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February 24, 2016 | The Ruse

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


Remember the moaning, wailing and faux outrage on this pathetic blog last autumn over the Trudeau plan to neuter tax-free savings accounts? Sure ya do. The lefty moisters said TFSAs are a sop to the rich, since only 1%ers could afford to utilize them. Besides, it was robbing the government of gazillions that should go to better causes. Like giving them money.

The right-wing fossils argued in defence of keeping the contribution limit at ten grand, saying this was already after-tax money and TFSAs are by far the most democratic of investment vehicles, since everybody gets the same limit regardless of age or income. Besides, TFSAs benefit the young to a greater extent thanks to long-term compounding, plus we all have an obligation to save and invest. The T2-loving lefties countered, claiming the public pension system needs to be stronger, giving a better safety net for all. Besides, investing is hard.

Meanwhile, I was not above pointing out that if the kids really care about tax breaks and income inequality, they should target RRSPs instead – which truly benefit the rich. But nobody cared. Justin made the TFSA into a political football – the symbol of unfairness to the 99% – and the game was on.

As you know, one of the very first acts of the new government was to denut the TFSA, slashing the limit from ten thousands to fifty-five hundred. This was done in concert with implementing the new ETR tax (eat-the-rich) and bringing in a small middle-class tax reduction. The cost of doing this, about $1.5 billion per year.

Well, now we have some facts. Bad news for the moisters.

On Tuesday the Department of Finance published a sexy fat document called Report on Federal Tax Expenditures—Concepts, Estimates and Evaluations. A ‘tax expenditure’ is a reduction in potential tax revenues resulting from a government exemption policy. Like letting you write off your bus pass, or your kid’s music lessons, or your home office expenses or your RRSP contribution. In the case of the TFSA, the ‘tax expenditure’ amounts to the revenue the government might have collected on the money inside TFSAs if that cash had been invested outside, with the gains subject to tax.

This is what the Liberals had argued: letting rich people (the only ones who could possible find $900 a month to invest) shelter the money (which had already been taxed) from additional tax constituted a great burden on the public purse. But they were wrong. As they were in claiming a new tax on the rich would pay for a cut for the middle. Ditto with a deficit three times the size of the one pledged. Plus the broken promise of a balanced budget in four years.

So here’s what we now know. Write it down.

Over seven years the ‘cost’ of having TFSAs in place (including the $10,000 limit) was $3.7 billion. Hmm, say the Vespa-riding, condo-dwelling, scruffy hipsters, that sounds like a lot. And it is. But in context, not so much.

The ‘tax expenditure’ cost of RRSPs, in contrast, was $107.7 billion over the same period of time – or almost 30 times as great – and the lion’s share of that money went, proportionately, to the top income-earners.

Hell, it even cost the government ten times more than TFSAs ($31.6 billion) to remove the HST on groceries. Giving everyone a basic personal exemption from income tax (of $11,327) – which benefits lower-income filers the most – cost the feds a whopping $256 billion in foregone revenues. And how about union dues? Allowing brothers and sisters to write them off taxable income cost more than $7 billion, or twice the amount lost to TFSAs.

Meanwhile there are far more people opening up and contributing to TFSAs than retirement savings plans. A survey by H&R Block found a scant 18% of Canadians plan on making an RRSP contribution this year, but it’s certain that number will include many high-income folks who can score a 40% or 50% return on their investment by doing so. RRSPs can be used for serious tax avoidance – to shift income from a fat year to a thin one. To shovel money into the name of your less-taxed spouse. To finance a mat leave. To take investment assets now being taxed and render their gains tax-free. To collect a free refund, then use it to buy a house.

In short, those justice-seeking, T2 supporters who swallowed the rhetoric about TFSAs favouring the rich and robbing the system, should feel jaded. Not only have they diminished a tool which could yield huge benefits as they age and grow wealth, but they’re perpetuating a current system dramatically skewed to the rich. In short, they were played.

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February 24th, 2016

Posted In: The Greater Fool

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