For many the New Year is a new beginning, a time for change and perhaps a New Year’s resolution. Well I am not sure if our new Finance Minister Bill Morneau made any New Year’s resolutions, but he is certainly implementing a number of changes. In December several policy changes were announced, in my view the big announcements were changes to the income tax rates and the lowering of the Tax Free Savings Account (TFSA) contribution limit. While the changes in income tax rates will have an impact, given that most folks top up their TFSA at the beginning of the year I believe the change with the most immediate impact will be the lowering of the TFSA contribution limit.
The TFSA contribution limit in 2015 was $10,000, however starting January 1, 2016 that will be rolled back to $5,500 per year. The TFSA has only been around since2009 and has experienced several changes, which has created some confusion. A quick recap of the TFSA: Any Canadian resident over the age of 18 with a valid social insurance number qualifies for a TFSA. For 2009, 2010, 2011 and 2012 the contribution limit was $5,000 per year. The $5,000 per year limit was indexed to inflation and in 2013 we received our first increase, to $5,500. The $5,500limit was in place for 2013 and 2014. In 2015 the limit was increased to$10,000 per year, but the contribution limit was no longer indexed to inflation. The changes announced in December will lower the limit for 2016,back to $5,500. However, starting in 2016, the TFSA contribution limit will once again be indexed to inflation.
The TFSA contribution limit is cumulative, meaning if you don’t maximize your contributions in one year you can catch up in future years. By the end of 2015 the total contribution room was $41,000 per person. If you add in the 2016 contribution the maximum contribution someone can make to their TFSA is now $46,500. There is a penalty for over contributing. If you have contributed too much CRA will notify you and inform you of the penalty. Unfortunately CRA only sends notices to those that have been penalized and that owe money, they will not automatically send you an update on your TFSA contribution room. If you are unsure how much room you have left you can contact CRA and request an update. If you have an online account set up with CRA you can log in to your account and make the request, or you can phone 1-800-267-6999.
In my opinion the greatest feature of the TFSA is the tax free growth and that feature has not changed. You have the flexibility to invest the money in your TFSA in a variety of investments and all of the growth is completely tax free.I can understand the recent changes have created confusion, but the TFSA is still a great tool and should be part of your retirement plan.
This information transmitted is intended to provide general guidance on matters of interest for the personal use of the reader who accepts full responsibility for its use, and is not to be considered a definitive analysis of the law and factual situation of any particular individual or entity. As such, it should not be used as a substitute for consultation with a professional accounting, tax, legal or other professional advisor. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group.