TFSAs Cut Back to $5,500 in 2016

TFSAs Cut Back to $5500 in 2016

The axe has been swung on Tax Free Savings Accounts – the Liberal government is reverting the annual contribution limit to $5,500 in 2016 from the $10,000 limit implemented this year under former Conservative Finance Minister Joe Oliver.

Bill Morneau, Oliver’s successor, announced the change Monday following the recent throne speech. While the rollback isn’t a surprise – Prime Minister Trudeau has pledged to revert the limit since it was introduced – it’s not popular. A poll taken by Angus Reid during election time found 67 per cent of Canadians didn’t want any changes made to the higher TFSA limit. And, now that the dust has settled, how will Canadian savers fare?

Also read: 8 Liberal Government Money Promises You Should Know About>

Why the Rollback?

The limit for TFSAs was upped  to $10,000 in the Conservative’s May federal budget as one of several pre-election goodies that included the now-defunct Universal Child Care Benefit and income splitting. Trudeau immediately criticized the increase, stating it was a measure that would only benefit the rich.

The Liberals’ official reason for the reduction is that it’s necessary to implement promised tax cuts to the middle class; the middle income-tax bracket rate will drop from 22 per cent to 20.5 per cent. As a result, those between $44,700 and $89,401 will save as much as $670 per year on their income taxes under their so-called middle cut tax plan, while those making $200,000 will now be taxed in the 33 per cent income bracket.

What Does This Mean for Your Existing TFSA?

If you’ve been maxing out your TFSA contribution room (as 6.7 per cent of account holders are, according to Morneau), there’s no need to panic – the limit will remain $10,000 for 2015  and will count toward your total lifetime contribution room.

Like RRSPs, unused annual contribution room for TFSAs rolls over into the following years. If you are just starting out with your TFSA today, you have $41,000 of contribution room to max out on this year, dating back to when the account was launched in 2009.

2009 $5,000
2010 $5,000
2011 $5,000
2012 $5,000
2013 $5,500
2014 $5,500
2015 $10,000
2016 $5,500

Who Will This Impact?

The TFSA was originally introduced in 2009 as tax-incentivized way to encourage Canadian saving. They’re a flexible way to set cash aside and grow investments, as any earnings remain tax-free. There is no cap on how much your investments can earn within the account and, unlike RRSPs, there are no strings as to when you can access your cash, and there are no tax penalties for withdrawing it from the account.

TFSAs have since been championed as an alternative to the traditional RRSP savings plan for those without time on their side – like seniors who started saving later in life and newcomers to Canada. A $10,000 limit gave these groups an effective way to ramp up their savings quickly, benefit from tax-free growth, and draw down with no restrictions.  According to the CRA, nearly 50 per cent of TFSAs are held by those 55 and up.

Also read: TFSA vs. RRSP>

Will It Ever Increase Again?

Prior to the Conservative’s $10,000 increase, TFSA contribution limits were indexed to inflation, meaning the limit could be increased in $500 increments should inflation wipe out $250 in value from the savings. This occurred in 2013, pushing the limit to $5,500 from the original $5,000. The Liberals have re-instated the account’s indexation, meaning another increase could be on the table.

Also read: Inflation and GDP – How It Works>

Are you unhappy that the Liberals have rolled back the TFSA limit? Tell us in a comment, or visit us on Facebook and Twitter.

Related Topics

Economic News / Growing Your Money / Saving For Retirement / Savings / Savings News / Taxes

14 thoughts on “TFSAs Cut Back to $5,500 in 2016

  1. So, although the amount is being cut back to $5,000 for subsequent years, you can still put in $10,000 per year if you are just starting your TFSA until you’ve added in the eligible $41,000 you have not yet used?

    • Hi Kim,
      The maximum TFSA contribution per year is as follows:

      2009 (when it was launched): $5,000
      2010: $5,000
      2011: $5,000
      2012: $5,000
      2013: $5,500
      2014: $5,500
      2015: $10,000
      2016: $5,500

      If you were to make your very first TFSA contribution today, you have a total of $41,000 of room you can max out on, right away. Next year, the total room will increase to $46,500. You could put all of that money in at once if you choose, and then would be limited to contributing only the annual maximum for years following that. So yes, if you have the room left, you could contribute $10,000 per year until you hit the total maximum from 2009.

  2. While selfishly I would have preferred the higher limit, this decision to roll back this bribe by the desperate Harper government before the elections makes total fiscal and economic sense for the country as a whole. Beside, it was an election promise made by the Liberals, they were elected on that platform, and they kept their promise.

    • Phillippe

      Unfortunately you do not understand the realities of average Canadians who are working hard and paying taxes to all governments. Average Canadians have limited opportunities to keep their after tax dollars which have already been taxed from further clutches of government hands. To save money and get the miniscule earnings that might be achieved and to have those earnings taxed again is ridiculous and highly unfair. The thinking that the TFSA only benefits the rich is also a fallacy, The rich have much better and more effective ways to shelter their money.

      The TFSA at least provided a way for hard working Canadians saving their money, which was already taxed, to at least have some relief from the over taxation that is going on and will only continue.

      Sorry Phillipe you have it all wrong.

  3. The genius Trudeau knows about as much about personal finance as DiCaprio knows about climate change. Roll it back just because it was a PC initiative? Clueless.

  4. Yeah, the election promises…I don’t understand why it had to be changed in the first place. If someone can’t contribute to the TFSA the entire $10.000, but can do $5.000 only, why are we concerned? The amount was not mandatory, last time I looked. People don’t always contribute to the RRSPs the full amount available to them either.. Grrrr….

  5. We are such a heavily taxed society that does not currently reward savers considering the low interest rates. The extra benefit for growth in the TFSA far outweighs the middle income tax savings of $600-$700 per year in the long run. I really wish they had kept it at 10K or even higher. As the person before me noted it’s not a mandatory contribution. If you come into money or have a wage increase the ability to contribute is beneficial. The more canadians who have structured their savings, retirement or “security fund” in case of lay offs, sickness etc based on their own savings the fewer citizens there will be having to collect from gov’t services & benefits assisting those with lower income or running into econonomic hardship. I think it’s better for the gov’t to encourage saving and individual retirement planning rather than supporting spending, increased debt & reliance on gov’t assistance.

  6. Trudeau’s claim that the $10K TFSA limit would benefit the rich only, is complete bullocks, and only reinforces how misleading government officials can be.
    The RRSP program is primarily a tax-deferral program touted as a retirement savings vehicle, whereas the TFSA program provides a real opportunity to maximize retirement savings.
    If you think about it, how much of their net worth do you really think TFSA’s represented for the rich / 1%’s when the contribution limit now stands at $46,500?
    And while the Libs are telling the public that the rollback was necessary to fund the tax cuts for the middle class, why didn’t they also talk about the fact that the seemingly inevitable CPP increase will essentially completely wipe out said tax cuts, and could actually cost some as much as $1000 on their take home pay, leaving some middle class folks $400 less to take home ($600-$1000).
    And don’t even get me stared on the golden pension plans and perks that government employees have, all of which are funded by taxpayers. No cuts there right? But meanwhile you punish the very middle class who make up the majority of current TFSA account holders.
    Do you know women on maternity leave get 95% of their salary for the entire 12 months that they go on mat leave? Yup, 95%
    This was nothing but a daft political move so they can say they delivered on a promise.
    And as another commenter said, if people are so strapped for cash and can’t afford the $10K contribution, what makes you think they can afford the $5.5K?
    Some more food for thought…..there’s concern about the potential loss of future tax income if the TFSA program were fully subscribed. There were the same criticisms for the RRSP program when it was first introduced, and now I believe the subscription is less than 30% so what makes people think it will any different with the TFSA program?
    I opened with a declaration of this being bullocks and I will close with the same sentiment. Bullocks.

  7. To clarify, the 95% of salary comment above refers to government employees….they get 95%of their salary the entire 12 months that they’re on mat leave.

  8. It looks like the government wants to get out of debt while putting people in debt. I dont understand why they dont build low income housing with four + bedrooms, increase jobs by building productive companies and let people save. Do they not make an interest on how much people save? no wonder they cut it back to 5500.00

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