The two most important ways your personal finances will be affected by this week’s federal election both relate to savings.
Justin Trudeau promised that a Liberal government would sit down with the provinces within 90 days to discuss enhancing the Canada Pension Plan. That is something Canadians have long wanted, but the Conservatives didn’t, arguing upgrades would be a tax that individuals and companies could ill afford.
Trudeau had also promised to roll back the popular $10,000 limit on the Tax-Free Savings Accounts the Conservatives introduced in the spring budget, claiming the increase only benefits wealthier Canadians.
Here’s how these changes might unfold:
The TFSA rollback
TFSA rules are unlikely to change before the end of the year, so this year’s $10,000 is safe.
Given the party’s to-do list, the likelihood of Liberal action on this pledge in the next few months are slim to none. A rollback is more likely to be included as part of spring budget measures.
But the last thing the government wants is for Canadians to try and get in under the wire by topping up their TFSAs early in the new year, only to have to take the money out later. That would be an administrative nightmare for the finance department.
So expect the Liberals to telegraph their intentions by year’s end, says Malcolm Hamilton, an actuary and pension expert who is a senior fellow at the C. D. Howe Institute. That way, everyone knows what’s coming.
The announcement could include a one-year grace period, or it could come with quick action. Either way, expect clarity, Hamilton says. “They don’t want people to over-contribute,” he says.
That warning may also tell us whether the $5,500 limit will continue to be indexed to inflation. That’s a key component of the original plan.
The $5,000 limit introduced in 2009 rose to $5,500 in 2013. That’s because the TFSA was designed so that when inflation eroded the limit’s value by $250, it would rise by $500. At a 2 per cent rate of inflation, $5,500 is worth $110 less at the end of Year 1. After three years, an increase is triggered.
You’ll almost certainly get to keep any unused amount from this year’s higher limit, even if the limit changes. That’s because unused amounts are carried forward for later use.
Expanding the CPP
While Trudeau promised to meet with provincial finance ministers within 90 days of his election, that doesn’t mean pension change will happen soon. The provinces must agree on what expansion means, and then decide on how to fund it. Then it has to be implemented. That’s a long process.
Nor will any deal mean an immediate pension bonanza. The changes will most certainly continue to be a fully funded model, which means money is collected before it is paid out. The real beneficiaries will be young workers who will retire 40 years from now.
This presents a dilemma for the Ontario Liberals and their provincial pension plan, which is scheduled to begin in Jan. 2017. There’s little chance a CPP deal will be in hand by then.
At a press conference Tuesday, Ontario Premier Kathleen Wynne said she’s going to talk with Trudeau about CPP enhancement, but will move ahead with Ontario’s plan. “We will continue to implement because we can’t stop,” she said.
Jeff Kissack, a consulting actuary at benefits consultant Towers Watson, says the good news for Ontario is that a Trudeau government will likely allow the federal finance department to help collect the money. That’s the best way to go, since the feds already have the machinery in place to do so (the Harper government refused to co-operate).
Kissack is part of a group at Towers Watson looking at how the Ontario plan might work. What he sees is expensive and difficult to manage.
The CPP model is national. It doesn’t matter if you work in Toronto or Calgary, you pay the same amount and cannot opt out. The record-keeping is simple. The Ontario model, meanwhile, is provincial. If you leave the province, somebody has to record that move so the benefit can be paid later.
And workers could opt in and out all the time as they change jobs — one employer might have a plan, while another doesn’t. They have to wait to join a plan, so pay for the Ontario one.
With the CPP, we all pay to a maximum, regardless of our income. But Ontario’s plan has a $90,000 cap. That, too, must be recorded. “The Ontario plan is far more complicated than the CPP,” Kissack says.
Another weakness: the information will have to be collected and submitted by 400,000 companies, some quite small, that may not even have HR professionals.
“I suspect there’s going to be a lot human errors,” Kissack says.
What it means: We can be hopeful about CPP expansion, but don’t expect it for a while. In the meantime, the Ontario plan will go ahead, with the best outcome being that it’s folded into an improved CPP at a later date.