The TFSA Shouldn’t Be Scrapped, It Should Be Fixed: Budget 2015

Today The Globe and Mail Report on Business published 5 economists’ thoughts on what tomorrow’s federal budget could and should do.

I chose to focus on a measure that is virtually guaranteed to be in the budget, because the federal government has promised to do it since the last federal election in April 2011: double the annual contribution limits to the Tax Free Savings Account.

I thought it was bad policy in 2011. It’s even less of an excusable policy direction now. It doesn’t even do what the feds say it does.

Distributional analysis by tax experts, particularly Kevin Milligan and Rhys Kesselman, shows that the program is most used by higher income, older Canadians; those who least need the help of fiscal policy.

Fiscal analysis by the Parliamentary Budget Office notes that doubling annual contribution limits to the Tax-Free Savings Account will cost the public purse $14.7-billion federally and $7.6-billion provincially by 2060.

The TFSA has always been a “Contact-C™” policy measure, with the impact of the tax cut getting bigger over time. It’s a time-released headache for the public treasury.

Making it a bigger problem, faster raises the question: Who is agitating for higher contribution limits? The only people constrained by the existing limits on TFSA and RRSP contributions have incomes over $150,000 – roughly 3 per cent of tax filers.

The TFSA may benefit anyone who can save, but evidence shows it further advantages the already most advantaged.

Still, the program also helps lower-income Canadians who are able to save. It shouldn’t be scrapped. It should be fixed.  That means putting limits on the program.

Tomorrow’s budget should include:

  • A lifetime limit on contributions of $150,000, equal to roughly 25 years of contributions at the current annual maximum of $5,500. (The average annual contribution per TFSA holder has been falling every year since the program began, in 2009.  As of the last count in 2012, the average annual amount contributed was $3,500.)
  • A lifetime tax-exempt limit of $450,000 on each TFSA holder, allowing for a three-fold gain in value. That ceiling is 46-times higher than the median financial assets of Canadian households in 2012.  There is no reason for Canadians with low or no savings to provide tax relief to those lucky enough to have set aside almost half a million in cash alone.

If the government pushes on the accelerator, it should at least make sure this thing also has brakes. If not, we’ll end up in the fiscal ditch. Hopefully, that’s not the point.

Armine Yalnizyan is Senior Economist at the Canadian Centre for Policy Alternatives. You can follow her on Twitter @ArmineYalnizyan.

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