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"Tax-Free": The Effect of a Heuristic Cue on the Choice Between a TFSA and an RRSP

Author

Listed:
  • Leslie Berger

    (Lazaridis School of Business and Economics, Wilfrid Laurier University, Waterloo, Ontario)

  • Jonathan Farrar

    (Lazaridis School of Business and Economics, Wilfrid Laurier University, Waterloo, Ontario)

  • Ruth Pogacar

    (Haskayne School of Business, University of Calgary)

  • Lu Y. Zhang

    (Ted Rogers School of Management, Toronto Metropolitan University)

Abstract

The authors investigate whether and, if so, the extent to which a heuristic cue, the term "tax-free," contained in the name of one of the two primary tax-sheltered savings plans in Canada—the tax-free savings account (TFSA)—biases individuals' saving preferences relative to the registered retirement savings plan. On the basis of the heuristic-systematic model of information processing, the authors predict that the term "tax-free" is a favourable heuristic cue that will suppress systematic processing and bias individuals toward selecting a savings plan with this term in its name. They conduct three experiments to test this proposition. Overall, the results suggest that individuals have a clear preference for a tax-sheltered savings plan with "tax-free" in its name—regardless of the content of accompanying explanatory information. The preference for savings plans with "tax-free" in the name may suggest the need for more education and financial advice to reduce the use of heuristics.

Suggested Citation

  • Leslie Berger & Jonathan Farrar & Ruth Pogacar & Lu Y. Zhang, 2023. ""Tax-Free": The Effect of a Heuristic Cue on the Choice Between a TFSA and an RRSP," Canadian Tax Journal, Canadian Tax Foundation, vol. 71(1), pages 1-32.
    • Handle: RePEc:ctf:journl:v:71:y:2023:i:1:p:1-32
    DOI: https://doi.org/10.32721/ctj.2023.71.1.berger
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