Finance Minister Jim Flaherty tabled his government’s third budget in Parliament today. The mainstream media has extensive coverage of budget highlights but if you are inclined to read the document yourself (available here), here are my notes of the interesting bits:
- Improved management of EI: The government is proposing the creation of a new crown corporation to ensure that the EI account is “managed on a truly break-even basis over time” (Page 71).
- Tax Free Savings Account (TFSA): The Conservatives proposed this idea in their platform for Election 2004 (the one in which Paul Martin won a minority). In Budget 2008, the government is planning to implement the idea. Starting in 2009, Canadian residents aged 18 years or older can contribute up to $5,000 annually to the TFSA. Contributions are not tax deductible but the growth within the plan and withdrawals are not taxed. Perhaps more importantly, income earned within a TFSA or withdrawals will not affect federal income-tested benefits and credits such as CCTB, GST rebate etc. (Pages 76-82).
- Increased Flexibility for Locked-in Pensions: The budget proposes to allow withdrawals of funds from life income funds under certain circumstances (Pages 82-83).
- Increasing the time limit of RESPs:: Currently, RESPs may remain open for 25 years from the date of inception. The budget proposes to increase the time limit to 35 years (Page 113).
- Increasing the GIS earned income exemption: The Guaranteed Income Supplement is reduced by 50 cents for every dollar of other income. The current exemption for employment income is $500. The budget proposes increasing the limit to $3,500 (Page 118).
- [Update] Rebate for Fuel-Efficient Cars Nixed: The $1,000 to $2,000 rebate announced with much fanfare in the previous budget will be available for vehicles purchased by the end of 2008 but is not being extended beyond the current model year. It is not clear if the “green levy” on gas-guzzling vehicles is also being terminated (Page 165).
- [Update] Taxes on Dividends are Increasing: There is a bit of bad news on the dividend front. Individuals will be paying more tax on dividends to compensate for the reduction in corporate taxes. Specifically, the eligible dividend gross-up will fall from the current 45% to 38% in 2012 and the dividend tax credit will fall from the current 19% to 15% in 2012. This works out to marginal dividend tax rate increasing by roughly 5% across all tax brackets (Page 290-291). (The Star is reporting that the rebate program is being killed but not the “green levy”. Why am I not surprised?)
Other Coverage:
The Globe and Mail
CBC
Toronto Star
National Post
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12 responses so far ↓
1 MillionDollarJourney // Feb 26, 2008 at 6:53 pm
CC, you called it with the new tax free account!
2 Dave // Feb 26, 2008 at 6:57 pm
Note that the TFSA is $5,000 annually not one-time.
“Starting in 2009, Canadian residents age 18 or older will be eligible to contribute up to $5,000 annually to a TFSA, with unused room being carried forward.”
3 Canadian Capitalist // Feb 26, 2008 at 7:00 pm
Dave: Thanks for pointing out the ambiguous wording. I’ve corrected it.
FT: I just got lucky. The idea has been floating around for sometime. The Conservatives themselves proposed something very similar in their platform for election 2004.
4 Dave // Feb 26, 2008 at 7:04 pm
The more I read about the TFSA the more I like it. Apparently “withdrawals will create contribution room for future savings” which is great.
I just wish they would give me the TFSA room I would have eared had they had this when I was 19.
5 Bryce // Feb 26, 2008 at 7:16 pm
So will the new debate be TFSA or RRSP or Mortgage?
6 Bryce // Feb 26, 2008 at 7:18 pm
Oh I’ve got it. RRSP to get a refund which is put in the TFSA which creates a tax free income stream that is applied to the Mortgage.
7 Canadian Capitalist // Feb 26, 2008 at 7:52 pm
Dave: That’s a great feature of TFSA because it can be used for other saving goals such as purchasing a vehicle. Withdrawals can be replenished in future years.
Bryce: Yes, TFSA adds a whole new dimension to the RRSP vs. mortgage debate.
8 dropby // Feb 27, 2008 at 1:18 am
I don’t quite understand how TFSA works. How will the withdrawl from TFSA be taxed?
9 Xenko // Feb 27, 2008 at 1:55 am
“I don’t quite understand how TFSA works. How will the withdrawl from TFSA be taxed?”
Withdrawals are not taxed. The initial deposit was effectively already taxed (how much depends on your tax bracket) since it is after-tax income.
10 0xCC // Feb 27, 2008 at 8:42 am
The thing about the TFSA that I bet the government is counting on is that the contribution rate will be very low. Look at how much eligible room is unused for RRSPs, the same thing will probably happen for TFSAs.
I also really like the idea of a TFSA, I want more details though. This account seems perfect for a bunch of things like retiring early, doing larger renovations on a house, saving for a down payment on a house, saving for putting lump sums into the mortgage when your mortgage interest rate happens to be low but bond or equity market returns are better. Which brings up one of the details I want to know more about, what happens to income (interest, dividends) that is generated inside a TFSA?
11 Canadian Capitalist // Feb 27, 2008 at 9:13 am
oxCC: TFSA is a tax-deferred account. All the income, dividends and capital gains generated within the account are not taxed.
Check out the following pages for more details:
Link
Link
12 Dave from GP // Feb 29, 2008 at 4:49 pm
Thanks for pointing out these highlights. That is why I subsribe to this blog.
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