Despite being one of their election promises, the Conservative government has appeared on the fence regarding the doubling of TFSA annual contributions to $11,000. However, federal Finance Minister Joe Oliver as emerged as a strong supporter of the increase: a confidential letter from Oliver leaked to the Toronto Star reveals the Tories are indeed strongly considering doubling TFSA contributions.
In it, Oliver mentions a study by the finance department showing Canadians of different ages and income levels contributed the maximum to the TFSA. Despite Oliver’s argument in favour of doubling TFSAs, the study also reveals only 6.8 per cent of Canadians between ages 35 and 44 and 5 per cent between ages 25 to 34 contributed the maximum.
Also read: Can Canada Afford to Double TFSAs?>
Will All Canadians Benefit From Doubled TFSAs?
Not everyone is in favour of doubling TFSAs. While Oliver argues that the NDP and Liberals are opposed to helping out Canadian families across different income levels, the opposition sees it differently.
NDP finance critic Nathan Cullen argues that middle-class families will hardly see any benefit; it would be mostly wealthy Canadians that would benefit and it would cost the federal government coffers billions of dollars in lost tax revenue. The Liberals are singing a similar tune, saying more TFSA contribution room means more tax breaks for well-off Canadians.
The Parliamentary Budget Officer (PBO), which provides independent analysis to Parliament on the state of our country’s finances, came to the same conclusion that doubling TFSAs will mostly help wealthy Canadians. PBO Jean-Denis Fréchette argues that “higher-wealth households will be able to continue contributions, but TFSA contribution room limits will soon exceed the financial asset base for most low-wealth to middle-wealth households.”
“Continued growth in individual limits offers no additional benefit for these groups. Consequently, TFSA benefits, currently balanced across wealth groups, will become increasingly skewed toward high-wealth households over time,” the PBO said.
However, despite the criticism against doubling TFSAs, the Tories look poised to do just that when the deliver the federal budget on April 21. And it’s not the first time they’ve gone against the grain; they have already come under fire for keeping the income splitting tax measure, despite the hit to the budget from the plunging oil price.
Is a Balanced Budget in the Cards?
Of course, the TFSA doubling promise was made pending a balanced federal budget – a goal that seemed derailed by sliding oil prices. However, there is speculation this week that the government’s recent sale of GM shares have freed up the room to balance the budget after all. The Conservatives announced on Monday they were selling their remaining shares of GM to Goldman Sachs. Based on the closing price of GM shares on Monday, the sale, which takes place on Friday, will be worth US$2.7 billion.
And, as a likely fall election looms, the government is introducing yet another budget measure: despite running a deficit the last few years, the Tories are introducing legislation to force future governments to keep a balanced budget, except under “extraordinary circumstances.” The only time the government could run a deficit would be during a recession, war or natural disaster when costs exceed $3 billion in a single fiscal year.
However, before the government could run a deficit, the finance minister would have to appear in front of the House of Commons finance committee and provide a timeline of when the books would be balanced.
The PBO once again doesn’t see eye to eye with the Tories, stated that forcing the government to balance the books could result in “unintended consequences,” such as limiting the government’s ability to deal with economic uncertainty and further downloading of costs to the provinces. Most provinces introduced similar legislation during the 1990’s, but were caught off guard during the financial crisis of 2008.
Sean Cooper is a Financial Journalist and Personal Finance Expert, living in Toronto, Ontario. He offers Unbiased Fee-Only Financial Advice, specializing in pensions and the decumulation of financial wealth in retirement. Follow him on Twitter @SeanCooperWrite and read his blogs and request his writing services on his personal website: http://www.seancooperwriter.com/