Tuesday, 14 April 2015

Federal Finances – Totally Extreme

Well, despite years of deficits at the federal level, more specifically an over 25% increase in Canada’s national debt since they took over, the Conservatives feel it is time to double the amount Canadians are allowed to put into TFSAs next year.  Hey, no objections here.  If you want to let me shelter $47,500 from tax and potentially make some really lucrative investments, who am I to refuse? The Conservatives will be denounced by the other parties and traditionally “left” participants in the public debate in Canada, saying it only benefits the rich.  While there is some truth to their argument, because not many people necessarily have all the money lying around to max out their TFSAs, including me, it is simply shameless pandering to the large segment of the population whom we should have no sympathy for: those who live beyond their means.
It is not just the “1%” who could have found a few hundred bucks in their jeans every month to invest every month since the TFSA was created in 2009, a time during which we have seen the US market triple and the Canadian market double.  A reasonably thrifty and industrious person earning the median national income or less could have easily done that and be sitting on over 50k today tax-free.  But no, we should penalize this guy because the average Canadian is absolutely clueless, and has no money to invest because of their car payments, $180 cable packages, and maxed out credit cards and lines of credit.  The fact that only a small part of the population seems to have the intellectual wherewithal to take advantage of their right to use this account properly should not incite overzealous populists to alter or cancel the program.

Besides, anyone with knowledge of recent Canadian fiscal history knows to take this carrot and stick vote buying with several grains of salt.  What the government giveth the government taketh away.  Loopholes and opportunities to shelter money are always exploited to the max by rational actors (a group that does not include average Canadians, it would seem) until they are no longer tenable.  In the early 2000s, many companies in Canada figured out that instead of being publicly owned corporations they could turn themselves into something called “income trusts” (and they still exist today: any ticker on the TSX that ends with .UN is an income trust) and thereby avoid paying tax on their profits.  This is because they would distribute much or all of it to shareholders in the form of income which, until 2006, was not taxed in the hands of the shareholders.  Seniors and smart people of all ages could invest their savings in shares which would provide a reliable stream of tax-free revenue, and many did.  It was fun while it lasted.  The conservatives had to break their election promise when it became apparent that Bell, the big banks and pretty much any blue chip crown jewels this economy had were going to join the bonanza and convert to income trusts, pretty much ensuring an avalanche of corporate profits was going to completely escape taxation indefinitely.   The loophole was closed.  Income trust income is taxed today like regular income, whether it be in the form profits flowing from refining zinc (Norando Income Fund, TSX: NIF.UN) or selling slices of pizza (Pizza Pizza, TSX: PZA.UN).

So the odd greedy pissed-off senior would leave a comment on political news articles, and Jim Flaherty said he got earfuls in airports for the rest of his life, but most of the population didn’t give a shit because they weren’t personally affected by the change, and probably didn’t even know or care what it meant.  The same thing is going to happen one day with TFSAs.  Those future trillions can and will be taxed at the stroke of a pen, in the name of “fairness”, and na├»ve entitled Canadians won’t be able to do a damn thing about it.  Revenue Canada is the nation’s most powerful creditor, and anyone who thinks their RRSPs and TFSAs are bulletproof needs to remember that nothing is guaranteed in this world, not even the solemn word of the Canadian government.  The Income Tax Act has been amended many times and it will be amended again if the nation’s fiscal health is compromised, and demographics pretty much ensure that it will be.
But in the meantime, invest away or “smoke ‘em if you got ‘em”, to use one of my favourite redneck quotes, with your tax-sheltered cash.  Because whether you choose to invest in Bell, Potash, or some junior uranium producer in the third world, you’ll be doing better than this next group of people who are going to be affected by another Conservative government policy.  For all the bitching in the Canadian financial pages about high fees, these people would be in heaven if they could pay 2.5% a year on their money.  They are the people who don’t have any money – the people who are going to be affected by the government’s policy of requiring everyone to sign up for direct deposit by spring 2016.
It’s hard for some people to digest – that the notion of walking into bank branches, standing in line with physical paper cheques, waiting for 5 days for the cheque to clear, etc, etc, is just completely unnecessary in 2015, and has been for a long time.  The real old timers will want to update their bankbook at the end, just to complete this cumbersome and time consuming sequence.  These amounts and who they are destined for is all digital data in the computers now.  If people want to hang onto their “symbols” of how banking used to be, that’s fine, but these things are now purely symbolic, so normally I’d be all for the government doing its part to phase out what costs, after all, real taxpayer dollars.  And these bank artifact antique collectors are not the people I want to talk about. The truth is, there are people in Canada who do not have and cannot get bank accounts.  This is the most vulnerable layer of society who will probably experience more stress and difficulty as a result of this change, and this is what has driven a lot of criticism of this policy.
There are all kinds of people out there – mentally unstable, unable to look after their own affairs, transient – who cannot get bank accounts.  To get a bank account you need two pieces of ID, to get the ID you need to have your original ID and navigate government bureaucracy.  Also, to get ID, you generally need a fixed address. You laugh but there’s people out there who can’t deal.  And these are the people who end up giving a huge chunk of their pathetic amount of government assistance to cheque cashing outlets and other shady payday loan companies because they are literally in hand to mouth survival mode.  If they had bank accounts they could have immediate access to their money when it gets deposited, if they can get their head around obtaining a void cheque and sending it to the government (not likely).  And that is if they can get the bank account.  Someone who smells, is incoherent, scary, or unable to be respectful and polite is not going to get far in a bank.  Or maybe they are banned from certain banks for doing things desperate people do, like writing cheques to themselves and depositing empty envelopes in ATMs. 
For a brief period in my life when I did collections calling the States, I discovered that a shocking number of Americans I talked to had no bank account and functioned only with money orders.  I know there is a similar segment in the Canadian population.  And this policy, if it is applied too severely, will adversely affect that segment of the population.  All to save 19 million bucks.  Whether the government is competent or not, we’re stuck with it, so as far as this being an important cost-cutting measure, all we can say is “If you say so”. 

Now let’s get to work depriving it of untold billions of tax revenue.