An extra $100,000 for TFSA room?

The Senate Standing Committee on Banking, Trade and Commerce is one of the more functional committees in Parliament that hasn’t dissolved into a partisan morass.

In one of their recent reports (October 19, 2010), one of the committee recommendations was that Canadians should receive a $100,000 contribution room to their TFSAs:

The federal government amend the Income Tax Act to establish, in addition to the existing annual contribution room, an amount for lifetime contributions to a Tax-Free Savings Account. The amount of the lifetime contribution room, which should be increased annually in accordance with changes in the Consumer Price Index, should initially be $100,000.

Moreover, the existing ability to carry forward unused annual Tax-Free Savings Account contribution room should continue.

Although this policy is unlikely to be enacted by the government, if they did it would be a non-trivial method of sheltering income. The actual committee report (page 35 onward) goes on to state that most Canadians are very unaware of how to use TFSAs, and that such accounts are typically used to store GICs or other equivalently conservative investments, rather than stocks or bonds.

Anybody investing in the marketplace should be trying to maximize their TFSA as quickly as possible, as it is truly the only “free lunch” that the government gives to people in terms of taxation. Mathematically speaking, the power of compound interest kicks in if you can competently manage the investment portfolio for a long duration of time. Assuming the government does not change the tax advantage of the TFSA, it removes one of the largest risks of financial planning, mainly the future income tax rate.