OTTAWA On Friday, when banks reopen after the New Year's holiday, Canadians will begin taking advantage of one of the most significant tax changes since the introduction of registered retirement savings plans five decades ago.
The year 2009 marks the official beginning of federal Finance Minister Jim Flaherty's widely praised Tax-Free Savings Accounts, which he introduced almost a year ago in his February budget.
Individuals can deposit up to $5,000 a year into the funds, which, like RRSPs, will be run by banks and other financial institutions. Savers will pay no tax on their gains from investing, and they will be able to withdraw the money at any time without worry of paying a levy to the Canada Revenue Agency.
The measure takes effect at a time when many investors are looking for havens after watching the value of their stock portfolios evaporate during the financial crisis. Individuals who turn to TFSAs won't see big short-term gains, but the initiative has the potential to revolutionize the way Canadians invest, analysts say.
“This is something that will become part of our lexicon over the next few years,” Scott Hennig, a director at the Canadian Taxpayers Federation, said Wednesday from Edmonton. “The immediate impact is not that huge, but the long-term impact will be pretty big.”
The advent of TFSAs is by far the biggest change in federal tax policy this year.
Unlike recent years when the turn of the calendar brought big cuts in levies on corporate profits and the goods and services tax, Prime Minister Stephen Harper's government is showing restraint as it braces for the country's first budget deficit in more than a decade.
The GST is staying at 5 per cent. The tax rate on profit for small businesses is unchanged at 11 per cent after falling from about 13 per cent since 2006. The general corporate income tax rate falls as scheduled Thursday to 19 per cent from the current 19.5 per cent.
Premiums for employment insurance and the Canada Pension Plan creep higher this year. For example, employees who earn more than $42,800 a year will pay an additional $90 in payroll taxes this year, according to Mr. Hennig. That's the biggest increase since 2003, yet amounts to an additional contribution to the two programs of less than $3.50 on a bi-weekly paycheque.
The potential benefits from TFSAs should mute much of the grumbling about those small increases.
“We think TFSAs are a great gift the government has given Canadians to help them save,” Peter Aceto, chief executive officer of ING Direct Canada, said in an interview Tuesday. “It's the most important thing that's happened in that regard since RRSPs 50 years ago.”
Bank of Montreal in November attempted to lure customers by offering to contribute the full amount to a winner's TFSA for life. Mr. Aceto's company has created almost 180,000 TFSAs since October.
With files from reporter Tara Perkins in Toronto