TFSA Limit Increase Could Cost Canada Billions and Only Benefit The Ultra-Rich

Posted on February 25, 2015 and updated February 25, 2015 in Life Insurance Canada News 4 min read
TFSA increase costs billions

Late last year, the Harper government said they were going to keep to their promise of increasing the annual contribution amount for Tax-Free Savings Accounts to $10,000. Recently, two separate studies were released stating that an increased limit on TFSAs will cost the government billions of dollars and will work towards the benefit of the wealthy. These reports come from Parliamentary Budget Office and the Broadbent Institute.

Parliamentary Budget Office Tax-Free Savings Account Report

In the report from the Parliamentary Budget Office (PBO) on Tax-Free Savings Accounts,

“PBO estimates that the TFSA program is regressive, overall. Benefits skew to higher income, higher wealth and older households.”
In this year alone, PBO estimates a loss in revenue for both federal and provincial governments to be $1.3 billion in taxes alone.

PBO’s conclusion is that the gains for low- and low-middle income households will plateau in 2040 while higher income households will continue to benefit.

“TFSA gains for low- and low-middle income households project to plateau in 2040, while PBO estimates that higher income households will benefit from continued annual increases TFSA contribution room”

Broadbent Institute Report Double Trouble:The Case Against Expanding Tax-Free Savings Accounts

Author of Broadbent Institute’s report, Jonathan Rhys Kesselman, had similar findings to PBO’s report. In fact, the Broadbent Institute takes their stance one step further stating Canadians are going to end up having to pay for the increase.

“The great majority of Canadians would enjoy no significant benefits. In fact, they would bear the burdens of an expanded TFSA by enduring the reduced public services or bearing the increased taxes needed to offset the lost revenues.”

Broadbent Institute believes that Canadians will have to pay for the increased maximum contribution because the loss of revenue will be too great for the Canadian government to handle.

“By 2050, annual program costs could rise by $4 billion to several times that figure.”

To get an idea of how to maximize the benefits of these programs we will frame the following scenario around a couple earning a combined income of $280,000 per year with two kids. First, they would both have to contribute the maximum $24,930 in their RRSPs. Next, $5,000 in RESP contributions would need to be made for both children to maximize the 20% Canadian Education Saving Grant (CESG). Now, with the new limit on TFSAs, this couple would have to deposit $10,000 each in order to reach the new maximum amount. If you want to take advantage of all of these savings accounts you would have to save $74,860 per year in registered funds.

BMO Household Savings produced a report from 2013 that calculated the average amount was saved throughout the year per household. The report found that Canadian household savings, which include both RRSPs and TFSAs, averaged less than $9,000.

We reached out to personal finance expert Big Cajun Man and he shared a contrary view:

“If folks aren’t putting the maximum in their TFSA, I am not sure what they are thinking. The TFSA while not as flexible as a “Savings account” should be the one thing Canadians should be putting money into (not just “rich Canadians”), for savings.“

Let us know what you think about the proposed TFSA limit increase in the comments section below.

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My Own Advisor
My Own Advisor

Increasing the TFSA limit to $10k per adult will make the RRSP largely obsolete for lower-income Canadians. This is a good thing, because once after-tax income is earned, contributions can be made and can grow tax-free for good; unlike the tax-deferred RRSP.

For higher-income Canadians, the TFSA is also a gift. Higher-income Canadians can use a combo of TFSA and RRSP to save for retirement. Maxing out both accounts would be difficult for anyone but it’s certainly a goal worth striving for in my book.

Let the debate continue! 🙂

Cheers,
Mark

LSM Insurance
LSM Insurance

Thanks Mark. What are thoughts on the example in the article, the couple with 2 Children making a $140,000 each. All things being equal how would you prioritize RRSPs, RESPS and TFSAs

Anup b.
Anup b.

I think the increase is the logical move and should definitely be limited to no more than 10k I think the other savings vehicles such as rrsp and resp is not accessible to all and the tax implications on the backend don’t serve the retirement need entirely . I think rrsp has its place but no longer need to make maximum when you can save tax free and capital gain with no tax in the tfsa , it’s a no brainer to 1. TFSA 2. Resp if you have kids and 3. Rrsp in that order and broken down to… Read more »

LSM Insurance
LSM Insurance

Thanks Anup. I think the RRSP versus TFSA argument will continue to heat up once the limit increase comes in place. Rob Carrick of the Globe and Mail had an interesting article on the topic here http://www.theglobeandmail.com/globe-investor/personal-finance/retirement-rrsps/tfsas-vs-rrsps-the-gen-y-guide/article16910787/