Apr 222015
 

Finance Minister, Joe Oliver¬†introduced the government’s 2015 Federal Budget yesterday. The big takeaway is that there will be tax breaks for everyone. Yay! ūüėÄ The proposed budget is expected to get passed as the Tories hold a majority government.

It’s nice to finally see some welcomed changes in fiscal policy to address the economy rather than rely on monetary policy alone. ūüôā Federal budgets are important because it shapes¬†the way we plan our personal finances.

Increased TFSA Contribution Room

The annual contribution limit for the Tax Free Savings Account rises to $10,000 effective immediately. This means Canadians who have already maxed out their TFSA for 2015 will now have another $4,500 of contribution room to use. The TFSA is a holding account where we can buy investments and not pay taxes on the gains.

Some people believe this change will only benefit the upper class who are already wealthy. Here’s my poor attempt at humour on Twitter from yesterday.

However, Ottawa says that individuals with annual incomes of less than $80,000 accounted for more than 80% of all TFSA holders at the end of 2013. And about half of TFSA holders had annual incomes less than $42,000, meaning the TFSA is mostly being used by the middle class. Personally I think the new TFSA policy benefits serious savers, not necessarily the wealthy.

RRSP delays taxation to a future date when we’ll likely be in a lower income tax bracket than today. Gains in a TFSA are made from after tax contributions and are not taxed, for the most part. So¬†between the RRSP and TFSA average Canadians now have a lot more freedom and room to save and invest with preferential tax treatments.

Here’s a table showing how much someone would need to save to max out both accounts.¬†The maximum RRSP contribution limit assumes the person earned the same income in the previous year.

Combined Tax Sheltered Savings Table 2015

Annual Gross IncomeMax TFSA RoomMax RRSP RoomCombined TFSA/RRSP Limit% of Income
$20,000$10,000$3,600$13,60068%
$30,000$10,000$5,400$15,40051%
$40,000$10,000$7,200$17,20043%
$50,000$10,000$9,000$19,00038%
$60,000$10,000$10,800$20,80035%
$70,000$10,000$12,600$22,60032%
$80,000$10,000$14,400$24,40031%
$90,000$10,000$16,200$26,20029%
$100,000$10,000$18,000$28,00028%

 

As we can see people¬†who make $50,000 a year will have to save more than 38% of their incomes before running out of space in tax advantaged accounts. There is no point in buying GICs, bonds, stocks, mutual funds, and other investments in a regular cash account anymore, unless you’re like me and trade derivatives or buy securities on margin. ūüėČ

Decreased Minimum RIF Withdrawal Rate

The new federal budget also gives seniors more options. When an RRSP is converted into a Registered Retirement Income Fund (RRIF) retirees will be able to leave more money in their tax sheltered account each year to help their savings last longer and can also lower their overall tax burden. The proposed new RIF minimum withdrawal rate will decrease from the current 7.38% at the age of 71, to 5.28% starting at the age of 71, and gradually increase to 20% by age 95. 😄

15-04-new-riff-rules-federal-budget-2015

In general lower income, and younger folks should prioritize saving in a TFSA before considering RRSP, and vice-versa for high income earners. I like to put bonds in my RRSP, and the more volatile, higher potential investments in my TFSA. For most Canadians I believe the TFSA has a more important role in our financial lives than the RRSP. However, both are important as the RRSP can save us money today by delaying the tax liability to future years, while the TFSA can save us money in the future. Holding the right amount of each can minimize the overall taxes we pay over time.

Continue reading »

Jul 162012
 

What is the largest expense you have? For me, it’s taxes, which makes up about 30% of everything I make. As a democratic society we are not only responsible to pay our fair share of taxes, but we should also try to understand where our tax money goes. ¬†Did you know the CRA (IRS equivalent) uses up 3% of all our tax money? ¬†Before the next time you sit down with your¬†accountant or pull up some tax software, have a look at these charts below showing where the¬†federal government gets all their taxes from, and where they spend it on.

image source: creditcardscanada.ca

In today’s reality it’s common practice to want the best education for our kids and the best health care for our elderly parents, despite whether or not we have the ability to afford it or not. So if a family is already in debt and is living paycheck to paycheck, what can they do to maintain their style of living? They borrow more money of course and dig deeper into debt, just so they can pay for those services with the hope that their financial situation will get better in the future. Sounds familiar?

Canada is in a similar situation. This country is in debt. And instead of saving money each year to pay off that debt it chooses to borrow even more money to continue paying for all it’s important federal services. Our teachers and nurses are being paid by borrowed money (a loan) that every future tax payer is on the hook for. It’s a fine balance between doing what’s best for our people now, VS what’s best for the future. I would personally like to see a balanced federal budget and will gladly pay more taxes, or receive less social benefits, or some combination of both. But I know not everyone would be on board with that. Fortunately our financial situation hasn’t hit a point of no return¬†yet. But if we continue to spend more than we make then eventually, if nothing is done about it, we might find ourselves facing the same challenges as Greece is right now. The United States also has their own financial difficulties.