’m a US investor – I understand your arguments and stand with you. I say continue to echo these articles, as it will detract from investment or cause investors to move/change their focus – ultimately/potentially reducing the government’s income received via this tax (as smart investors will choose not to sell and find other forms of cash flow generation). Tax systems are always frustrating, continue to echo your concerns!!


      1. I agree, the whole tax code needs a complete overhaul to simplify it, after decades of previous government constant tinkering.

        Who knows- houses may be a tax possibility as this government seems determined to ramp up spending, and implementing policies for more government dependence and less self reliance, building towards 38 years of their projected deficits for Canada.

        One Dad, I assume that is a rhetorical question. Unfortunately I suspect the worst is yet to come.

        JimF, this is my thinking too, and I hope they do in fact consider what the US is doing in many regards- personal, corporate,environmental taxes etc otherwise we’ll have a lot more challenges ahead. Moving cautiously is prudent, especially with a guy like Trump.

        Mark, “interesting agenda” is one way to put it! I’m more in favour of policies like what Maxime Bernier states.

        1. I don’t see any value in reporting if you sold your principle residence unless they (CRA) want to track it and thereby tax you on it. Consider your principle residence gains tax-free, for now. That’s my prediction.

          Our challenges in this country are just beginning. Taxation, more debt; Gen X like me is screwed if I don’t save and invest on my own for what lies ahead. Oh wait, the Liberals are messing that up as I type.

  11. Good post Mark.

    I’m praying for a change to a government that is much more fiscally responsible and will reduce income and capital gains taxes, restore higher TFSA limits.

    1. I think the government should be encouraged folks to save and invest where possible. Regardless if it’s TFSA or RRSP or taxable. It’s frustrating. They took away the higher TFSA contribution room and now likely this. Might as well start taxing our houses.

      1. Mark I think your suggestion is good but contra to what the government really wants – or at least the current Liberal – they would much prefer that everyone is beholden to the state (nanny state) – started with T1 and carried on by T2 (aka shiny pony) – any independent thought or resources not controlled by the state is bad in their opinion – all this under the guise of supporting the “middle class” (whatever that is) when in reality it is the middle class that is getting shafted. Perhaps they will tax capital gains on personal residences – that would kill them off.

        1. The nanny state mentality drives me nuts. The less government intervention, the less waste, the better. I fully believe healthcare and education should have government oversight. A minimum, rather, modest standard for all Canadians. I would fully support that. I don’t support government waste on unnecessary programs.

          eHealth in Ontario alone wasted $1 B years ago. How on earth is that acceptable???

  12. Some in the know at both the Globe and Mail, and Maclean’s, believe it won’t actually happen, at least this year, as they want to delay to see what the US does, it would go against their innovation agenda and they are hearing the warnings from the investment community any tax change would do more harm than good, and this was mainly a trial balloon to distract from some other unexpected announcement.

    1. Well, I hope that is all they are doing this year – floating a balloon. I hope it doesn’t take flight but alas, I can only vote when my time comes up next.

  13. Hi Mark,

    My biggest concern is a change in the taxation of dividends. My retirement income has been set up using low tax dividends, any change in their taxation would reduce my cash flow and the value of the original investment.

    As you, I would prefer not to change the capital gains tax. However, I could live with an increase for an investment held less than one year. To me, anyone selling this quickly is almost business income, not investing, and therefore does not deserve a lower tax rate on a sale.

    I do have one suggestion to increase government revenue. I would tax Return of Capital in the year it is received and not reduce the ACB of the investment. I believe a lot of this income is not reported correctly which is not fair to those of us that do.

    Good luck investing.


  14. Liberal gov’t spending has to be covered somehow. One of their mainstays is to tax higher income people so capital gains will fall into that category.

    1. We are not higher income people we are the middle glass.

      The difference between us and the average middle class is we have saved and invested over the years instead frittering away our income.

      So these Liberal Donkeys are taxing us instead of controlling spending.

      The middle class is worse off now than under the Conservative Goverment.

      What a fiscal mess they have created In just over a year.

      1. “The middle class is worse off now than under the Conservative Government (sic).”


        I wouldn’t have as much of an issue with this taxation if they kept the TFSA contribution limit at $10k. This way, people that can and do save, can be rewarded. These changes, including what may also come, to the dividend tax credit are creating a massive disincentive to save and invest. It’s wrong.


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