Liberal leader Justin Trudeau speaks during Question Period in the House of Commons on Parliament Hill in Ottawa March 31, 2015. REUTERS/Chris Wattie

The incoming Liberal government of Prime Minister-designate Justin Trudeau has a very long to-do list but tax planners and financial advisers will be looking especially at when and how he plans to fulfill a promise to cut the maximum contribution level for tax-free savings accounts (TFSAs).

Stephen Harper’s Conservative government launched the TFSA program in 2009 as a simpler alternative to existing registered retirement savings plans (RRSPs).

Canadians could put money into these accounts – anything from conventional bank savings to mutual funds or other investments – and, unlike RRSPs, never pay tax on the earned income.

And while there would be no tax deduction for contributions like RRSPs provide, TFSA-holders could withdraw money tax-free and replace it later without penalty. Unused contribution room also could be carried forward to future years.

In its final budget this year, the Tory government raised the annual limit for contributions to $10,000 from $5,500. That move crystallized some criticism that had already been building about the TFSA program.

So who loses out?



The left-leaning Broadbent Institute issued a report last February arguing the TFSA program largely benefits people who are already well off and have available cash they can shelter from taxes. It does nothing to improve the financial security of lower-income Canadians, said the report, written by Jonathan Rhys Kesselman, who co-authored a 2001 paper that formed the basis for the Tories’ TFSA program.

And unlike RRSPs, whose proceeds are taxable on withdrawal (presumably at a lower level paid by retirees), TFSA investment income is permanently shielded from taxation. The institute said that means as the TFSA accounts grow, Ottawa stands to forego more and more in tax revenue that will affect programs and services in the future. In a separate report, the Parliamentary Budget Office estimated the foregone revenue would run into billions over the life of the program.

The Liberals have largely bought into this argument and Trudeau promised that if elected, he would roll back the contribution limit to $5,500 as part of the party’s platform to focus on tax breaks for the middle class.

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But when and how this will be done is not clear yet. Globe and Mail financial reporter Rob Carrick wrote this week he’s been getting emails from people concerned about whether Ottawa might cut the limit for 2015 retroactively, after people had already contributed their maximum, or perhaps find a way to claw it back next year through lower limits.

Reducing limit retroactively almost impossible, says expert

A retroactive reduction would be nearly impossible Jamie Golombek, managing director for tax and estate planning for CIBC, told Yahoo Canada.

“I certainly have heard nothing like that,” he said in an interview. “It’s legally possible, theoretically possible. I think it would be unlikely.

“It would create a mass confusion for the Canadian public as well as for both the CRA [Canada Revenue Agency] and any administrator who is administering a TFSA plan on behalf of clients.”

A more likely scenario, he said, is that assuming Trudeau recalls Parliament before its traditional winter break, the new government will announce the TFSA limit will return to $5,500 as of Jan. 1, 2016.

All it would take is an announcement by the finance minister or a small piece of enabling legislation that could go quickly through Parliament, said Finn Poschmann, president of the Atlantic Provinces Economic Council, who as a C.D. Howe Institute research fellow co-wrote the 2001 research paper that led to the creation of TFSAs.

That way the government could serve notice it was reducing the allowable contribution in time for the next tax year even if it does not formally make the rule change until January. Tax law in Canada requires only that the government announce its intentions ahead of a rule change and taxpayers would be required to take notice, Poschmann said.

Poschmann agrees the new government wouldn’t even consider retroactively cutting the contribution limit.

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