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TFSA Costing the Government?

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:

  1. 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).
  2. 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).
  3. 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.

Feel Free to Comment

  1. I heard that, if a TFSA reaches a certain level (e.g.) over $100K and you are a senior collecting old age security, that the government may CLAW back your OAS or CPP.
    Am I correct?
    Depending on the Government on Oct. 19, this seems to be the depending factor.
    Seniors are the group of citizens who always seem to get fleeced.
    Has anyone heard what may be in the policies of the three parties as far as any benefits to Seniors. I haven’t even heard the word SENIORS mentioned by any of the three candidates.

  2. As your three scenarios demonstrate, it is impossible to forecast how much tax revenue the federal government will lose as a result of TFSA’s.

    Another perspective to consider: the TFSA was created because the government was concerned that Canadians were not saving enough to fund their retirements. If folks save more, they may be less dependent on a range of government programs. This could result in saving for governments at all levels.

  3. I agree.

    And if some people use their TFSAs successfully and save some money in it combined with some income, hopefully it should reduce the number of people falling into welfare programs especially as they age. That also saves the government some $$.

    I’m sure there are some investing magicians who will use the TFSA to protect enormous sums from taxes. But they would have just found some other way to do the same thing without the TFSAs so I think their impact on the tax stream is negligible.

  4. I don’t think that TFSAs are going to cost the government all that much in potential tax revenue and here is my thinking:
    1. There are caps on how much money you can put in so per person this amount is relatively small not to mention how many people are actually taking advantage of TFSAs?
    2. Your argument is 100% valid, most investments aren’t going to make you any really significant returns and once you tax those in the long term the amounts aren’t going to be that significant.
    3. If it was that detrimental to making money do you think they would still exist? while the minister of finance might not be an accountant or economist but people the governor of the bank of Canada is (among other people). If this was really going to hurt the government someone would have said this was a bad idea.

    At the end of the day, I think most people don’t use TFSA’s and I would hazard a guess and say a lot of people don’t even know what they are. This is an investment vehicle that can be beneficial but doesn’t have to be and a smart investor will take advantage of it over the long term (but how many will?)

  5. I don’t think the government needs to worry about losing tax revenue from TFSA investments. Most people don’t understand TFSAs and aren’t making much money on them anyway.

    If they are investing the money is going in to mutual funds with high management fees and so the government came make money taxing the investment salespeople who call themselves investment advisers.

  6. “Am I missing the point here, is the TFSA going to cripple the government by having Canadians not paying taxes on their investing growth?”

    I don’t think you are missing anything. Cutting the GST dwarfs TFSAs in terms of tax revenue reductions. Any smart economist would say reducing personal income taxes would be a better than GST cuts or TFSAs. In what field is Harper trained again?

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