The trouble with tax-free savings accounts


Daniel Tencer reviews two new studies into the public policy implications of tax-free savings accounts, which were introduced by the Harper government in 2008.

While one in three British taxpayers now have a tax-free account, that drops to as low as one in 20 among low-income earners, the study found. “The introduction of ISAs has done little, if anything, to break down the barriers to saving faced by low-income individuals,” the study says. Not surprisingly, the main reason for not participating in the accounts was a lack of money to put in them…

Meanwhile a study from UBC economics professor Kevin Milligan, also published at the CTF, estimates that the government could have a hard time raising revenue as TFSAs grow older and larger. Milligan notes that, because TFSAs accumulate over time, eventually Canadians will have a large portion — if not all — of their assets sheltered from taxation altogether.

The current issue of the Canadian Tax Journal includes two other papers on TFSAs: one from Jonathan Rhys Kesselman on possible reforms and one from Finn Poschmann on reasons for expanding TFSAs.


The trouble with tax-free savings accounts

  1. No foresight at all. Cons never sit down and think things through….it’s just whatever they think will get them a vote.

    • Oh.. I think this one was actually thought through pretty carefully.

      Think “starve the beast”.

      • Yes, but they’ve never thought that through either. You can’t run a country without taxes…or have a military to defend it. The amount has been argued about for centuries….but most people are aware that taxes are necessary.

        The right wing never figures out the end result of their fantasies.

  2. I looked into a tax-free savings account. If I put in the maximum amount, and earned a respectable 3% interest over 10 years my total tax savings would be about $40. Its a total joke.

    • Dan: the TFSA is just a container. It can hold stocks, bonds, and mutual funds that will net you much more over the long term. A lot of people don’t realize this because the banks haven’t marketed them that way.

  3. Does the British tax free study results surprise anyone?

    Jim Flaherty and the Conservatives pandered to upper middle income and high income individuals with TFSA policy. To be clear Canadians are putting after-tax dollars into TFSA’s but they are a useful mechanism to avoid paying tax again on withdrawal. If after tax dollars are barely covering your living expenses chances are slim you will have a TFSA.

    The problem for the conservatives is Flaherty already screwed the same individuals when he flip-flopped on Income Trusts in 2006. The income trusts are now effectively double taxed, once at the corporate level and once again in the hands of investors thus removing any advantage over a normal corporate structure. Anyone caught up in Deficit Jim’s Income trust betrayal probably isn’t feel much gratitude about TFSA’s.

  4. The writers seem to think that exempting income of the relatively affluent from taxation is an unintended consequence. Libertarian Steve isn’t that dumb — “starving the beast” has always been a good thing in his universe.

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