TFSAs: Cutting Taxes for the Affluent

The latest issue of the Canadian Tax Journal has a number of articles on Tax-Free Savings Accounts. Among the papers of interest: Kevin Milligan projects the potential tax impact of accumulated TFSA contribution room by estimating what a mature TFSA would have meant for income taxation in 2005. Even short of doubling the contribution limit to $10,000, Milligan finds a near “revolutionary” decline in the total federal tax base, leading to “an appreciably different income tax than exists today.” Maureen Donnelly and Allister Young look at the slightly-longer UK experience with Individual Savings Accounts (ISAs), a plan similar to TFSAs. They find that beneficiaries of TFSAs are likely to be predominantly older, wealthier taxpayers, with relatively little benefit for low-income individuals. Rhys Kesselman argues that without a series of reforms, expanding the TFSA contribution limit would aggravate the TFSA’s existing deficiencies and result in a windfall for high income earners, allowing high earners to shelter additional wealth from income tax, and leading to higher GIS payments/lower OAS recovery tax.

(From my colleague, Chris Roberts.)


  • The hype put out around the TFS accounts is total BS, if an average Canadian making $50,000 somehow manages to put the maximum in a TFSA (20% of their income) he will reduce his taxable income by the INTEREST on that account (as verses a regular savings account). At current rates the interest would perhaps amount to be $200 if they are lucky, a reduction of gross income of 0.004%. The amount of tax savings on this amount will not even buy you a morning coffee for a month, and if you are like so many of us making more like half that then it will not even enter into the picture. Not that those folks have a chance in hell of saving anything. Yes I agree, this reduces government income by rewarding those who can save this kind of money but does nothing for those who struggle to put a few nickles away for a rainy day! Of course those who can leave the savings to acclimate in the TSFA will eventual save much more, and it would seem to me that only the affluent can do that.

  • Rural,

    The maximum contribution is $5000/year which is 10% of your examples income, not 20%.

    As to the writer of this peice, you say the TFSA is geared towards the affluent, but that can be said for anything in this world where your expected to use your own funds rather then have them given too you. People with a higher income will always have the potential to put more aside (though statistically they often don’t).

    So the only solution is for the state to deposit money in their names to the TFSA or something similar to keep it fair? Are volunteering your own income to be the first to be additionally “taxed” to cover the costs of funding the retirement of lower income individuals?

  • The CTJ piece by Finn Poschmann – Why We Should Not Fear Expansion of Tax-Free Savings Accounts – is also quite interesting, and points out that more than 8 million accounts have been opened to date.

  • My read on the TFSA is that entices people to reduce savings in RRSPs. This is to the advantage of the state as Rural points out since there are no beneficial income tax reductions on a TFSA only the potential for protected capital gains. On an RRSP you get both protected capital gains plus significant current year tax savings.
    The further problem with both the TFSA and RRSP is that any capital losses cannot be claimed against gains so you need to be very careful in portfolio construction

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