Tuesday's federal budget raises the amount Canadians can contribute to TFSAs each year to $10,000 effective immediately. That's up from the most recent limit of $5,500 but less than the $11,000 doubling that had been floated in recent months.
Unlike other savings vehicles such as RRSPs, contributions to TFSA are after-tax funds but can grow — tax free — indefinitely. Nearly doubling the limit is great news for savers and investors, but it also represents foregone future tax revenue for governments.
A lot, in fact.
By the government's own estimates, the extra TFSA room will cost government coffers $85 million in the current fiscal year, jumping to $360 billion annually by 2019. Five years on, that's $1.1 billion in foregone revenue.
The government also tinkered with the amount that seniors are obliged to withdraw from their retirement funds. By age of 71, seniors must convert any RRSPs into a Registered Retirement Income Fund, or RRIF, which draws out money each year – money that must be taxed. Seniors groups such as CARP had lobbied the government to scrap the minimum withdrawals entirely, because people are living longer and sometimes running out of savings.
The government stopped short of that, but did lower the minimum annual requirements. Under the old rules, a 71-year-old would have to withdraw 7.38 per cent of his or her RRIF in the first year, escalating all the way to 20 per cent by age 94. Under the new rules outlined in the budget, those limits have been ratcheted down to 5.28 per cent to start, and down to 18.79 per cent by 94.
The government says the new rules will allow seniors to preserve 50 per cent more capital over the life of their RRIF, at a cost of $670 million in foregone tax revenue over the next five years.
Boutique tax credits
There were a few other low-hanging pieces of fruit on the tax-cut tree:- Specifically, the government has a new tax write-off for home improvements made to improve accessibility. Starting this tax year, homeowners who spend up to $10,000 on renovations such as wheelchair ramps, walk-in bathtubs, non-slip flooring and grab bars can get a tax deduction for up to $1,500.
- There was an olive branch to students, too. Under current rules, students have to be enrolled in a program for a minimum of 60 weeks to qualify for Canada Student Grants. Under new rules, that requirement will drop to 34 weeks, which the government estimates will help 42,000 more students a year get money for schooling.
- The government is also changing the student loan program. Under current rules, any dollar over $100 a week that a student earns from a part-time job while studying reduces the loan amount they're eligible for. The budget proposes eliminating that "penalty" from now on, which the government says would help 87,000 students a year.