February 7, 2021 | What They Know

We remember what T2 did to TFSA contributions when he took over from Stephen Harper. In the autumn of 2015, back where we all naïve, there was no virus and a Toronto property cost 48% less than during Covid, Justin Trudeau said this of the limit:

“It is irresponsible. It’s only the wealthiest Canadians who have $10,000 laying around at the end of the year that they can put into that.”

It was pure politics, of course. As a direct result of the Libs chopping contributions by about half in 2016, Canadians saved less. There’s also ample evidence they started shovelling more into real estate. In fact, property escalation has been epic.

But here’s an interesting fact you might not know. While Harper-era TFSA contribution limits have been gutted because “only the wealthiest Canadians who have $10,000 laying around,” RRSP contributions have been goosed – by almost 12%. And, ironically, this (not the TFSA) is the preferred tax-slashing vehicle of the wealthy. The richer you are, in fact, the more the RRSP gives.

For 2020 the max allowed is $27,830, or four-and-a-half times the tax-free account limit. Not only that, but for every dollar put into an RRSP, the feds will reduce your income tax bill – a benefit TFSA investors don’t get. So if a filthy-rich, capitalist swine, oligarch blog owner in the 54% tax bracket did the max, he’d get a tax break of just over $15,000. Moreover, the twenty-seven grand can be invested in growth assets for decades, earning tax-free capital gains. At age 71 it can be converted into a RRIF, and continue to make taxless annual advances in value, with only a tiny amount (5%) required to be taken as taxable income.

Thus, the more you make, the better the deal an RRSP contribution is. And unless there’s a fat govy defined-benefit pension involved, in retirement most wealthy people can juggle assets and income to minimize the tax bite on registered investments. It’s even possible to chop or eliminate the tax through a melt-down strategy.

All this is why we have the following situation:

While the total number sticking money into the retirement plans is fading, the amount rich folks are stuffing in there is bloating. The average age is rising (now 46). The number of contributors earning over $80,000 has more than doubled (from about 30% to 70%). The amount of money placed in these plans yearly is up by double digits (to almost $45 billion).

So, a shift. Fewer people using RRSPs. But more well-off contributors. Bigger tax savings. A larger wealth divide. It’s ironic the most democratic tax shelter in this country – the TFSA, where everyone gets the same limit just for living here – was politicized and attacked by the populist, nail-the-rich prime minister while the one favouring overlord dudes like me was increased.

This isn’t fair, of course. But politics is about optics, not equality. And there are always consequences.

RRSPs are tax-shifting vehicles. Not just for retirement. If you stuff a plan during employed years it can be used to support you during layoffs, maternity leaves, sabbaticals or the next pandemic (shudder). Money can be taken out, tax-free, to go back to school or used as a property down payment. If you have your RRSP managed, fees will be subsidized by taxpayers (since those withdrawals are not counted as income). If you use existing assets to make an RRSP contribution, a tax break will come for selling yourself things already owned. If a loan is taken to make a deposit, the tax refund can be used to pay it down. And a spousal plan lets a high-income, high-tax spouse move big gobs of money to a less-taxed partner and still get 100% of the tax deduction. The money can later be removed for a big benefit.

Well, we all know what’s happened since the Trudeau attack on the notion of tax shelters. Financial illiteracy is rampant, and the feds haven’t helped one bit. Only one in five of us now makes an RRSP contribution. Close to 80% of all TFSA money is in cash or interest-bearing, brain-dead assets. Most people use them as glorified savings accounts. And, as we all know, Canadians would rather roll the dice, have a one-asset strategy, snorfle dripping dollops of debt and go all-in on a house.

By the way, 70% of RRSP contributors are now men. Yikes. What does this tell us?

The deadline is just sixteen business days away. Miss it at your peril.

About the picture: “Here’s a pic of Sherman (Silver Lab),” says Todd. “We would all look like this if we were walked 2 miles in the morning. Then 2 miles at night and ate only from a crockpot ! He’s a 120 lbs of pure lovin! Took this pic by Boundary Bay.”

Garth Turner February 7th, 2021

Posted In: The Greater Fool

Next: Home Sales, Mortgage Rates, Housing Bubble »