Jonathan Chevreau waded into the current debate on TFSAs and made a case in favour of Tax-Free Savings Accounts. While others debate whether TFSAs allow the wealthy to shelter too much income from taxes, Chevreau’s main argument is that “TFSAs merely eliminate double and triple taxation.” This just isn’t true.
Chevreau goes on to explain “When you invest in non-registered or taxable accounts, not only does the capital you invest come after being subject to income tax, but all dividends, interest and capital gains generated from that capital will be further taxed each and every year.”
This so-called double and triple taxation is actually the first-time taxation of new income in taxable accounts. Your original capital is not taxed again. When your already-taxed money earns interest or dividends, only the new income gets taxed, not the original capital.
When you sell an investment, you only pay capital gains taxes on the growth in value, not the original principal. Once again, it is only the new gains that are taxed. In fact, only 50% of the new capital gains get taxed. So, wealthy Canadians are not only free from double taxation, but they pay no taxes at all on a significant portion of their returns.
An argument that actually makes some sense, but Chevreau didn’t make, is that when you view your finances after accounting for inflation, the parts of capital gains that are just keeping up with inflation do get double-taxed, in a sense. However, the 50% capital gains tax exemption more than remedies this problem.
I’m not in any hurry to pay more tax than I have to. I’m in a position to benefit greatly if TFSA limits get raised. But we shouldn’t try to justify giving more tax breaks to the wealthy with a bogus argument about double taxation.