A new study in Canada into tax-free savings accounts (TFSA) 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, CBC News reported.
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.”
The Parliamentary Budget Office is expected to release a similar report on the tax-free accounts on Tuesday.
Few Hit
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 percent 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 percent.
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.
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.
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.
