Last week the federal government announced a doubling of the annual contribution to the Tax Free Savings Account (TFSA). Ensuing immediately has been a debate about the merits of this tax policy change.
TFSAs can play an important part of an individual's savings needs. When they were introduced in 2009, the government claimed that within 20 years, 90 per cent of Canadians could have all their savings assets in tax-efficient vehicles (RRSPs, RESPs, RDSPs, TFSAs etc). This is a laudable goal.
Critics claim only 15 per cent of account holders contribute the maximum per year to their TFSA or that some do not even contribute from one year to the next. These are weak arguments. Should we consider reducing RRSP limits if they aren't used? People are not saving enough for their retirement and increasing the TFSA limits sends a message that the government will not penalize savers for saving more.
While people might not have $10,000 to contribute to a TFSA every year, it does not mean they are unable to take advantage of its benefits. Consider home ownership in Canada is at its highest recorded levels with over two thirds of Canadians (69 per cent) owning their home. Since unused TFSA contribution room can be carried forward to future years, a portion of the proceeds from a sale of a house can be deposited into a TFSA, thereby continuing the tax-efficient treatment of equity built up in a principal residence.
Perhaps the most puzzling is that the same critics claim the increased contribution limit will plunder the treasury in future years. Critics cannot have it both ways. By definition, if TFSAs aren't used, tax isn't sheltered. But let's stick with lower future tax revenues for a moment. In reality, government relies very little on its annual revenue from taxes on investments and capital gains. For perspective, when someone projects that in 40-60 years the TFSA could cost governments up to $40B per year, the annual federal government budget could be well over $1 trillion and GDP could be well north of $10 trillion.
Additionally, none of these projected revenue reductions considers the positive effects from increased consumption or other economic activity that will occur from extra wealth in the hands of the individuals who created it. It also helps the efficient allocation of capital as it removes tax implications from some investment decisions. Furthermore, increased personal wealth will raise the standard of living of many retired individuals. This will lower the burden on future governments for social support programs for these people. Targeted initiatives can then be directed to the people who need help the most, which no one disputes currently as being elderly, widowed women.
Even if the revenue loss figure were true, what's so wrong that? Reducing a government's revenues can increase the level of fiscal discipline by encouraging governments to be run more efficiently.
Finally, the TFSA is not just for people who have maxed out on their other retirement accounts. In fact, it might be more advantageous for savers in the lower/middle income brackets to use the TFSA instead of an RRSP, since TFSAs have no withdrawal restrictions. This provides savers with more flexibility and additional choices. Contrasted with an alternative option of the one-size fits all approach of increasing mandatory Canadian Pension Plan contributions, the TFSA enables greater customization and control for each individual's savings needs and risk profile.
We ought to applaud initiatives that provide savers with more choices, encourage self-determination and empower individuals to take greater control over their financial futures. The TFSA does just that.
Adam Chambers is the former director of policy to Canada's Minister of Finance and holds a JD/MBA from Western University
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