Who Benefits from the TFSA?

This was published today in the Globe and Mail’s online business feature Economy Lab. A fuller analysis can be found at the PEF website, here.

Stephen Harper has unveiled yet another plank in a platform that seems remarkably out of touch with the concerns of an electorate walking on post-recession eggshells. His latest proposal would double the contribution limit to the Tax Free Savings Account (TFSA) to $10,000 a year.

The TFSA is pitched as something that’s good for everyone.

Reality check: In 2008, before the recession hit, the average after-tax income of individuals in Canada was $31,400. Median after-tax income (50 per cent of Canadians made less) was $25,400. That’s the most recent data available. The full impact of the recession on incomes had not yet registered.

Why double the contribution limit when the majority of Canadians are nowhere near able to contribute to the max now?

Introduced in January, 2009 — at the height of the recession and at a time when every other government across the globe was trying to stimulate spending, not saving — TFSAs permit Canadians to tuck away up to $5,000 in savings a year and never pay tax on whatever that money earns.

But, in the wake of a global economic meltdown that wiped out almost half a million full-time jobs in Canada, a lot of people are having trouble finding any money to save at all. In fact, they were having trouble saving before recession hit.

As a result, there are only 4.8 million TFSA accounts. That’s just 18 per cent of eligible Canadians (18 and older), and a smaller share of Canadian households.

A small minority of Canadians have stuffed $19-billion in assets into these accounts in less than two years. A lot of those people have their money in low-yielding savings accounts. But a privileged few who have maxed out their RRSP and RESP room can use this account as mad money, investing in high-risk, high-return ventures and doubling or tripling their savings in a few short years. Tax free.

Even before it is expanded, Budget 2008 estimated the TFSA would drain $920-million from the public purse in its first five years. Turns out Canadians who could take advantage of the program socked away more than expected. But we’ll never know the true cost of this move as it is neither a tax expenditure or a spending program.

Budget 2008’s initial estimates predicted the TFSA would eventually blow a $3-billion hole into annual federal revenues — just as Canadian politicians agonize about the rising costs of healthcare that seem so unaffordable.

You could relieve an awful lot of day-to-day stress for $3-billion. You could improve services, repair infrastructure or tackle poverty in a meaningful way.

Doubling the TFSA contribution limit means billions more will be forfeited, as UBC’s Kevin Milligan has argued here. And that’s just one proposal in Mr. Harper’s Economic Action Plan, Part Two. Budget 2011 and the first 13 days of the election campaign have proposed dozens more that widen income disparities and trim revenues.

The standard push-back on the suggestion that the tax cut agenda is a wrong-headed use of public resources is the observation that it’s our money in the first place, not the government’s.

That is absolutely right.

It’s not the government’s money, it’s our money. And how we use our money to create a prosperous and civilized society is critical.

Let’s be clear. This measure will make the rich and powerful more rich and powerful. The rest of us will be left begging for funding for basic services.

The banks would like to see the TFSA expanded (more deposits, more lending, more profits). The rich would like a bigger tax shelter. But there is no broad-based demand to double the limit.

Some say that the TFSA is a good program for the poor who can afford to save but who would lose government income support by so doing; or whose taxable incomes on the other side of retirement will remain in the bottom tax bracket.

Both of these statements are true. But helping the poor is not why the TFSA was introduced by Mr. Harper’s government.

The TFSA should not be expanded. It should be capped.

Lifetime contributions should be limited to $50,000 — 10 years of contribution. Growth of assets in the account should be limited to $150,000 tax free. Poor people don’t gamble with their savings. It would take a long time to triple that maximum contribution when it’s growing at two or three per cent a year.

Let’s use public policy to serve the interests of the public. Not the affluent. They don’t need the help.

Armine Yalnizyan is a Senior Economist with the CCPA.


  1. Once again, an excellent, timely analysis of a Harpo give-away to the rich. But will the cash-poor majority take heed?

  2. I agree with your assertions–with a couple of exceptions:

    “But a privileged few who have maxed out their RRSP and RESP room can use this account as mad money, investing in high-risk, high-return ventures and doubling or tripling their savings in a few short years. Tax free.”

    Yes, but to do so they must risk losing all the money invested in the account, permanently eliminating that amount of contribution room. This is a significant downside (also true for RRSP). Of those people that choose risky investments for their TFSA – I bet that a greater portion of them will lose money than make money. And when they lose–they can’t claim capital losses (thereby benefiting Canadian tax coffers).

    I think the TFSA has an advantage for young people at low income levels. RRSP contributions at low income levels do not provide much of a tax break, and withdrawals are fully taxed at marginal rates that may be much higher when withdrawn in later years. Those at low income levels are capable of saving and do so. TFSA is a reasonable alternative to the RRSP for this purpose.

    Your idea of capping the amount allowed in a TFSA may be a reasonable compromise to prevent this from disproportionately benefiting high-income taxpayers.

  3. I like the idea of capping contribution room.

    Alternatively, if the goal was to incentivize saving among the lower income Canadians, the TFSA contribution room could be income-tested. For example, only those with taxable income under some threshold can contribute in a given year. It seems to me that if you are wealthy, you can and should pay tax on your investment income.

  4. Why must we be so socialist and penalize anyone that works hard to get ahead? First we tax suxccessful people to death and then we’re going to take away the one program the government created that will actually allow people to make money that the government can’t touch? I am a homemaker that was able to contribute to my TFSA, and with my self-directed investing strategies, this will one day offer me, and my family a whole new freedom one day. Those who want the TFSA abolished are jealous of others success.

    1. I think Tan is correct, why do we penalize people who are disciplined enough to save and invest for their future. Times are tough, but why does socialist economics drive discussion.

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