TFSA rule changes: Will more mean less?

The federal budget's near doubling of the amount Canadians can put in a tax-free savings account will cost governments billions in foregone tax revenue. Is that a good thing ... or will future Canadians be paying the price?

Savers will benefit, but future governments will have less money to spend

Stephen Harper: "That's utterly false" TFSAs will be costly

8 years ago
Duration 4:08
Prime Minister Stephen Harper disputes criticism of his plan to increase the limits of tax-free savings accounts to $10,000 a year.

The prime minister was firm. No, Stephen Harper said, his government's decision to nearly double the contribution limit for tax-free savings accounts won't hobble cash-strapped governments of the future by costing them billions in foregone tax revenue.

"The TFSA will not be an expensive problem down the road. That's utterly false," he said in Winnipeg on Thursday. "What will happen over time is that the monies held in tax-free savings accounts will grow. That's a very positive thing. It's not going to create a deficit. We have balanced budgets projected for many, many years to come."

Harper's comments came amid a flurry of criticism from opposition politicians and some economists who say the decision to dramatically boost tax-free account contribution limits will pose long-term revenue headaches for future governments.

His own finance minister didn't help the government's nothing-to-worry-about position when Joe Oliver suggested on Tuesday that his budget's increase of the account limit might indeed be a problem for Canadians to deal with — but only far in the future.

"I heard that by 2080, we may have a problem [due to TFSAs]," Oliver said to the CBC's Amanda Lang. "Well, why don't we leave that to Prime Minister Stephen Harper's granddaughter to solve that problem."

Finance Minister Joe Oliver takes part in a TV interview after tabling the federal budget in the House of Commons on Tuesday. A near doubling of the contribution limit on tax-free savings accounts was one of the most talked about parts of the budget. (Justin Tang/Canadian Press)

The 2080 date was a reference to a February report from the parliamentary budget officer that a doubling of the tax-free savings account limit to $11,000 could have an additional fiscal impact for federal and provincial governments of almost $40 billion by 2080.   

No sooner had Oliver uttered those words about 2080 and the PM's hypothetical granddaughter than the opposition parties accused him of appearing to let future generations worry about any potential revenue problem his budget proposal might cause.

Oliver denies that the limit expansion will push the problem into the future for the sake of short-term gains now. "We're not talking about short-term gain," he told reporters in Kitchener, Ont., on Thursday. "We're talking about short-term, long-term, medium-term gain. When you provide more opportunity for people to save, they're going to be contributing to the economy."

So how much of a potential revenue drop are we talking about? In the budget documents, the Finance Department estimates that the new account limits would lower federal revenues by an additional $1.1 billion over the next five fiscal years. Finance estimates that 20 years from now, the total federal revenue cost could amount to 0.3 per cent of total federal tax revenues.

How much will the new account limits cost federal and provincial treasuries by 2050 or 2080? That obviously depends on a whole host of factors. But just about everyone who's looked at this issue says the measure will eventually lower total tax revenues by billions per year.

Exponential growth

It's easy to see how the costs — or benefits, depending on one's point of view — could build exponentially. Someone who has never contributed to an account before can now drop $41,000 into one. In another 10 years, that contribution limit would rise by $10,000 a year to $141,000 — $282,000 for a couple. All income earned by that money would be tax-free.

Federal figures show that 1.9 million Canadians contributed the $5,500 maximum in 2013 — almost a fifth of the 10.7 million account holders. Economists are already starting to muse about the likelihood of a future cap on contributions. 

UBC economist Kevin Milligan, who has extensively studied the effect of tax-free savings accounts, writes that the newly boosted limit "will move us quite far along the path of eliminating the taxation of investment income within 10 years." Whether that's good or bad for the economy is a worthy debate, he says, "but we should not pretend that nothing will change until 2080." 

Rhys Kesselman, a professor in the School of Public Policy at Simon Fraser University, agrees. His research into ways of helping low-income Canadians save for retirement helped lead to the creation of tax-free savings accounts back in 2008. He says the tax revenue impact of the accounts — and the higher contribution limits — will be felt long before 2080.

"Most of the revenue impact will be seen by mid-century," he told CBC News on Thursday. "It's 35 or 40 years until the system gets mature — enough people will have had enough years to contribute." 

Federal and provincial governments are not going to have the revenues they need.— Rhys Kesselman, School of Public Policy, Simon Fraser University

Kesselman has long been on the record as a critic of a big boost in the account limits, saying this will tend to benefit wealthier Canadians. Low- and middle-income Canadians, he says, will bear the cost of expanded contribution limits because they will face increased taxes to offset lost revenues, and he says they will be the ones most affected by reduced public services.   

"Federal and provincial governments are not going to have the revenues they need," he says. "A lot of spending is not going to happen or governments are going to have to raise tax rates." 

He notes that the provinces aren't "squirming" now, because the initial impact of the new limit is low. But he says the provinces should be concerned because the change will put more and more pressure on provincial finances, as more people shelter more investment income.


8 years ago
Duration 2:17
How are tax-free savings accounts different from registered retirement savings plans? James Fitz-Morris explains your options

Major implications

Jack Mintz, who is the Palmer Chair at the University of Calgary's School of Public Policy, argued in a commentary this week that the boost in contribution limits will have major budgetary and political implications in the future. But he says those who see smaller government (and less government spending) as a good thing will find this latest move eminently sensible.

"Those who want more public spending will find the TFSA limit increase to be an unwelcome development, since future governments will have less money to spend," he writes. "For those wishing smaller governments, the new limit is the antidote to larger governments." 

The Harper government, for its part, says the numbers show that the economy can afford beefed-up tax-free savings accounts — now and in the future.

Critics and supporters seem to agree on one point — that the new rules will change this country's economic and political landscape. The debate over the direction, amount and quality of that change has just begun.   

TFSAs by the numbers (2013):

Number of account holders: 10.7 million

Number of Canadians contributing the maximum amount: 1.9 million

Total annual contributions: $40.2 billion

Total annual withdrawals: $14.6 billion

End-of-year market value: $118.3 billion

Source: Department of Finance 


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