The Canadian financial world has been abuzz of late concerning changes to the Tax Free Savings Account, or TFSA, contribution system. Canadians could previously save a maximum of $10,000 per year in their TFSAs: finance minister Bill Morneau announced Monday that the available TFSA limit will be reduced by almost half to $5,500 as of January 1, 2016.
The annual TFSA dollar limit
- 2009, 2010, 2011 and 2012: $5,000
- 2013 and 2014: $5,500
- 2015: $10,000
- 2016: $5,500
- 2017: $5,500
The TFSA is a valuable savings vehicle for many Canadians’ financial planning efforts: half of adult Canadian wage-earners have one. Sensing the potential impact on their ability to save tax-free over time as a threat to middle-class financial goals, numerous representatives of the news media and associations like the Canadian Federation of Independent Businesses have criticized the change, or even petitioned against it. The TFSA limit is not just an economic point of interest: support or opposition to the policy formed around it carries a significantly political overtone. More than 5.5 million Canadians indicated in a recent poll that they would rather the government keep the limit at the $10,000 the previous Conservative government implemented this summer. However, to this blog, the politics are less important than the effect on the everyday, savings-conscious financial consumer.
It’s worth noting that, with indexing for inflation, that annual limit will continue to grow in $500-increment chunks, and it won’t be long before you’re allowed to contribute $6,000 annually. Also, you may feel the temptation to rush to contribute before the limit is reduced: 10,000 still goes for this year, and you can carry that room forward into future years if unused.
Overall, the changes to the TFSA limit will trade savings incentive for benefits on taxes for most Canadians. In an era when savings rates have been at some of their lowest points in the last five to ten years, this may appear to be a questionable decision. However, considering that Canadian debt load is, by contrast, at its highest levels in as many years, the reduced TFSA ceiling may be a move to create more opportunities for Canadians to pay down high interest or long-term debt. The balance between savings, tax and debt is a delicate one – these three elements, along with investment, form the crux of the personal financial plans made by almost all of us in the long term. It is important to focus on the development of savings, but the priority (in our minds) should be the establishment of a sustainable financial plan which is not being impeded or undone by debt.