TFSAs: Who really benefits from new contribution limits?

The fight for the "middle class" is often a key part of every election campaign — and one that is fought on many fronts. The limit on tax-free savings accounts has already presented itself as one. As the Conservatives make good on an promise to double TFSA limits — and Liberals promise to roll it back.

Liberals vow to roll back TFSA limit — Conservatives say that amounts to tax hike on middle class

Tax-free savings account: What's in it for you?

8 years ago
Duration 1:30
James Fitz-Morris provides the answer in a consumer-friendly animated video feature

The fight for the "middle class" is often a key part of every election campaign — and one that is fought on many fronts.

The Liberal leader announced today that he will raise taxes on people earning less than $60,000 a year.- Employment Minister Pierre Poilievre

The contribution limit on tax-free savings accounts has already presented itself as one.

The federal government used last month's budget to make good on an election promise — it "doubled" the contribution limit on tax-free savings accounts.

The TFSA limit is going to $10,000 from the current $5,500. The Conservatives made the promise to double the limit when it was $5,000, which is why the move is often referred to as "doubling," when, technically, it only increases by 82 per cent.

Liberal Leader Justin Trudeau has since promised to roll back the limit to $5,000 and use the extra tax revenue to pay for enhanced family benefits.

The spin

The government is portraying TFSAs as an important savings tool for all Canadians, especially the much-vaunted middle class.

"Most of the people who have maxed out their tax-free savings accounts earn less than $60,000 dollars a year," Employment Minister Pierre Poilievre told the House of Commons last week.

"Some are saving money to buy their first home, or to start their first business. Some are saving to put their children through college or university," Finance Minister Joe Oliver added in the budget speech. "Others are putting away extra income to make their hard-earned retirement more comfortable and enjoyable."

The counter spin

Liberal Leader Justin Trudeau says he isn`t against TFSAs — in principle — but believes the benefits diminish as the program expands.

"The TFSA itself, up to $5,000, is an encouragement to people to save," he said," but the reality is there's not a lot of people who, at the end of the year, have $10,000 laying around that they can invest."

Numbers don't lie — usually

It's usually tough to spin numbers — but not impossible.

It is true that the majority of those who maximize their TFSA earn less than $60,000 a year.

Of the approximately 1.9 million Canadians who hit the $5,500 cap in 2013, 1.1 million claimed income of less than $60,000.

That's a whopping 59.6 per cent of TFSA holders.

However, not everyone has one, and there are about 23 million in that income bracket number who are eligible.

So, when compared to everyone eligible to make contributions, only about 5 per cent are putting as much dough as they can into TFSAs — a far less impressive statistic.

The age effect

Another factor is age.

According to Finance Canada reports, many of those hitting the TFSA maximum in the initial years of the program are transferring existing — taxable — savings into the sheltered accounts.

In fact, if you look at those who are expected to have mature savings accounts — 55 and over — they make up 70 per cent of those who hit the cap.

Of those under 55 and making less than $60,000 (presumably those "saving money to buy their first home, or to start their first business") about 270,000 fully loaded up their TFSAs.

​And that represents only about 1 per cent of the total adult population of the country.

The final rinse

Who benefits seems to be more tied to age than income, although both are obviously factors.

Fully one in five people over the age of 75 maximized their TFSAs — only about 1 per cent of 18 to 24 year-olds have done the same.

And there is another factor to consider when looking at the numbers: Many financial advisors recommend parents and grandparents who have maxed-out their own TFSAs put extra cash in the accounts of their children or grandchildren.

The practice is perfectly legal, shelters the money from taxes, and — even if the money is later withdrawn — the interest earned on it while in junior's TFSA will permanently boost the contribution limit.

The finance department's numbers show there were actually slightly more 18- to 24-year-olds making less than $20,000 a year that maxed out their TFSAs in 2013 than those aged 55 to 64 making between $150,000 and $200,000 who did the same.