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Possible Changes to the Tax Free Savings Account Limit


Tax litigation

Our readers will remember that the previous federal government had changed the contribution limit for Tax Free Savings Accounts (TFSA) to 10 000.00$ as of 2015, up from 5500.00$ in 2013 and 2014.

The increase was announced in the April 21st, 2015 Federal budget and the budget itself was approved by Parliament in June, 2015. Various banks and financial institutions handled the matter differently. Some institutions permitted their clients to make TFSA contributions up to the new limit even before the change was passed into the law, confident that the change would eventually be passed into law.

Other institutions would not allow their clients to make TFSA contributions up to the new proposed limit until the law was passed.

Those of you who followed the recent federal election know that the new Liberal government of Justin Trudeau has promised to roll back the contribution limit to TFSA to its previous level of 5500.00$. But will this change be retroactive and what effect will it have on those contributions made in the year 2015 above 5500.00$ to the limit of 10 000.00$.

Parliament does have the ability, when it amends laws, to give them a retroactive effect. This power is not absolute and it is subject to the checks and balances that exist in the Canadian Charter of Rights and Freedoms. However, it is at least possible that Parliament and the new Government could contemplate making the changes to lower the limit of TFSA back to 5500.00$ retroactive to the year 2015. As long as it does so, in a clear manner, then the retroactive change could be permissible.

There are, of course, many practical reasons not to make the change retroactive. For over 6 months now, people have been acting upon and relying upon the law as it was supposed to be changed and as it was actually changed in order to make TFSA contributions up to the new limit of 10 000.00$. Amending the law retroactively would, in effect, punish these people or at least cost them money for following the law as it then existed. Such a retroactive effect to the law is rarely welcome or desirable.

In fact, if the budget had never been passed and yet people were still making contributions up to the 10 000.00$ limit as proposed in the previous budget, there is an argument to be made that the new government should go ahead and implement the change in any case so that people will not have been penalized for following the law as they expected it to have been amended. This discussion is of course, theoretical because the law was passed and it did become lawful to make contributions to TFSA up to 10 000.00$ in 2015.

What to do about the future then? While, of course, it will be up to the new Government to decide if and how to enact changes to TFSA, the most likely and the least complicated outcome would be, if the government is committed to reducing the TFSA limit back down to 5500.00$, to leave the 10 000.00$ limit in place, but only for the year 2015 and that, for the future years beginning in 2016, the limit will again be 5500.00$. In this way, everyone in the year 2015 who made the contribution up to the 10 000.00$ limit will be in conformity with the law and people in future years will know that they can no longer contribute up to that limit but will be able only to make contributions up to 5500.00$. In this way, there is no complication resulting from trying to make the change apply retroactively to people who were following the law at the time that they made the increased contributions.

As for those people who attempted to make contributions up to the 10 000.00$ limit in 2015 but were unable to do so when they wanted to, because their institutions would not do so until the law was passed, well, frankly they are out of luck because nothing obliged those institutions at that time to accept the contributions up to the new limit because they could not be 100% certain that it would pass into law until in fact it did pass into law. The only advice that can be given now would be to make the contribution up to the 10 000.00$ limit before the end of the year and before any changes are passed for future years.

It is always a complicated and usually undesirable effect of a law to attempt to give it a retroactive effect. In many circumstances, such laws may even be declared unconstitutional because of the possibly unfair effect they may have on those persons who were following the law at the time that the original law was in force.

Usually, budgets have effect from the time that they are announced because it is known that the budget will eventually pass. The law, as such, has retroactive effect, but because everybody knows and assumes that it will have a retroactive effect, following the law in such matters is not complicated, because it is well established that from the time the budget is announced that it will be in effect retroactive to the day it was announced. It is like having a law pass into effect as soon as it is announced, although this isn’t legally the case but, in practice, that is the effect.

While one can argue whether or not increasing or decreasing contributions limits to TFSA are matters of good policy, as a matter of good law, it would probably be a very bad idea to try to make the contribution limit decrease retroactive to 2015, when since April of 2015 people were able to rely upon the law that was in fact passed in June of 2015. Any changes to be made would be most simply and most fairly made for the time going forward as of January 1st, 2016.

For all of these kinds of questions, it is prudent to consult as needed your lawyer, your account and/or your tax specialist.

Franco Tamburro, Attorney at Law.
Alepin Gauthier Avocats inc.

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