TFSA Contribution Limit Expected to Decrease

Craig Sebastiano
by Craig Sebastiano October 30, 2015 / No Comments

Last week, Canadians voted Justin Trudeau and the Liberal Party into office and that will likely mean a reduction to the TFSA contribution limit.

This year’s federal budget raised the limit to $10,000 for 2015 but the Liberals pledged to reverse the limit back to $5,500. They argue that the increase only benefits the rich.

But many don’t want the limit rolled back.

A not-for-profit organization, Working Canadians, launched a petition on Tuesday asking the federal government to keep the annual limit at $10,000. The group says TFSAs aren’t just for the rich, citing numbers from the Canada Revenue Agency.

According to the latest figures available, more than 10.7 million Canadians had opened a TFSA by the end of 2013. Of the 1.9 million Canadians who maxed out their TFSA in 2013, 60% of them earned less than $60,000.

A majority of Canadians are in favour of keeping the limit right where it is. A recent Angus Reid Institute survey found 67% of Canadians didn’t want the TFSA limit to change while the remaining 33% supported a rollback.

Older Canadians would also like a higher limit. CARP, which represents those over the age of 50, found 67% of its members favoured an increase. The organization says TFSAs are valuable for retirees who can’t contribute to RRSPs (RRSP holders must convert their account to a Registered Retirement Income Fund in the year they turn 71) and who won’t benefit from tax deductible RRSP contributions.

Of the Canadians who have maxed out their TFSAs, 46% of them were senior citizens and more than 70% were over the age of 55, according to the Canada Revenue Agency.

Preparing for changes

It’s expected the federal government will make an announcement by the end of the year that 2016’s limit will drop back to $5,500 from $10,000.

What should you do if you haven’t maxed out your contribution this year? PwC Canada’s Tax Insights publication recommends the following: “Contribute $10,000 to your TFSA for 2015 to ensure you will not be affected by the rollback with respect to your 2015 contribution.”

Saving $10,000 in a TFSA instead of a non-registered account this year will help you save on taxes. Let’s assume you buy a one-year GIC at 1.7% and pay tax in Ontario at the marginal 43.41% marginal rate. How much will you save?

GIC bought in a non-registered account

Year Beginning Principal Interest Earned Tax Payable Ending Principal
1 $10,000.00 $170.00 $73.90 $10,096.10

GIC bought in a TFSA

Year Beginning Principal Interest Earned Tax Payable Ending Principal
1 $10,000.00 $170.00 $0.00 $10,170.00

While you’ll earn $170 in interest, buying a GIC in a TFSA will help you save $73.90 in taxes.

Although the TFSA limit is expected to be cut back to $5,500, it should increase again.

The Liberals have said they would index the TFSA to inflation in $500 increments like it was in the past. The last increase was in 2013 so the contribution limit could rise to $6,000 within the next few years.

Flickr: Pictures of Money