Morneau said that the reduction will take effect on January 1, 2016, and that TFSA contributions will be indexed to take into account inflation moving forward, giving investment income some space to grow tax-free.
The decision was anticipated among investors in light of campaign promises made by Prime Minister Justin Trudeau. Currently, the TFSA currently provides room for up to $41,000 in cumulative contributions.
Concerns on whether unused contribution room for the $10,000 limit in 2015 will carry over next year have been allayed, as investors who did not make any contributions in 2015 but have maxed out their accounts in previous years would have space for as much as $15,500 in contributions in 2016.
Those who have no more room, however, have been advised to use alternatives such as stocks, registered retirement savings plans, corporate-class mutual funds, and high-interest savings accounts.
“The TFSA offers no deduction as the money goes in, but it offers tax-free income going forward so what you are now losing is $4,500 of tax-free savings room annually beginning in 2016. If you had $10,000 available to contribute in 2016, you should be looking at alternatives of where you can put that extra $4,500 that can no longer go into the TFSA,” Investors Group assistant vice-president of tax and estate planning Aurele Courcelles told The Globe and Mail
Federal Finance Minister Bill Morneau announced that the Liberal government will roll back the annual contribution limit to $5,500, reversing a move by Conservatives that set the limit at $10,000 in the 2015 budget.