TFSAs to increase?

One of the campaign trail promises was to double TFSA contribution limits to $10,000/year if/when the budget is balanced.

Given the existing projections of the federal government, this may not happen for a few years, if ever.

However, an increase in TFSA contribution limits would make them much more significant vehicles for investing than present. It is a much more functional solution than giving some form of relief on capital gains taxes – effectively the TFSA becomes the conduit for this, or for relieving people from paying taxes on interest income.

Because of the contribution limit rate, TFSAs disproportionately favour lower net worth individuals – for example, if your net worth was $20,000, you could invest it all tax-free but if your net worth was $1,000,000 then it would be a drop in the bucket. It is a surprisingly egalitarian method to allowing tax-free compounding of capital.

The only negative part of the TFSA is that you can’t write off capital losses – so make those choices carefully.

2 thoughts on “TFSAs to increase?”

  1. Sacha, your last comment about not being able to write off capital losses in a TFSA, is so simple, but yet very rarely discussed in TFSA articles, but is the crux of the matter if investing in equities.

    If your investments increase in value, at the high rate you have saved 23% (at least in Ont.) in income tax on your realized capital gains within your TFSA. However, if your investments decrease in value and are sold in your TFSA, you will have forgone the capital loss you could carryforward outside your TFSA. Very clearly, you are playing off a potential tax-free capital gain against the risk of incurring a capital loss which is forgone.

  2. Mark, yes, this creates an interesting choice on which types of assets to put in the TFSA – generally ones that have a high chance of not losing capital and ideally those having income. At least if you lose money in the RRSP your consolation prize is that you never have to realize that deferred income.

    Given that, the category of assets that seem best put into the TFSA would be debt securities trading under par or REITs giving out a distribution that is below their cash generation ability.

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