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If it hurts like this now, what will it be like tomorrow?

Tax-Free Savings Accounts...More of the same regressive tax policy

I don't write about politics as much as I used to, but you all know that I have no love for conservatives, expecially our current Prime Minister and his ilk.  The latest federal budget does nothing to change that.  I know I'm a bit late on the analysis of this, since the budget came down in late January, but that's because the "how does it affect me" part didn't really sink in until I started working on my taxes.

I have no particular issue with paying taxes.  Taxes pay for things I value like universal health care, education, roads, social services and a whole bunch of other things that make Canada a good place for most people to live.  In fact, if paying more taxes would turn "most people" into "everyone" I would happily pay more--but only to a point.   I would prefer that current taxation schemes become more progressive (which could mean I would pay more) and do a better job of redistributing wealth through the provision of services and less taxation for the very poor, rather than the current trend towards encouraging those who already do okay to keep more of their earnings out of the system.

The Tax-Free Savings Account is one of those new programs that gets it completely wrong in my books.  This new scheme allows anyone over 18 to annually save $5000 of money, and shelter all the investment interest it accumulates from taxation, forever.  Any of the $5000 that is not used in a tax year can be rolled over into the next year similar to RRSPs.  However unlike registered retirement savings which are taxed when they are withdrawn (ie the taxation is deferred), the captial gains from the TFSA are never taxed.  The tax savings are greatest for those who can put away the most money.  No sign of progressive taxation there...

The smart people at the Canadian Centre for Policy Alternatives sum up my issues with this program nicely:

This is essentially a program to shield capital gains. Consequently over two-thirds of the benefits from this program go to 6% of Canadian, those with taxable incomes of more than $100,000 (They were the source of 69% of all taxable capital gains in 2005.)  This is a male dominated group, but also a very elite group: 5.7% of men who filed taxes, and 1.6% of women.

Looking ahead, TFSAS raise another troubling issue: a future generation of retirees could be paying little or no income tax (for those who could afford to save) but expect to receive large amounts of high-cost public services, such as public health care.

Budget 2008: What's In It for Women?

This new program also raises personal issues for me.  I live very comfortably.  My family income is much higher than the median national family income and while I live in a big expensive city and have a comparatively large mortgage, our family is able to do pretty much anything we want.  As Jo suggests in a very thoughtful post, we have chosen how we wish to live, and do what we need to achieve that. 

I have some money that I could use in one of these accounts.  It seems foolish not to take advantage of this and increase my personal wealth.  Does that mean I should strive to donate a portion of this to causes I deem worthy and exchange taxation-based income distribution with philantropy?

While I know that both government and charitable organizations play important roles in Canadian society, I also feel like my government is going in a direction I don't support.  I suspect that most Canadians are not having this conversation with themselves.  They seem to not consider how their taxes contribute to services they demand for themselves and for others (everything from funding for amateur sports to Aboriginal housing), but instead think only of keeping more of their money; like the "tax man" is some nefarious entity that keeps them from their holiday or big screen tv.  

I also suspect there's a whole bunch of people out there who wish they had an extra $5000 they could save and earn some extra income.   



Thanks for this thoughtful post. I never thought of the TFSAs that way before. For me it's not about hiding from the "Tax Man", because like you, I don't mind paying taxes. I just like saving money for future things, because I don't make enough money that I can just buy a new computer, camera, whatever. I don't have a TFSA yet, but I have an RSP and had a CMMF but I needed the money for something so I took it all out :P

Thank you Stephannie, I've missed your politcal posts.

I don't mind paying taxes, but I'll admit that when I sit down to do my taxes each year that my goal is to not pay more taxes. I don't truly care how much I get back (though getting some back is highly appreciated), but the idea of having a lump sum that I need to pay when I can't necessarily afford it makes me very uncomfortable.

I don't know that much about the Canadian taxation system, but can a TFSA be set up for someone else? Sort of like a trust fund, initially set up in your name but designed to go to your children once they reach a certain age?

We are having this discussion, and many others. I inherited some money recently, enough so that after we gave a lot to charity and did some stuff to our house we have a bit left over, and frankly we don't know what to do with it that fits our ethics. I don't like the market, we don't like the TFSA program, we've maxed out our RSPs and RESP for the moment. How can we let this money grow for our retirement in a way that doesn't exploit other people? It kind of keeps me up nights.

Well said. But you knew where I stood anyway.

On your question, have you seen Kiva? Looks like a good model. Not charity but micro-lending.

Though I think saving your money with a credit union, especially a community one, is also a good idea. They invest your savings in local projects rather than in the kind of stuff the big banks invest in.

I'm sure Mat could explain why governments would use tax breaks to encourage savings. But he's down at your place giving a paper (tomorrow; maybe the politics department if you are interested. Paterson is his last name).

Thanks for this post - we need to say these things as often and in as many places as we can. We're all complicit but need to recognize it and do what we can. I second JoVE on the credit union, although as a UofT person maybe you're already with Alterna?

I'd love to have an on-site yoga teacher. I can't even find an off-site one that I like!
I agree with you 100% on the tax issue. I don't know what to do with the small amount of money left over at the end of each month so it's sitting in my current account and building up but I refuse to invest in anything that has to do with the stock market and making money from companies exploiting employees (which is the only way to earn benefits). I have been using some of it to help groups pay their legal fees when they challenge laws that I oppose.

TFSA are good for people who won't have 250K (FV) in their RRSPs when they retire and/or don't bother contributing to RRSPs. If you're in the 40K bracket and manage to squirrel away a couple of bucks then TFSAs are the way to go as long as there are no front or backend withdrawal fees. Have to shop around for the bargains.

Savings in Canada are below 0%, I guess this was a way for government to encourage people to save.

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