December 15, 2020 | Squandered

Why, I asked him, are you calling it that?

Actually he never answered me. That was consistent, because Jim Flaherty (I’m pretty sure) hated me. He was a Stephen Harper man. I was radical, populist, blogger MP with the heretical view that people should tell government what to do, not vice versa. It didn’t end well.

Jim was the finance minister, who did some good deeds. One of those was adopting my idea for a new retirement-investment vehicle based on the American Roth IRA. Unlike an RRSP, nobody would get a deduction for using it but assets placed inside would grow free of tax while withdrawals would also be tax-free. That way it could boost retirement income without pushing people into a higher bracket. Oh, and it would be universal. The most democratic of shelters – equal contribution for all, regardless of income, assets or station in life.

Then he called it the TFSA. Tax-free savings account. I despaired, knowing what would occur. The whole thing went further off the rails when the government gave examples of how to use it – like saving for new flooring. Ugh.

Well, it’s been about a dozen years now. The limit again next year is six grand, taking the grand total of all possible contributions to $75,500 – plus growth. Along the way the TFSA was viciously attacked by the current prime minister who, in gutting the yearly space from the $10,000 Conservatives had in place, labelled it a tool of the rich. That was a fiction and piece of political theatre. Shame on him.

If the Libs want to attack something of benefit to the wealthy, the RRSP is a better target. The more people earn the more they can contribute, getting a whopping tax break for doing so. The annual limit of $26,500 is four times that of the TFSA and can save a high-income dude about $14,000 in tax. Moreover you can borrow for an RRSP and use the tax refund to pay the loan down (not possible with a TFSA). A big-income earner can contribute to a spousal RRSP, grab all the tax benefit while the other person takes the money out at lesser or no tax. Can’t do that with a TFSA, either. You can slide assets you already own into a RRSP and receive a tax break for doing so. No such benefit with a TFSA.

In short, Trudeau’s attack on the people’s tax shelter, as modest, humble, egalitarian and democratic as it may be, was just as dumb as F calling it a ‘savings’ account. The Cons corrupted it. The Libs diddled it.

Okay, so here we are. The latest stats show Canadians have placed more than $300 billion into 19 million accounts held by 14 million people. That’s almost half the entire adult population. A new BMO survey says the average amount held is just a hair over $30,000. All of that = success. Despite Mr.Socks’ attempts to shame it.

But wait. We have a problem.

The same bank survey found only 49% of people are aware “a TFSA can hold both cash and at least one other type of investment.” In fact, about 40% of the hundreds of billions in those millions of accounts sits in… cash. Savings. Making way less than 1%.

F may be gone, but this horrible legacy lives on.

For the record, a TFSA is not for saving money. It’s not a glorified bank account for your next Fluevogs, trip to Cub or bamboo flooring. That is a complete waste of a beautiful thing. So stop thinking like a Trudeau.

The TFSA is a money machine designed to be stuffed with growthy assets like equity-based ETFs. None of that growth is ever taxed. No withdrawals will be added to your taxable income. And unlike an RRSP you can actually put back (in the next calendar year) anything you withdrew. A major benefit is that a fat, old TFSA can, in retirement, throw off a great income stream which is unreported and therefore will cause zero claw-back of government pogey, like the OAS.

For example, someone who starts contributing six grand a year at age 28, earns an average of 7% in the TFSA and retires at 65 will have $1.127 million in there, of which about $900,000 is taxless growth. That would throw off $75,000 a year in annual retirement income. Add in CPP (average $710 a month) and OAS (currently $614) and you have a retirement income of $91,000, with zero tax. If you retired with an RRSP of $1.1 million, this would be impossible. Less income. More tax.

Now, imagine what would happen if 14 million people properly invested that $120 billion in TFSA cash for the next few decades.

We don’t lack the tools. Or the money. Or the income or the vehicles.

We just need a whack on the head. And better leaders.

Garth Turner December 15th, 2020

Posted In: The Greater Fool

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