A new study says doubling contribution limits for tax-free savings accounts (TFSAs) would cost billions in lost tax revenue and primarily line the pockets of wealthy Canadians.
The report by Broadbent Institute says most Canadians would not benefit from the plan to nearly double the TFSA contribution limit to $10,000 a year, up from $5,500. Instead, they’d bear the burden of reduced public services or higher taxes to offset the lost revenues.
Read: TFSA contributions expected to rise
The study was written by Jonathan Rhys Kesselman, an economist whose research on so-called tax-prepaid savings plans laid the groundwork for the government’s initial introduction of TFSAs in 2009.
Finance Department estimates suggest the accounts reduced Ottawa’s revenues by $65 million in 2009, $165 million in 2010 and $160 million in 2011. Those same estimates projected a hit of $295 million in 2012 and $410 million in 2013.
Read: TFSAs remain popular
Parliamentary budget officer Jean-Denis Frechette released his own report today on the short- and long-term impacts TFSAs will have on government finances. It projects the fiscal impact of the TFSA program this year to be $1.3 billion, or 0.06% of GDP. Two-thirds of the cost is borne by the federal government, the report says. The remaining third is borne by the provinces.
The study estimates that by 2080, TFSA fiscal costs will increase tenfold, reaching 0.57% of GDP. Frechette’s report also called the TFSA program regressive.
Read: More than half of Canadians don’t have a TFSA
“Benefits skew to higher income, higher wealth and older households,” the report says. “Low-income households’ benefits range from half to one-fourth the median between 2015 and 2080.”
Kesselman’s study found that by the time the existing TFSA framework matures in 40 or 50 years, it will cost the federal government as much as $15.5 billion annually. It also predicts that the tax-free nature of the accounts will eventually cost the provinces as much as $9 billion annually—a figure sure to grow larger should contribution limits be doubled.
Economists have long warned that higher TFSA limits would have the greatest impact on public finances years from now, making them attractive election promises, since future governments will be the ones footing the full bill.
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