04/07/2015 03:13 EDT | Updated 04/07/2015 03:59 EDT

Doubling TFSA Limit Mostly Helps The Wealthy, Threatens Government Finances: Critics


The Tories’ plan to double the contribution limit on tax-free savings accounts (TFSAs) hasn’t even been officially announced yet, but critics have already said it’s a giveaway to wealthier Canadians and a threat to the financial stability of the federal government.

According to reports at iPolitics and the Toronto Star, Finance Minister Joe Oliver on Tuesday circulated a letter to the Conservative caucus extolling the virtues of raising the TFSA limit to $11,000 from the current $5,500. The move was widely seen as a sign that the policy announcement is imminent.

The Tories initially promised to double TFSA limits in the 2011 election, contingent on them being able to balance the budget. Despite a sharp drop in oil revenue, the Harper government still expects a balanced budget this year.

But critics — including one of the original proponents of a TFSA scheme — say the scheme would do more harm than good. They point to the fact that TFSAs are a tax cut for those who have enough to save; in other words, it does little for low-income Canadians.

“There is absolutely no case — on either economic or equity grounds — for the doubling of TFSA contribution limits,” said J. Rhys Kesselman, who co-authored an influential 2001 paper that argued in favour of the TFSA.

“The great majority of Canadians would enjoy no significant benefits. In fact, they would bear the burdens of an expanded TFSA by enduring reduced public services or bearing the increased taxes needed to offset the lost revenues,” said Kesselman, a professor at Simon Fraser University’s School of Public Policy.

Because investors’ TFSAs accumulate yearly, as time goes on, a larger and larger part of individuals’ portfolios will be sheltered from taxes. According to a recent report from the left-leaning Broadbent Institute, written by Kesselman, within 40 years the TFSA program will be costing the federal government up to $15.5 billion every year, and provinces up to $9 billion a year.

The Finance Department reports that TFSAs cost the government $65 million in 2009, $165 million in 2010 and $160 million in 2011, and the number is expected to continue growing.

“While the initial revenue cost of TFSA doubling is modest, it is a ticking time bomb that would hamstring future governments,” Kesselman said.

But Kesselman’s co-author in the 2001 TFSA article, Finn Poschmann of the right-leaning C.D. Howe Institute, disagrees. In an interview with the Financial Post earlier this year, Poschmann said that two-thirds of TFSAs are taken out by people who earn less than $60,000 a year.

“The fact that some high-income earners are able to take advantage of the same program doesn’t mean it’s a bad program,” he said.

Poschmann argues that doubling TFSA limits will encourage Canadians to save more of their income.

With household debt loads soaring to record highs in recent years, Canadians are saving half as much of their income as they were in the 1990s.

According to StatsCan, the savings rate in Canada over the past 10 years has been 4 per cent, down from 7.9 per cent in the 1990s.

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