Tax-Free Savings Accounts were sold by the Conservative government as a way of helping all Canadians to save money, but new research suggests they disproportionately help older white males.
A study published in the latest edition of the Canadian Tax Journal argues the four-year-old tax break will do little to help low-income earners save money, while creating a cumulative effect over time that will help high-income earners.
Another study published at the CTF estimates that TFSAs will reduce the federal government’s tax base.
TFSAs allow Canadians to put aside up to $5,000 per year. While they are not tax-deductible, like RRSPs, they are exempt from taxes on any gains made on the money in the accounts, such as interest.
“Canadians from all income levels and all walks of life can benefit,” the government says of the tax break.
But study authors Maureen Donnelly and Allister Young looked at the effects of Great Britain’s version of the TFSA, known as Individual Savings Accounts (ISAs), on which the Canadian tax break is modelled, and found that the higher one’s income, the likelier that person is to have a tax-free account.
The U.K.’s tax-free accounts have been available since 1999, providing more data on the effects of the tax break than is available in Canada, where they have been in existence since 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.
The study also found that, since the British accounts were introduced, the participation rate among low earners has been declining, while the participation rate for high earners has been growing.
“The typical ISA holder is male, belongs to the highest-income cohort, and is approaching retirement,” the study found.
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.
“Because unused contribution amounts accumulate over time, the TFSA will have much larger consequences when it becomes a mature system,” Milligan writes. “For example, while today’s 40-year-old will have only $20,000 of available TFSA contribution room, an individual aged 18 today will begin accumulating contribution room in 2012, potentially affording him $110,000 of room by age 40 (assuming an annual limit of $5,000 for each year). This means that the TFSA will affect coming generations much more than we have observed in its first few years.”
While that may be good news for savers, it may be bad news for the government’s balance sheet, which will see “a noticeable decline in the federal tax base and an even bigger impact on federal revenues,” Milligan writes.
“These simulations suggest that a mature TFSA system results in an appreciably different income tax than exists today,” he concludes.
Prime Minister Stephen Harper ran for re-election in 2011 on a promise to double the limit on TFSAs, to $10,000 per year. However, that is contingent on the federal government returning to balanced budgets, which is not expected to happen for several more years.
“The TFSA have been a tremendous success,” Harper said during the election. “This is another major step forward to allow Canadians to keep more of their hard-earned money and to save and invest in their own priorities.”
The Donnelly and Young study echoes arguments other economists have been making about the TFSA for a few years now.
An actuarial report last year estimated that TFSAs are giving wealthier Canadian access to benefits meant for the poor, because money sheltered in TFSAs isn't counted towards your income when calculating eligibility for aid.
Writing in the Globe and Mail last year, Armine Yalnizian of the Canadian Centre for Policy Alternatives argued that TFSAs “will make the rich and powerful more rich and powerful. The rest of us will be left begging for funding for basic services.”
She suggested that, instead of increasing the limit on TFSAs, the total lifetime contribution amount should be capped at $50,000.
What is the TFSA?
The <a href="http://www.tfsa.gc.ca/" target="_hplink">Tax-Free Savings Account</a> (TFSA) came into effect on January 1, 2009. Any Canadian aged 18 or older can invest $5,000 each year in the account and any capital gains earned on the money will not be taxed. Money can be withdrawn from the account at any time.
Who's Using The TFSA?
The measure has been popular, but who is benefitting most has become a matter of fierce debate. In just under three years, 41 per cent of eligible Canadians have opened a TFSA. Nearly half, 46 per cent, of those who earn more than $100,000 per year have opened one, more than in any other income group, according to <a href="http://www.newswire.ca/en/story/851833/three-years-later-majority-of-canadians-still-unclear-about-tfsas" target="_hplink">a survey recently conducted by Angus Reid for ING Direct</a>. How much money has been deposited by each earnings group remains a mystery. "I think the evidence shows that that's the kind of tax change, that while it's sold to the public as providing more choice and opportunities and everything else, really the only people who can benefit from it are the ones that have enough disposable income," <a href="http://www.queensu.ca/news/media/experts/beach-charles-m" target="_hplink">says Charles Beach, an economist at Queen's University</a>. "Someone who's unemployed or living on low income, they simply don't benefit from that. So that's the kind of tax cut that I think favours those with the higher income."
TFSA Lifts All Boats?
The Fraser Institute's Niels Veldhuis points out data on the TFSA remains scarce and that we shouldn't rush to judgment. That said, he argues that any vehicle which leads to more savings must be good for the economy. "It is positive regardless who is using it. The more savings we get, the more investment we get, the better off we all are." It's a matter of "fundamental economics," asserts Conservative Minister of State for Finance Ted Menzies. "Investments put in a bank are utilized by the banks to lend out to grow other businesses."
A 'Lunatic' Policy?
Armine Yalnizyan, senior economist at the Canadian Centre For Policy Alternatives (CCPA), questions the supply-side argument that savings will translate into investment and investment into jobs and economic growth, especially since the TFSA was introduced during the "nadir of the economic meltdown." She argues consumer demand is more important than investment for stimulating growth. "In the middle of this economic calamity, the federal government introduces a measure that does the opposite of what every other nation around the world is trying to do, which is to stimulate aggregate demand. Instead the government is favouring a program that tells people to pull money out of the economy. Stop spending, start saving. That is lunacy, there is no other word for it."
More And Bigger TFSAs
Soon, Canadians will likely get the chance to put away even more money into their TFSAs. The Conservatives promised during the last election campaign to increase the annual contribution limit to $10,000 per year once there is a return to balanced budgets.