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 Tax-Free Savings Accounts- Really worthy of a lot of thought?
By Jim Cottreau FRPA
I remember when the idea of tax free savings accounts was released in the budget announcements.My first reaction was to scratch my head and wonder what all the noise was all about. After all interest rates were low and a $5,000 investment in a savings account, paying interest at 1% would earn $50.00 in one year. The second year it would earn .50 cents more. Tax on $50.00 of interest income for the average taxpayer would be some $15.00 which was hardly enough to generate a lot of excitement. The case supporting the concept seemed to be very underwhelming.
The idea of saving $5,000 every year to save $15.00 in taxes seemed to be a huge money investment for little tax return. There are two wrinkles in this story, the first is the actual return on the investment and the second presumes that every Canadian has $5,000 to invest in a savings.
The plan itself is quite simple. A taxpayer can invest $5,000 indexed for inflation dollars and the growth is exempt from taxation. Re-contributions in the following calendar year are permitted, to the extent of any amount distributed from the account.
One has to wonder if the purpose was to encourage Canadians to open more savings accounts or reward those who have surplus funds. The reality is that people with money, save money. People who have difficulties making ends meet will not strive to save $15.00 per year in taxes by saving $5,000 in a tax free savings.
My original perceptions underwent a huge transformation when the scope of the Tax-Free Savings accounts was released. It went from a “savings” account as most taxpayers know their savings, to an investment account. Now you can buy stocks, mutual funds etc up to $5,000 and any gains are non-taxable. Of course, any losses are not tax deductible as well. Now, we have simply another investment product for the financial products marketplace to sell to potential clients.
What is the real difference between an RRSP and a Tax-Free Savings account? That question is the most difficult one to measure. If you make an RRSP contribution you get a refund cheque and your savings can be increased again by placing the refund into another RRSP. Your money grows much faster. It will be taxed when it comes out of the RRSP; however, we all presume our income will be reduced at retirement time and so will our taxes.
The bottom line is that if you have an extra $5,000 and you have taken your RRSP to the maximum, then place $5,000 cash into the tax-free investment savings. Put the money into the corner of your investments and promptly semi-forget about the resultant “ tax savings”. Maybe much political ado about nothing?
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