Doubling TFSA limit will only help wealthy, study argues

A new study into tax-free savings accounts says there is no justification "on either economic or equity grounds" for doubling the contribution limit without conditions.

In the last election campaign, the Conservatives promised to double the annual savings account contribution limits once the budget is balanced — and it remains among the few big-ticket promises that have not been fulfilled.

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However, economist Rhys Kesselman says the promise needs a rethink.

"Raising the limits for TFSA contributions without conditions and without correcting deficiencies of the current scheme would be a dereliction of fiscal responsibility."

Kesselman holds the Canada research chair in public finance at Simon Fraser University and is also a research fellow with the Broadbent Institute. That think-tank, founded by former NDP leader Ed Broadbent, is releasing Kesselman's study.

The Parliamentary Budget Office is expected to release a similar report on the tax-free accounts early Tuesday.

The Broadbent Institute study looks at who is contributing to the accounts and how much — and concludes only the wealthy would benefit from a doubling of the limits.

Few hit existing limit

Compiling data from Canada Revenue Agency and Finance Canada reports, Kesselman concludes Canadians earning less than $200,000 a year have more than enough room as it is to build retirement savings with the current limits on tax-free accounts and registered retirement savings plans.

It is estimated 11 million Canadians have opened the savings accounts since their inception in 2009.

In the first year, 64 per cent of account holders contributed the maximum $5,000 — mostly attributed to people transferring other non-registered savings into the tax-sheltered accounts.

By 2012, the latest year for which there is data, less than a quarter of Canadians reached the annual limit, and the report says for those under 60 years of age the rate is less than 16 per cent.

Since then, the annual limit has been increased to $5,500.

Help imbalance

In 2001, Kesselman co-wrote a paper proposing tax-free savings accounts as a means to encourage and help low-income Canadians to save for retirement.

One of the key features is that income derived from the account holdings — either through interest, return on investments or dividends — does not need to be claimed for income tax purposes.

That means it does not get factored in when calculating income supports for the elderly such as Old Age Security or the guaranteed income supplement.

While this helps low-income Canadians by not punishing them later by clawing back these supports, wealthy Canadians can also start collecting "welfare for seniors" by living off tax-free savings instead of an RRSP, registered retirement income fund​ or other pension income.

Finance Minister Joe Oliver defends the program, saying the "vast majority" of the estimated 11 million Canadians who have opened tax-free accounts are low- and middle-income earners.

"Our government introduced tax-free savings accounts as a way for Canadians to save for retirement, their kids' education and the down payment on a house," Oliver said.

Pays to start young

Kesselman estimates that those who start saving in their 20s under the current rules could sock away between  $700,000 and $4 million over their lives, depending on the rate of return on their investments.

Doubling the limits boosts the top estimate up to $8 million.

All of this will have an effect on both federal and provincial coffers.

Kesselman says when the program fully matures after 40 or 50 years, Ottawa will be losing more than $15 billion a year in revenues, while provinces will lose a combined total of $9 billion in forgone revenues annually.

He notes that in comparison, the modified income splitting the Conservatives introduced last year is expected to cost about $2 billion annually, but suffers from the same criticism — namely, that it overwhelmingly benefits those with higher incomes.

"The great majority of Canadians would enjoy no benefits," Kesselman concludes about a doubling of current limits. "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."