Top up your TFSAs now and prepare for election consequences

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If you have some cash available and haven't made your maximum $10,000 TFSA contribution this year, you'd better snap to it. The new limit may not be around for very long. Both Liberal leader Justin Trudeau and NDP leader Thomas Mulcair say they will roll it back if either becomes Prime Minister. That's a real possibility at this point.

The Conservatives increased the annual contribution limit on Tax-Free Savings Accounts to $10,000 in the spring budget. The increase became effective immediately and applies for the 2015 tax year.

Mr. Trudeau criticized it immediately, saying the move would only benefit the wealthy. If elected, he vowed to cut the limit back to the original $5,000 a year. Mr. Mulcair has been less vocal on the issue but in his one-on-one interview with the CBC's Peter Mansbridge last week he too said his government would reverse the TFSA increase. "So you would keep it at $5,000 and not go to $10,000?" Mr. Mansbridge asked. "Exactly," Mr. Mulcair replied.

In fact, the contribution limit prior to the budget was $5,500, so both leaders are actually saying they would cut it to below where it was at the start of this year.

Neither party makes any reference to TFSAs on its official website so we have no details on when or how this rollback would occur. For example, when the Conservatives raised the limit to $10,000, they also eliminated indexing, thereby freezing it at that level. Would the NDP or the Liberals reintroduce indexing as part of their rollback, to make the plan consistent with other government programs? We don't know.

And what about timing? The TFSA rollback doesn't figure to be a top priority for either an NDP or Liberal government. The move would most likely be made as part of the first budget, which is unlikely to come down before February at the earliest. That means the $10,000 limit would still be in place at the beginning of 2016. Applying a reduced limit retroactively would create mass confusion and force people who had already made the maximum contribution to withdraw some of the money. A more likely scenario would be to implement a lower limit effective on budget day or at the start of 2017.

The broader issue is whether a rollback actually makes any sense. Both the Liberals and the NDP use the rationale that the increased TFSA limit only benefits the wealthy. If that's really what they believe, then logically they should also roll back contribution limits on RRSPs, currently 18 per cent of the previous year's earned income to a maximum of $24,930 a year. Moreover, RRSP contributions are fully tax-deductible, which benefits high-bracket taxpayers disproportionately. Yet neither party has said a word about this, which is understandable given the popularity and wide use of RRSPs.

The $10,000 TFSA contribution limit is not all that generous when compared Great Britain's Individual Savings Accounts (ISAs). As of 2016, adult U.K. residents will be able to invest up to £15,240 annually in their plans. Using the exchange rate of £1 equals $2.04, this means adult U.K. residents will be allowed to contribute the equivalent of $31,090 a year to an ISA, more thanthree times the present contribution limit in this country.

TFSAs have become very popular since their introduction in 2009. As of the end of 2013, there were about 11 million accounts in existence with a total fair market value of just over $118 billion, according to data compiled by the Canada Revenue Agency.

The CRA numbers also show that TFSAs are not mainly for the rich, as the Liberals and NDP are claiming. More than 2.9 million TFSA holders – 27.5 per cent of the total – had total income of less than $25,000 in 2013. Almost 3.1 million – 28.6 per cent – reported income between $25,000 and $50,000. So more than half the TFSA account holders in Canada have incomes of less than $50,000. Another 2.9 million were in the $50,000 to $99,999 range.

In terms of the value of their investments, the under $25,000 group had a total of just over $27-billion in their accounts while the $25,000 to $49,999 cohort had about $35-billion. These are astounding numbers when looked at in the context of the "TFSAs are only for the rich" argument. Lower-income Canadians actually control 52.5 per cent of the total fair market value of all the plans in the country. The $50,000 to $99,999 group – middle income by most standards – held $35.1-billion in assets. Only about 18 per cent of all TFSA investments were owned by people with incomes in excess of $100,000.

Unfortunately, Mr. Trudeau and Mr. Mulcair aren't likely to acknowledge these facts at this stage. No politician wants to climb down from a promise in the middle of an election campaign.

So if the NDP or the Liberals come out on top on election day, make sure to top up your TFSA as soon as possible. The window won't stay open for very long.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.