Who Benefits from the TFSA?

A shorter version of this analysis was published today in the Globe and Mail’s online business feature Economy Lab.

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 (TSFA) to $10,000 a year.

The rich in Canada thank you, Mr. Harper. For everyone else, it’s virtually meaningless.

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?

What’s the take up?

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.

What’s the cost?

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.  There is  no way of tracking who gets the most of it, who’s maxing out the limits or how much the government is losing on the venture.

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. He estimates the total price tag of the TFSA under the new proposal will be a loss of $6.7 billion to the public treasury.

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.

Who Benefits?

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.

Canada’s banks will be, um, laughing all the way to the bank. Introduction and expansion of the TFSA means they can have their cake and eat it too.

The TFSA helps banks build up deposits.  More deposits, more lending, more profits.  Public policy helps fatten the banks and shields them from risk too.  CMHC’s mortgage insurance protects the banks against mortgage holders who default.  The homeowner may go bankrupt, but the investor doesn’t lose a penny on his gamble. Taxpayers also helped out  during the credit freeze, buying $69 billion in mortgages from the banks to keep the money flowing. It’s unlikely we were sold the most reliable mortgages.

We’re making money on the deal now but should interest rates soar and defaults start to climb, the Canadian taxpayer would take the loss, not the banks who made some questionable lending decisions.  (In fact the reason Canada’s mortgage portfolio is riskier now than a decade ago is the direct result of public policy.  The Harper Government approved the introduction of government-insured zero down, 40 year mortgages in 2006….the very move that brought the house of cards down south of the border.  By 2007 about two-thirds of all new mortgages being issued were highly-leveraged. We weren’t smarter in Canada. We just came late to the party.)

TFSAs:  They’re not here for you

The TFSA is sold as an Everyman’s policy: anyone can save more and win big, tax-free.  But it’s really a win-win for the banks and people with lots  of cash, while those struggling to stay afloat are ignored.

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. It’s about helping the rich.

A Bush League Idea

By the way, you may be surprised to learn that a similar initiative was proposed three times by President George W. Bush and thrice rejected by the U.S. Congress.  That’s because it was shown it would strip the treasury of $300 to $500 billion in ten years, primarily favour the rich and make little difference to savings pattern.  It made no sense in the U.S.  Why does it make sense here?

What Should We Do?

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

That would allow poor and middle class Canadians to continue to benefit.  The rich could benefit too, just not in a super-sized way.

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.


  • Great work as always Armine.
    One small technical issue on bank balance sheets.
    When you say “The TFSA helps banks build up deposits. More deposits, more lending, more profits. ” Its actually the other way around, banks don’t lend deposits, they lend to create deposits, more lending = more deposits. TSFA’s are a great macro-economic mechanism in a progressively unequal and polarized economy since banks can recapture the proportion of business loans used to pay the high incomes of the corporate and financial overclass that isn’t spent on consumer goods or that ain’t going into the stock market.

  • “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.”

    If you can reliably ex ante spot investments that will double or triple in a few years, it’s possible that you’re in the wrong line of work.

  • By the way, the TFSA-analogous investment in the U.S. is the Roth IRA, which has been around for over a decade – i.e. it was introduced under Clinton.

  • “…it was introduced by Clinton”

    What the cigar tube?

  • I really thought people would go for the “under Clinton” joke, but hand that man a cigar!

    U.S. retirement accounts are a jungle compared with Canada. We have registered pension plans, RRSP’s, DPSP’s and now TFSA’s. They at least ten things – defined benefit pension plans, money purchase plans, cash balance plans, 401(k)’s, SIMPLE (yes it’s an acronym) 401(k)’s, 403(b)’s, IRA’s, Roth IRA’s, 403(b)’s, 419 plans, 457 plans, and I’m sure I’m leaving some out. The Canadian system makes much more sense.

  • Armine Yalnizyan

    Lana Payne raised an important question in the previous “just the facts” post: Do we know how many people contribute to the max (like we do for the RRSP and the RESP)?

    Here’s my answer:

    The number of people and the amount they put into their accounts won’t register with CRA statistics (tax stats). The budgetary impact will never be published in an annual tax expenditure or pubic accounts report – as mentioned above, it’s neither a tax expenditure nor a public spending program.

    So there is no public record of the impact of this measure, but the information is out there, in the private sphere.

    The banks have it: the number of accounts, the amount deposited in each annually. Not obliged to share it of course, but that’s where Flaherty got his numbers for the statement that I cite on the numbers and amount of assets. So if they want to talk about it they will. If not, well, none of our business I guess.

    Furthermore, don’t think there is any system that will ever link accounts to show what a small number of families benefited from the full tax saving room – and the TFSA is designed in a way that encourages people to turn their family into a tax shelter.

    As soon as they turn 18, I give my kids the max and my financial advisor invests it to get the highest returns, pooling with other deposits put aside in the family.

    The returns can pay for grandkids’ education or subsidize/upgrade housing options or vacations or whatnot, thanks to the willingness of the Canadian electorate to shield the growth in my unearned income through investments from taxes.

    The grandkids get to take a ride on an even bigger gravy train, through the magic of compound interest.

    Holy shades of plutocracy batman! No wonder it was hailed as a “revolutionary” new tax reform by accountants and the financial industry.

    We introduced inheritance taxes and high marginal tax rates to raise needed money and stop this sort of thing – not sure if introduced in the wake of World War One, when income taxes introduced; or in the 1940s, during World War II. Repealed in 1972 by Trudeau, and replaced by a capital gains tax.

    Yes anyone who can save can take advantage. But it’s not for the Average Joe. (At an average after-tax income of $31K, whose going to put aside $10K????)

    And just because lower income people contribute the max doesn’t mean they are thrifty. It could mean someone else is supporting them.

  • Armine Yalnizyan

    Dear rcp – always great to hear from you. Re your comment “If you can reliably ex ante spot investments that will double or triple in a few years, it’s possible that you’re in the wrong line of work.”

    An 8% annual rate of return will double your original investment in 10 years. Most investors have been aiming for a 15% rate of return. The high rollers will will gladly risk a relatively small amount, say $10K, on a gamble to double their money in six months or a year, perhaps overnight.

    I have no money to play around with, but the more you have, the more likely you could use a small portion of your cash as mad money and just play with it.

    Most of us are not in this league, but why reward further those who are?

  • Armine Yalnizyan

    Re rcp’s comment that the analagous tax shelter was introduced by Clnton over a decade ago: I’m not expert on American tax shelters, and there are indeed a lot.

    But there are dozens of websites that describe what was sought by the LifeTime Savings Account idea, an innovation to tax shelters introduced by George W. Bush for the first time in 2003, and rejected two more times.

    It is precisely the model for the TFSA. Not much of a surprise that Harper imported it, holus bolus. More of a surprise that there was no resistance, given the degree of debate in the U.S.

    Here’s one link that identifies the many steps in the effort to get it passed: http://www.lifetimesavingsaccount.com/

  • Armine, I think that the Lifetime Savings Account was rejected precisely because it was attempting to fill the niche already filled by the Roth IRA. If you look up Roth IRA, you will see that there is no deduction for contributions (just like the TFSA) and no tax on eventual withdrawals (just like the TFSA). I therefore continue to maintain that the Roth IRA is the US analogue to the TFSA.

    Take a look at an old copy of the Canada-US Tax Treaty (which explicitly allowed Canada to introduce a Roth IRA analogue well before the TFSA was introduced) if you’re dubious.

  • On rates of return: I’m sure that some people have been aiming for 15% rates of return, but very few people other than Edward Thorpe have ever achieved them consistently. (Look up “Fortune’s Formula” – it’s a fascinating book.) The CPPIB is currently shooting for 4% real return, and those who think they can outperform that target are (IMO) delusional.

  • RCP,

    You are consistently dodging the substance of the matter, namely; what is the profile of people who have 10,000 a year to put in a investment tax shelter? Disproportionately the well to do. And given the already regressive tendancy in tax policy this is just one more insult with no offset to the injury.

  • Travis, we went through this argument previously. Although I don’t expect to convince you (based on past experience) Armine does note that TFSA’s are superior savings vehicles for low-income people. As she explicitly states:

    “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.”

    And I’m afraid I don’t agree with your “regressive tendency” statement. We still have a progressive tax system in Canada.

  • Unfortunately for the author’s argument, the reality is that the affluent are also a part of the public, and most TFSA holders, though not poor, are also not affluent.

  • Also, of course anyone, rich, poor, can get lucky on a stock, but the investor who can reliably “double or triple their savings in a few short years” is exceedingly rare. There are people like that out there, but very few.

    People who are smart enough to earn income sufficient to put them in position to invest apart from their RRSPs tend to be the same people who grasp that fact.

    Warren Buffett, for example, has averaged about 20% per year over his career.

    Your article is based essentially on the view that any tax policy must be directed at ameliorating the condition of the poor, in order to be legitimate.

    That is offensive.

    Those who draw *less* from the public welfare are no less deserving, simply by virtue of their station or their accomplishments.

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