Tax-free savings accounts are a gift to the banks, not to Canadians

The TFSAs serve several purposes.

1) It is aiding banks to re-capitalise and get their debt ratios in line

2) It is fostering a new ethic to save without incurring the hassles of a RRSP

3) As for low return now just wait. With all this cash being pumped into the system inflation is going to be a problem in the near future. This is going to lead to 80's style interest rates to squeeze inflation out of the system. The fact that Obama is tapping people like Martin Feldstein and other ex-Reagan economic advisors means that inflation is expected.

If interest rates do go up (and I think they will come back up to 8-9%) tax free compounding will be quite a benefit. Use the "rule of 72" and you will see that at 8% one would double their money in 9 years and that's if you never added any more savings.

4) There is soon going to be one of the largest transfer of generational wealth in history. Parents of Boomers and Boomers themselves are starting to die. Gen Xers and Gen Yers are going to inherit a crap load of money and assets. Not everybody but a lot will. Having a quick and understandable savings vehicle already in place is a good thing as unused TFSA contribution room can be carried forward.

5) As for bank fees shop around. ING direct charges none.

I like TFSAs it gives banks real assets that they can use to lend and savers benefit a lot.  

As usual, Alice Klein is full of shit.

She actually swallows whole the theory that we can pull out of this economic crisis if only everybody gets out there and spends money on consumer goods. She laments that the TFSA encourages people to – horrors! – save their money. She ignores the fact that one of the precipitating factors of the current crisis is wasteful spending and overconsumption; or the fact that the financial bubble which has now burst was based in large part on unprecedented levels of debt-financed consumer spending, made possible by sub-prime mortgages and a thousand other easy-credit schemes that were bound to collapse in on themselves when it came time to repay them.

Klein thinks "stimulus packages" are designed to encourage consumers to spend. She will be in for a shock when she sees Harper's stimulus plan in 10 days' time. "Stimulus package" is neoliberal talk for "corporate welfare".

What does Klein think is going to happen to the money that people put into TFSA's anyway? Does she think it will be "lost" to the economy? Will it sit in a bank vault gathering dust? Of course not. The bank will turn the money around and lend it out to other customers who will spend it.

Klein doesn't even acknowledge (because she probably doesn't know) that TFSA's are not just interest-bearing deposits, like bank savings accounts. They can also be investment accounts, where the money is put into mutual funds or other investment vehicles. How is that not a "stimulus" of precisely the kind that Harper will be proposing? Is Klein's pal Ignatieff against that?

Nobody is going to hold off on making consumer purchases in order to put their money into a TFSA. If they were going to hold off on purchases, it's because they can no longer get credit, or they fear their source of income, whatever it may be, will soon dry up. The TFSA is simply a new kind of account, taking its place alongside all the other savings vehicles that already exist. Why, for example, isn't Klein lamenting the existence of Canada Savings Bonds, or GIC's, or RRSP's, or RESP's or any of the other types of savings options that she fears will tempt consumers to put off buying more carbon and plastic crap?

Arguing that the banks will benefit from TFSA's is not an argument at all; banks always benefit, whether they take in money from you or lend it out to you. This is a given. Bank-sponsored TFSAs are nothing new in that regard.

As for the tax cost to the government, it's not unlike the tax cost of allowing people to have RRSP's. The difference is that with RRSP's you get to defer payment of potentially large amounts of tax for potentially many years (ultimately in most cases paying far less tax), while with TFSA's you get to avoid payment of tax altogether on what is actually in most cases (in this economy, at least) a very small amount of income. I'm not convinced TFSA's are a better deal for the taxpayer than RRSP's, in the long run.

TFSAs are not a bad idea in principle. They help lower and middle income people do medium-term planning with their savings, and are much better than RRSPs. But the fees are going be enormous, and Flaherty came up with this policy knowing that this would be a gift to the banks so long as he was there to sell it as just what they are, tax-free, without mentioning that they are going to be fee-heavy. Some banks haven't even worked out their complete fee schedules yet because they are trying to lure consumers to sign up with them by promising not to charge fees for a month or a year, and promising free first withdrawals.

Then they are going to start charging annual, monthly, administrative, withdrawal, deposit and transfer fees, and account cancellation charges all over the place in or near the three digit range. Toronto Dominion and Royal Bank of Canada are already charging enormous fees, and they're finding new ways to charge consumers all the time - such as requiring that you have a minimum balance, or charging different fees according to the size of account balances, and so forth.

But... uh... don't worry... there're no taxes.

skarredmunkey wrote:

But the fees are going be enormous, and Flaherty came up with this policy knowing that this would be a gift to the banks so long as he was there to sell it as just what they are, tax-free, without mentioning that they are going to be fee-heavy.

There's no reason why they have to be fee-heavy, other than the fact that banks charge you fees for everything.

I have a TFSA with ING Direct. No fees ever. President's Choice Financial also charges no fees for its TFSA savings account.

Shop around.

I think people are overlooking a main thrust of TFSA’s. I doubt there’s(or will be) very much new money going into them, rather existing income-generating assets will be gradually converted to this vehicle. As investment room increases each year, what began as modest will mushroom to a robust tax dodge.

As to who they help, well it’s not your average Joe/Jane, rather it’s somebody who has some surplus resources and that layer is getting thinner and thinner.

As to what it is, when you peel away the layers it’s just a multi-purpose tool for cutting income(read progressive) taxes, the more you make the greater the cut(not because the more you make the higher the marginal rate, a structure battered by Mulroney and each administration since, but because the more you make the more able you are to take advantage of it), up to a point anyhow, probably around the 8th or 9th income decile.

The effect, of course, besides shifting more to the higher income by reducing the effective tax on income and on capital gains(or at least making this possible, depending on asset structure), is to eat away at the fiscal capacity of government to deliver collective services(lie infrastructure) or to assist those(many) who don’t have the resources to benefit from TFSA’s in any direct way. That is, to make the rich richer and the poor poorer(catchy, maybe there's a song in that.)

Doubtful skarredmunkey the raison d'etre of these banks is to be a "no fee" bank. 

leftyboy wrote:

Rod,

Just because some rich people will benefit from the program does not mean it is a bad idea. My grandfather passed away a while ago and I inherited a little money. I want to save that money but I also need access to it as my job is freelance. Putting it into an RRSP would be silly for me as I don't want to go through the hassle and expense of cashing in my RRSP if I had to make rent.

There are ways of structuring the program (eg. tax-free limits on windfall speculative profit) that would still allow it to function to your beneifit. That is, something closer to a real "savings" account.

As it is, it is a huge Harper tax break for speculators--those who should be taxed more. 

The deposit "headroom" of the account can quite quickly balloon into a big capital gains tax-free investment account, for those traders who win through speculation, (or insider knowledge, etc).

 A $5000 a year deposit headroom is added each year (and carried forward even if the amount is not deposited in that year) regardless of gains (or losses) within the account.

If, for example, after a couple of years of contributions, and speculative winnings, the trader had an account of $50,000  the trader could remove the money to use any way s/he likes without any capital gains tax.
The amount removed is tracked and added the following year to the account's deposit headroom (eg 50,000, plus 5000 annual) and the game continues.

skarredmunkey wrote:

Good point, but isn't there always the risk that ING and PC will start charging fees later once you've already signed up for a TFSA and given them your money, even if its a year or two down the road?

Yes, there is that risk, however small. If it happens, I will be able to withdraw the entire balance of the account on 24 hours' notice with no tax consequences, and put the money somewhere else.

The real risk is that the bank will lower the interest rate that it pays on my account (which in fact it has already done since I started the account).

Spector, I checked out ING and saw they're offering a 9 month GIC at 2.75 and the interest in the savings account is currently at 3%.    Did you consider the GIC option?  I think interest is going to continue to go down (I think BoC will eventually go down almost to 0), so 2.75 might not be bad...

I didn't want to lock my money in, so I didn't go for the GIC option.

I expect interest rates will go down on the savings account, but ING lives and dies on the basis of interest rate competition, so I doubt they will be leading the pack in savings account rate cuts. Their low overhead allows them to keep rates relatively attractive.

Cumulative, yes LT, that's the way they're structured.

But I emphasize my prior comment that I doubt that they'll attract much new capital(which is a main ostensible reason). People who already have savings(like a mess of GIC's) will just transfer them in to a TFSA at a rate of $5K/yr, and them as don't won't see any benefit without a lot of belt tightening.

The benefits will be skewed to higher and higher income taxpayers the longer this vehicle goes on, and it works both ways - not only giving a boost to those with higher incomes, but undercutting the state's ability to assist those with lower income - a Stephen Harper/Jim Flaherty wet dream.

I found this analysis interesting:

Quote:

There are indeed a number of aspects that give TSFAs a broad appeal across all income segments and, in many instances, make them a superior alternative to RRSPs for some individuals.

Take, for example, the fact that any TFSA contributions must be made with after-tax dollars. This provision treats all investors the same, regardless of their tax brackets. By contrast, since RRSP contributions generate tax deductions, the RRSP contributors who benefit the most are those who face the highest marginal tax rate.

The tax treatment of contributions has implications for investors who cannot afford to contribute in the same year to both a TFSA and an RRSP. Lower-income earners, including those who expect to be in a higher tax bracket in the future, should consider whether they would be better off contributing now to their TFSA and holding off on RRSP contributions.

For example, consider a 23-year-old university graduate in an entry-level job, who would probably be earning much less income than he will be in 15 years. At this point, he should be much better off depositing into a TFSA immediately while his tax burden is low. He could then let his RRSP contribution limits accumulate, and take advantage of them when he is in a higher tax bracket.

The relatively low annual contribution limit of $5,000 for TFSAs further demonstrates the emphasis that the government has placed on helping low- to middle-income earners. The TFSA can have a major impact on these individuals, but is much less significant for high net-worth individuals.

The flexibility of being able to make withdrawals at any time from TFSAs, and allowing contribution room to accumulate whenever it is not used in a given year, also works to the benefit of investors who will need at some point to tap into their TFSAs for major purchases.

[url=http://torontostar.morningstar.ca/globalhome/industry/news.asp?articleid...

http://moneymartclassaction.com/index.php

There have been a few class actions since that article was written in 2004.  I'm 99% sure Strosberg et. al will be successful at trial but that mainly puts money in his pocket and will not result in any changes to the way MoneyMart is run. Nor will it mean the class members will be able to get out of the cycle of using the fast cash shops.

Payday loans are an awful industry but I'm not sure how the're related to TFSA's.  See here for more information about the lack of regulation:  http://www.parl.gc.ca/information/library/PRBpubs/prb0581-e.html#causes

Well-to-do is a relative term. Most expert opinion I have read about TFSA's says they are especially helpful for low to middle income Canadians who have income that fluctuates a great deal from year to year, or the elderly who have little flexibility in tax planning.

Of course they aren't going to help the desperately poor who don't ever have money to save. But there are plenty of other places I would look to divert government spending towards poverty elimination before cancelling the TFSA's.

And how do you figure a $5000 TFSA is going to save you $1,600 a year in taxes? The contributions are [b]not tax deductible[/b].

Here is another summary take on RSP versus TFSA form the Financial Post. As a generalisation it is generally true, but not always the case--most articles in financial newpapers target the main bulk of readers:
====
"He says the decision is simple: If your retirement income is projected to be lower than current income, choose an RRSP. If retirement income is expected to be close to current income, then the two options are the same. But if your retirement income is expected to exceed current income, then you should replace RRSP contributions with the TFSA.

Mr. Tal says the beauty of the TFSA is that it is suitable to almost every Canadian. The liquidty feature also helps out when people need money quickly.""
====

I can conceive a number of circumstnces where a tsfa could be additionally beneficial for someone of current limited means.
An Individual's deposit limit for an RRSP is linked to "earned income". It's easy to imagine some who have little RSP headroom beause of little  qualifying "earned" by standard employment, or have already used their potential deductions for various reasons or strained circumstances, yet still have a bit to save---the tfsa can be a good idea.

But, at the other end of wealth, as argued earlier:

Although, the tfsa $5000 a year added headroom may not sound like much for someone expecting to earn 3% on a savings account, the vehicles allowed in these accounts are as various as the financial institutions offering them--and at least one institution (more will follow) allows foreign currency trading (forex) and options(!) (more honest than the government promotional euphemism, the institution is calling theirs a "tax free TRADING account").
Winnings leveraged (for example) by  options, with even  the $5000 seed money can, by some pro online traders, balloon the holdings (and headroom) of the account in a very few years (or days) --and all is tax free, can be taken out, and the next year the same amount plus $5000 back in the expanded headroom next year for another go. (of course most people trying such strategies would lose their shirts, but I'm not talking about most people).

Lard Tunderin' Jeezus wrote:

I would concede their usefulness for retirement planning, but can only roll my eyes over claims that low-income Canadians will ever be in any position to benefit.

Well, I'm one of them. 

The operative word in my sentence is "would" lose their shirts, not "will"--that is, most people are also smart enough not to try (for very long) aggressive market speculation without sufficient market knowledge.
In any case, maximum net capital losses within a tfsa are self-limiting by the government's allowed headroom of 5000 per year, wheras with tfsa capital gains (and lost taxes) the sky's the limit.

 Generaly speaking ,if deducting capiital losses outweighed capital gains then just doing away with taxing capital gains at all would  be a hugh tax savings--which of course it wouldn't be.
(Though some progressive thinkers in taxation of would like to see capital gains taxed at the higher rate as "income")

you can carry capital losses back 3 years and forward 7 or 10 I believe, so I think people can actually refile their taxes from 2007, 6, and 5 to reduce their taxes in those years as well.  So if you were hit uber hard this year (say for example you bought Nortel when it was $100 and have been holding it ever since in the hope it would rebound), you could get lots of taxes back I think.

Lard Tunderin' Jeezus wrote:

I would concede their usefulness for retirement planning, but can only roll my eyes over claims that low-income Canadians will ever be in any position to benefit.

Anyone who saves money can benefit from a TSFA. Are you saying that low-income Canadians are incapable of saving money? Canada's savings rate is far too low, and the more incentives Canadians have to save, the better.

The TSFA is also a useful retirement vehicle for people in the lowest tax bracket, because they would receive the least benefit from the RRSP contritution deduction, and might face clawbacks of assistance from RRSP withdrawls (TFSP withdrawls are not income and do not result in clawbacks).

 And as far as the big bad banks are concerned, ever hear of credit unions? For example,

https://www.vancity.com/MyMoney/ProductsandServices/Investing/Investment...

 There are plenty of things not to like about the Cons' policies, but the TFSA is not one of them.

Klein [url=http://rabble.ca/columnists/canadas-post-obama-budget][color=mediumblue]... her canonization of Michael Ignatieff[/u][/color][/url] and rabble.ca continues to eat it up.

For shame.

The shame is in trying to paint Ignatieff as the long-awaited saviour of Canada - drawing explicit parallels with the accession of Saint Barack to the throne in the White House.

Quote:

Michael Ignatieff finally chose to speak clearly and openly about how he will judge Flaherty's Tuesday performance.

And his three criteria - does the budget protect the vulnerable, save jobs today and create the jobs of the future? - do, at least in broad terms, hit all the right notes.

Naturally, there's a ton of latitude in these well-spoken terms. But they do stand the Obama test. At their best, they speak to the values of justice, inclusiveness and compassion, combined with economic and environmental vision.

Extra kudos to Ignatieff for having the courage to take a further stand, saying he will vote against the inclusion of broad-based tax cuts in the budget, which he says, so wisely, are just a ticket to long-term structural deficits.

Ignatieff is signalling that he is prepared to expose the discredited neo-con fallacies of the Harper crew and make opposition to destructive tax cutting a wedge issue.

[IMG]http://i1.tinypic.com/2880bk3.gif[/IMG]

And whats with "paying the severance to employees of companies that go bankrupt"? [Max. $3254]

   Why don't those employees just get E.I. like other Canadians who lose their jobs?

  This seems like some kind of gift to corporations somehow, but I won't pretend to understand it. 

 http://www.canada.com/topics/news/story.html?id=1223730

[my link icon does not work on this site, sorry - copy/paste] 

glacier76 wrote:

That 23-year old can still make the contribution but doesn't have to declare that contribution in their tax return until he/she earns enough income for that tax deduction to really matter.

That's true, but it's not the same. She can put $5000 now into a TFSA and earn maybe $400 in interest over 3 years, tax free, and then put the $5,400 into an RRSP. Or she can put $5,000 into an RRSP now, and earn maybe $400 in interest over the next 3 years, all of which will be taxable.

In the first scenario, she gets a $5,400 tax deduction in three years' time; in the second scenario, she gets only a $5,000 tax deduction in three years' time, and in addition has an accrued tax liability for $400 in interest income.   

Quote:

The second paragraph is just so wrong, though. If I make enough money where I can max out my RRSP and TSFA, I would put my money in safer instruments in my RRSP, and be more adventurous with my TSFA. That way, I still get my RRSP tax deduction and all the interest I earn under my TSFA is tax free even when I take the money out (not the case with my RRSP). That will only work if you don't intend to ever take out money from the TSFA until many years later, to take advantage of compound interest. And only rich people can do that.

The second paragraph you quoted only talks about the relatively low annual contribution limit for TFSA's ($5,000) as opposed to RRSP's ($20,000), and makes the obvious point that TFSA's are not aimed at high-rolling rich investors; if they were, the annual limit would be a lot higher than rich-man's chump change.

So I don't really understand what your comment has to do with that. In any event, I disagree with your suggestion that "adventurous" investments are better in TFSA's and "safer" ones are better in RRSP's. Safe investments are more likely to grow, and that growth will be taxable in an RRSP (on redemption), but non-taxable in a TFSA.

Conversely, "adventurous" investments are more likely than safe ones to drop in value. Such investments in a TFSA would more likely produce dead losses with no tax advantage; whereas such losses in your RRSP don't erase the fact that you still got the tax benefit when you made the original contribution. In other words, the money you risk on an "adventurous" investment is pre-tax income, if it's an RRSP, and after-tax income if it's a TFSA. It always hurts more to lose after-tax income.    

Quote:

The last paragraph is the real benefit of the TSFA, which I figure is how most people will use this financial instrument. I'm using the TFSA to save up for my first home. So, I'm saving on taxes incurred from the interest had I kept it in a regular ol' savings account--which is certainly not a lot, but I guess it's better than nothing. But how much interest can $5000 accrue over one year, especially nowadays--100 bucks? So, I'm saving like 30 bucks. Woohoo!

Without TFSA's, people save up elsewhere for purchases like a first home. Instead of saving in a regular bank account, they can now save in a TFSA, save a bit of tax every year, and take full advantage of compound interest. 

I think the vast majority of money put into TFSA's is going to simply come from people transferring money they are already saving in bank accounts, CSBs, GIC's etc, rather than representing new pools of savings capital.

So what?  Are you suggesting that the TFSA is okay but should be limited to low risk, low reward investments (bonds, GICs etc)?  Or that day traders should not have the benefit? 

This is designed for all Canadians.   Of course, some people who are willing to take risks will get big pay-outs.  Some people who take big risks will lose all their investment and have no capital losses.  Let's wait 5 years, see how much the government thinks it's losing off all these wily day traders and then decide.  Maybe they will make adjustments but for the time being, I think it's a good thing.  M. Spector could take his (his, right?) 5 K, buy a bunch of penny stocks and make oodles. 

Who are these day traders who are so good that they beat the stock market?  Where can I find one to manage my money.  Right now, everyone I know in trading is happy to have lost less than the other guy.