Federal Tax Changes

On December 7th, the new federal government confirmed its campaign promise to reduce taxes for the “middle-class”, offset by an increase in taxes for Canadians with much higher earnings. The result is a 1.5% reduction in the federal tax rate on income earned in the bracket of $45,282 to $90,563. For those whose income meets or exceeds the $90,563 cut-off, the tax savings will amount to just under $680. Meanwhile, a new tax bracket has been created for Canadians earning $200,000 and more. These higher income earners will see their federal marginal tax rate increase by 4 percent.

TFSA Contributions

The Trudeau government has also followed through on its pledge to reduce the annual contribution limit to TFSAs. As of January 1st, 2016, the yearly maximum allowable has been rolled back to $5,500. The increase to $10,000 per year, announced last year under the Conservatives, was short-lived indeed. If you did not get a chance to take advantage of that increase in 2015, the good news is that you still can. All unused TFSA contribution room will continue to be carried forward, including the $10,000 limit for 2015.

Figuring out how much you can contribute to your TFSA is not always an easy task, particularly if you have not contributed the maximum allowable to your TFSA every year, and/or you have made some withdrawals over the years.

Since the inception of the TFSA in 2009, all Canadians over 18 years of age have been accumulating TFSA contribution room on an annual basis. There is no deadline to contribute to a TFSA, as any unused contribution room is carried forward into the next year. If any withdrawals are made from your TFSA, that amount (including any income earned) is added to the contribution room to be carried forward…but careful! It is only in the calendar year following your withdrawal that the new contribution room comes into effect.

Here’s the yearly breakdown of the total allowable contributions to a TFSA:

In sum, you can contribute the following amounts to your TFSA in 2016:

$5,500

+ any unused contribution room (which is cumulative from 2009 and includes all
withdrawals up to and including 2015)

Consider, for example, this scenario:

Since opening her TFSA in 2009, Jenny has contributed the maximum allowable limit in each year. By the end of 2014, she has accumulated a total of $35,000 in her TFSA account ($31,000 in contributions plus $4,000 return on her investments). In 2015, Jenny makes a $10,000 contribution, the TFSA dollar limit for 2015. Later that year, she withdraws $3,000 for a trip. Unfortunately, her plans change and has to cancel her trip. Since Jenny already contributed the maximum to her TFSA earlier in the year, she has no TFSA contribution room left for 2015.

If Jenny wishes to re-contribute part or all of the $3,000 she withdrew, she will have to wait until the beginning of 2016 to do so. If she does re-contribute any of the withdrawn amount before 2016, she will be charged a penalty equal to 1% of the over contribution for each month that the excess remains in her account

In 2016, Jenny’s total allowable contribution limit will be $8,500 ($3,000 + $5,500).

RRSP or TFSA?

This is a question that comes up all the time, and as mentioned in a past newsletter, there is no clear cut set of rules to determine the answer (see Your TFSA – April 2012). We really have to proceed on a case-by-case basis.

To help you sort out all of the differences between the two plans, here is a full comparison you can consider: