Tax-Free Savings Accounts: Expanding, Restricting, or Refining?

The 2015 near-doubling of the contribution limit for tax-free savings accounts (TFSAs) raises fundamental questions about the potential benefits for individuals and the economy; it also presents an occasion for examining deficiencies of the original TFSA scheme. This study provides the first in-depth critical policy analysis of TFSAs based on an assembly and synthesis of key available statistics on the provision. The pre-existing TFSA contribution limit is found to be more than adequate for almost all individuals, except for very high earners along with some older workers and retirees. Relatively low and declining proportions of eligible persons were utilizing the maximum limit even prior to the hike. Fairly high TFSA maximization rates by seniors at moderate and middle incomes are found to be transitory phenomena resulting from the scheme's short existence. The sharp increase in the TFSA limit will, over the long run, be of highly disproportionate benefit to top earners and wealth holders and of little benefit to the great majority of workers and seniors. The pre-existing levels of access to tax-sheltered saving via TFSAs, registered retirement savings plans (RRSPs), and workplace pensions were more than adequate for most. Those most able to exploit the higher limit are found to be engaged more in shifting taxable assets into their TFSAs and income splitting with their spouses via TFSAs than undertaking new saving. Thus, the higher TFSA limit will also yield minimal, if any, benefits for the economy at large. The study further assesses evidence on the long-run cost of the TFSA provision for federal and provincial income tax revenues and the old age security and guaranteed income supplement programs; the resulting figures, though subject to considerable uncertainty, are very large. Public perceptions that enlarged TFSAs will be of widespread benefit to many individuals and of little consequence for others not utilizing TFSAs are thus incorrect. The unconditional increase in the TFSA limit cannot be justified on economic or equity grounds, but the scheme has additional deficiencies that also require policy reforms. The study explores a range of possible remedies for TFSAs that would provide individuals who have excess RRSP contribution room with the option of increasing their TFSA limit; place bounds on lifetime TFSA contributions or accumulated balances; limit TFSA eligibility to individuals below a specified income level; constrain the currently unlimited immunity of TFSAs from income-tested benefit programs; and/or allow pooled registered pension plans to offer TFSAs. In short, the TFSA provision is overdue for reforms that could expand or restrict it in various ways while refining the scheme for more effective outcomes. Editors' note: This article was written before the 2015 federal election. During the election campaign, the Liberal Party indicated that, if elected, it would reverse the expansion of the tax-free savings account (TFSA) contribution limit introduced by the Conservative government in the 2015 budget. However, at the time the article went to press, the new government had made no formal announcement about the specific changes it proposes to make to the TFSA regime.