Wednesday, March 23, 2011

What’s Not in the Budget

Noticeably absent from yesterday’s unveiling of the 2011 budget are many of the measures called for by wealthy old people. I think the government made the right choice on these issues.

Many have called for big increases in RRSP and TFSA limits as well as making TFSA contribution room retroactive to age 18. None of this would do much for the average Canadian who can’t make use of all available room now, but a sudden large increase in RRSP room and particularly TFSA room would allow the wealthy to earn investment income tax-free.

One could imagine an extreme situation where a couple derives an income of $100,000 per year tax-free from a very large sum invested in TFSAs, but collect the GST rebate because their declared income is negligible.

If we keep creating tax measures to shelter more and more investment income from taxes, only income derived from actual work will be taxed. I don’t think we want a world where only working people are punished with taxes. RRSP and TFSA room should be at levels to encourage average people to save rather than allowing the wealthy to avoid taxes.


  1. @CC: I agree with you on the RRIF withdrawal schedules. Just because you have to withdraw the money doesn't mean you have to spend it (beyond paying taxes). The whole idea is that the RRIF will get withdrawn over the course of retirement. The argument that the withdrawal percentage shouldn't exceed the year's investment returns makes little sense tome.

    1. The comment above is a reply to Canadian Capitalist's comment:

      Yes, there is little sense in increasing RRSP and TFSA limits when most people have trouble maxing out their contributions as it is. IMO, I'm glad that they didn't decide to tweak RRIF withdrawal schedules. It may be a legitimate issue but unless we are sure it is, we don't want to fix something that may not be broken.

      Thanks for the mention.

  2. I agree with you. It's a taxpayers right to pay as little taxes as possible, so taxes have to be structured fairly. This is so your scenario of extremely wealthy people getting GST cheques doesn't play out too often.

    Those Canadians calling for a retroactive increase of the TFSA to age 18 have problems that are different than the majority of Canadians.

    Maybe one of the advantages of the TFSA is that the vast majority of Canadians can't afford to take full advantage of it, so the cost of the program is somewhat reduced while lots of people like the program, giving the government good will.

  3. Right on target Michael. My only beef with the RRSP limit is the percentage limit. I don't see why someone who earns twice as much should be allowed twice as much RRSP room. Make it a fixed dollar amount like the TFSA.

  4. @Gene: Another advantage (for the government) of the TFSA is that tax reductions are in the future and become the problem of future governments.

    @Patrick: For high-income Canadians, the RRSP limit does look like a dollar limit rather than a percentage. In this sense we have a hybrid system.

  5. Excellent points. As we see more Baby Boomers becoming the retried Wealthy, we will see more vocal pressure to provide tax free investments. I hope that whatever government is in place realizes in that catering to one generation will put a heavy tax load onto others. Everything has to be paid for somehow, and if the retired wealthy don't pay for it, someone else has to.

  6. @Jerry: Well said. I aspire to be retired and wealthy, but I prefer not to throw young people under the bus.

  7. Is this Michael James on Money or Michael James on Socialism? The wealthy already pay more in taxes, give us a break.

  8. @Nathan: If we go overboard on allowing people to shelter investment income from taxes, many wealthy people would stop having to pay any tax. I'm advocating balance. Suddenly giving everyone hundreds of thousands of dollars in TFSA room would allow the wealthy to shelter tens of thousands of dollars of income every year from taxes. This income wouldn't even reduce access to other benefits such as GST rebates, OAS, or GIS. The wealthy already get a break in the form of existing RRSP and TFSA rules. Radically expanding them would be a mistake.

  9. I don't see increase in contribution limit as a tax shalter. I see that as an incentive to save more. In this country average household debt is large and is on the increase. Part of that is that people are incouraged to spend now and live off goverment help when they retire. That doesn't make sense. I think it's more fair to tax consumption.

  10. @Basil: Higher contribution limits for RRSPs and TFSAs are both tax shelters and incentives to save. But if limits were raised dramatically, the incentive to save wouldn't change much. The limits would just be beyond the amount most people would be able to save. The only real change would be the added tax shelter for the wealthy.

    I should add that much higher limits would benefit me greatly. If I could put unlimited amounts in a TFSA, I could probably retire today and pay almost no tax for the rest of my life. So, I'm actually arguing against my personal interest.

  11. The only change I would really like to see is the rules on RRSP contributions, making it a fixed dollar amount for everyone. I think that would be more fair.