The new Liberal government has moved quickly to fulfill two major election promises that will directly affect your pocketbook.
Effective Jan. 1, 2016, the contribution to your tax-free savings account has been reduced from $10,000 to the previous limit of $5,500.
Further, the income tax rate for those earning between $45,000 and $90,000 a year has now dropped to 20.5 per cent, from the old rate of 22 per cent. This means a possible maximum savings of up to approximately $650 a year.
These changes – and more to come – cross over into your estate planning and financial retirement.
The TFSA is considered a highly effective retirement tool. It enjoys tax free treatment, so if in fact you were able to save $10,000 a year into your TFSA, all your growth is 100 per cent yours tax free. This could be income, GICs, and even stocks that could grow with no capital gains tax. You can also take the money out at any time for any reason and re-contribute it the following year.
A registered retirement savings plan, on the other hand, is treated very differently. Your annual contributions to an RRSP are deducted from your income the year you contribute which effectively lowers your tax bill. But an RRSP is tax deferred. It is not tax free like a TFSA. When you are later required to bring that deferred RRSP money into income – even if it has been rolled over into a registered retirement income fund by age 71 – the deferred money is now subject to tax.
For many, the TFSA was considered the best tool to grow for retirement. It gave you the benefit of tax-free growth. The arguments to cut it back to $5,500 a year were that the government would lose too much tax revenue, and that most people could not save $10,000 a year – and therefore it was only a tool for the rich or the highly disciplined saver. Those who used it as a power tool for their retirement have seen it cut in half.
While the effective tax rate fell for the middle class earner, the new year brought an increase for approximately 320,000 Canadians who earn more than $200,000 annually. That rate has risen from 29 per cent to 33 per cent. The increased tax bill to high income earners will vary from province to province.
We were told during the federal election that the cost of the “middle class tax cut” would be financed by the increased tax on Canada’s top earners and would pay for itself. Post-election it was a different story. The newly elected government said in fact its numbers were wrong and the middle class tax cut would in fact cost taxpayers $1.2 billion that would be added to the growing federal deficit.
As 2016 rolls into 2017 we will see many more taxes being considered or implemented to deal with the enormous deficits being run at provincial and federal levels. There already is discussion about raising the HST from its current 5 per cent level again. In Ontario there is discussion of the introduction of road tolls. There is now a provincial “beer tax” with the introduction of beer sales in supermarkets. The new tax is $1 on a case of 24, being phased in over four years. The new supermarket beer tax is expected to raise $100 million annually by 2019 for Queen’s Park.
In any event, let us have a happy and healthy New Year to help weather the changes ahead.
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