Higher TFSA limits are not the enemy

Why stop everyone from saving more, just to stick it to the Daddy Warbuckses out there?

Chris Young/CP

Chris Young/CP

In addition to the usual barrage of advice from financial experts that accompanies RSP season, the lead-up to this year’s contribution deadline brought with it something else entirely: an all-out assault on the RSP’s much younger cousin, the TFSA, and the Harper government’s vow to let Canadians double the amount of money they can sock away in tax-free savings accounts each year. The volley of criticism, picked up gleefully by media across the country, was spurred by a pair of reports, one from the left-leaning Broadbent Institute, and the other from the Parliamentary Budget Office, which together can be boiled down to two essential arguments: that the benefits of increasing the TFSA contribution limit to $11,000 will mostly go to the rich, and that the lost tax revenue will hurt Ottawa’s finances in the decades ahead. Critics jumped on the issue: Here’s another sop to fat cats that threatens to rob our children of government services in years to come! Only, it’s not that simple.

The first and most important point to consider is that saving is a virtue we should be doing everything we can to encourage. Why does this notion offend so many people when applied to the wealthy? After all, government does a good and fair job of extracting its pound of flesh from that group. Unlike RSPs, which let people delay their tax bills until they’re in retirement and, presumably, earning lower incomes, contributions to TFSAs have already been subjected to income taxes. And the collective tax bill is not insignificant. The top 10 per cent of earners—the ones collecting at least $87,000—took home 35 per cent of total income earned in Canada in 2013, but paid 54 per cent of all federal and provincial taxes that year.

Related reading: From MoneySense: Why we should leave the TFSA alone

It’s also wrong to suggest that only the wealthy stand to benefit from increased TFSA room. Yes, as the Broadbent report points out, fewer TFSA holders are maxing out their contributions than was the case when the plan first launched in 2009. This is held up as evidence that only the wealthy have the means to use their accumulated TFSA room (which stood at $31,000 in 2014 if one had never contributed), but it doesn’t acknowledge that Canada has also been in the throes of a debt-fuelled housing boom that is consuming much of people’s income. (Consider this: The home-ownership rate among the under-35 set with household incomes of just $20,000 to $40,000 is nearly 25 per cent, and jumps substantially with each step up in incomes. Is it any wonder they’re not also contributing much to their TFSAs?) Having said that, there are still plenty of people across all age groups (and likely across most income groups) who, by living frugal lives, save enough to make the most of their TFSA allowance each year. We should ask ourselves if it’s worth stopping everyone in the middle class from putting away more than $5,500 a year, just to stick it to the Daddy Warbuckses out there.

Of course, the inequality backlash is hardly new. It’s an extension of the national panic that always seems to ensue when there’s talk of making it easier for Canadians to shelter more of their money from the tax man. We saw it in the ’80s and ’90s under Liberal and Tory governments when proposals to expand RSP limits were discussed. Then, as now, critics fretted that registered savings plans would not only favour the wealthy, they’d blow a hole in government finances.

Both the Broadbent and PBO reports detail the long-term fiscal impact of a larger TFSA program and, since the numbers get bigger the further out one looks, those tended to be the examples seized on by critics. For instance, the PBO report states that by 2060, a larger TFSA program will leave the federal government with $14.7 billion less tax revenue than it would otherwise have.

Related reading: The case for raising the TSFA limit is shaky 

That’s a big number, to be sure. (I’ll leave it to others to explain why they think it’s a bad idea to impose long-term fiscal responsibility on governments.) But don’t consider that figure in isolation. For one thing, assuming federal expenditures grow at the same inflation-adjusted pace of the last 40 or 50 years, it’s not unreasonable to assume Canadian finance ministers will deliver trillion-dollar budgets by then. And much can, and will, happen over half a century: Housing and stock-market bubbles will boom and bust. There will be recessions, maybe depressions, and war. Our demographics will transform and technology will upturn the economy time and again, spawning revenue streams we can’t even imagine right now. In short, relying on a budget forecast so far in the future to justify denying Canadians a chance to save more now doesn’t make sense.

Look, some of the TFSA’s biggest supporters, such as tax policy expert Jack Mintz, see the need for technical tweaks to the system. (He believes income that retirees build up within their TFSAs should be calculated and used to claw back Old Age Security benefits to prevent program costs spiralling out of control.) Others argue Canada should continue to shift more of its tax base away from savings and onto consumption—a move that might entail jacking the GST back up. Still others believe a lifetime TFSA limit with no annual contribution cap is the answer. So there are options. But Ottawa should never lose sight of the value of having people take ownership of their own futures by rewarding them for saving.


Higher TFSA limits are not the enemy

  1. Thank you for clarifying the misconceptions of saving inside of a TFSA. For those that want to max out benefits of investing inside of a TFSA they should investigate a trading account and buy stocks directly such as one of the 5 Canadian banks. Year over year you should expect to see a 10% return (appreciation plus dividends) without paying any management fees(MERS) as you would with mutual funds. Another tip is to have your stock purchase enrolled in DRIP (dividend re-investment plan) that buy more stock with the dividends instead of paying out in cash. This is ideal for young investors so that they wealth will grow until such time that they need it. As for the older crowd they may choose to take their dividends out in cash.

  2. One thing I would like to see is a simplification of the tfsa withdrawal rules. Double the contribution limit, yes, but eliminate the silliness where a withdrawal this year creates more contribution room next year. $10,000 or $11,000 per year contribution room is plenty enough. It is that aspect of the tfsa, the ability to pull huge chunks out, then recontribute that amount plus your annual limit the next year, that not only complicates the administration of the program, but benefits only the highest income earners. We need to be careful not to make the tfsa so generous that it creates too juicy a target for some future revenue hungry government.

    • So you’re saying that once you’ve saved money, you should never be able to use it until retirement? That seems…. insane. There’s no benefit to the saver by taking out $5000 this year and putting in an extra $5000 next year to make up for it. It’s still $5000. Why shouldn’t people be allowed to do what they want with their money?

  3. The tax free savings account is the only effective tax expenditure measure to enable the working poor and middle class to accumulate wealth. The upper middle class and the wealthy have a multitude of tax expenditure and preference measures (RRSP’s, unlimited capital gains exemption on principal residence, flow through shares, individual incorporation, whole life insurance policies).

    Why has the left and the main steam media (apart from this article) jumped on the only measure that works well for ordinary people?

    Limit the tax expenditures on the measures only the wealthy use to pay for what is lost through enhanced TFSA’s. i.e. Limit the capital gains exemption on principal residences to the same accumulated TFSA limit.

  4. I personally don’t care either way (raise it, keep it the same. So long as they don’t delete abolish the program, I’m good).

    I can see the argument both ways.

    Argument against raising the TFSA to $10,000/$11,000. Poor – middle class people may not be able to max out the current limit, so by increasing the limit you are mainly benefiting the rich.

    Alternatively, according to studies…the largest age group maxing out the limit is the 71+ group. So the group that is forced to take out their RRSP. The study shows that more and more people max out as they age which makes sense since they probaby have more saved up. Even if they don’t, rather than invest in RRSP, it’s better to invest in TFSA. If I was 50 and knowing that contributing the max to my RRSP I probably won’t be able to make back the 25% or whatever I need when I withdraw, I’d probably buy just enough RRSP so I don’t have to pay anymore taxes at the end of the year and invest the rest in my TFSA.

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