A while ago, there was an expose done by a writer claiming that the Government couldn’t afford to raise the TFSA limit. Is the Government losing tax money on the growth inside TFSAs? I poo-pooed the whole argument, but I have since been in a statement on Twitter about the TFSA costing the Government.
The critical point in my mind is that the Government is not losing income tax from the money in the TFSA, as the money in the TFSA is “After Tax” Money, so the Government has already had a bite at the apple (the number of times Canadian money is taxed is an abomination in my opinion (but that is the Libertarian in me speaking)). This money has already been taxed. The Government is now allowing for a small portion of the income to grow without Taxes on the growth. Conversely, the investor is also foregoing the capital losses using a TFSA as well.
The real question that comes to mind is how much money has the Federal Government foregone setting up this program? I think it would be hard to tell because of the following possible scenarios:
- If I put $10,000 into a TFSA account with TD Waterhouse (or Nesbitt-Burns, Questrade, whoever), and I decide it would be cool to go for a risky investment because whatever growth will be tax-free. Purchasing “Old Prospector Mining Stock” which I have been told might be making a huge gold strike in downtown Ottawa. Unfortunately oPMS fails in it’s bid and it’s stock value drops to below penny status, and I lose all my money. I can’t claim this as a capital loss, because it was in my TFSA, and I have lost most (if not all) of the initial principle I put into things, in this case the government didn’t lose anything. I also have lost that TFSA room (i.e. I can’t put another $10,000 in to replace the lost money).
- If I put $10,000 into a TFSA account and bought GICs which grew by 2% over 10 years, the government has then lost about $2000 worth of interest growth in taxes or about $1000 in interest taxes or so (approximately).
- The one that critics seem to point to is if I put $10,000 into my TFSA and buy Big Cajun Man Super Tech at the IPO price of $24 a share and the company becomes a huge tech stock darling. The stock price rockets to $72 a share, suddenly there is $20,000 in Capital Gains taxes that the Government has lost. In this case my $20,000 in Capital Gains would have been taxed at about $4300 had it not been in my TFSA.
Huge Fed Losses due to TFSA ?
How many times will the 3rd case arise? My opinion is not often. Case 2 is more likely to happen (i.e. slow steady growth that isn’t taxed, but that means Canadians are saving more money, isn’t that a good thing). What is the harm to the Government? Some lost Tax income that they may even recuperate in later spending. I am sounding like a Trickle Down Conservative right now.
Am I missing the point here? Is the TFSA going to cripple the Government by having Canadians not pay taxes on their investment growth? I doubt it.