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That’s the number of us who have opened Tax-free Savings Accounts in the six years since they’ve been around. We love TFSAs and have been stuffing cash in them at a blistering clip. These accounts allow you to put in money on which you’ve already paid tax, but what’s inside grows tax-free. These accounts now hold investments worth $ 118 billion, according to the Canada Revenue Agency. The number of account holders has grown by 25 per cent in the past two years.
Part of the TFSA appeal is that they benefit all income groups. For those heading into retirement a TFSA hasn’t been around most of their working life. Lower income earners can save and not have the money count as income for the purposes of Old Age Security (OAS) and Guaranteed Income Supplement (GIS). For middle and higher income people it’s a place to set a little more aside. Young savers can use it to build a nest egg for a home.
The coin toss in an election year is whether the Tories will make good on their promise to make TFSAs even more attractive by doubling the limit to $ 10,000, or $ 11,000 a year, depending on the interpretation of their pledge.
Prime Minister Stephen Harper said he would do that when the federal budget was balanced. Last fall that seemed likely, but the dramatic drop in the price of oil makes balanced books less of a certainty now.
We’ll find out in a budget expected by the end of April or early May. While the odds of a TFSA bump aren’t as good as they were in November, don’t count it out. It need not be an all or nothing proposition. It could easily be something in between. Anything that encourages people to save when savings rates are at record lows and debt at record highs should be viewed as a good thing.
Also read: Hey, where’s my $ 11,000 TFSA limit?
Two recent studies urge Finance Minister Joe Oliver to stand pat and leave the limit alone. They say it would be bad public policy, costing the federal treasury far too much with a big impact 40 or 50 years down the road.
Jonathan Rhys Kesselman, an economist in the School of Public Policy at Simon Fraser University says in Double Trouble: The Case Against Expanding Tax-Free Savings Accounts, the increase wouldn’t add much to national savings.
He says lower income Canadians do not have the money to take advantage of the extra room and so the only advantage is to higher income Canadians. Presumably, though there are middle-income Canadians, who might find some benefit too.
The Parliamentary Budget Office made a similar argument. It says that if the TFSA limit is doubled, by 2080 the room inside TFSAs will grow from $ 1-trillion today to $ 9 trillion, creating a huge pool of money outside the tax system’s grasp.
There is no real proof of these dire predictions, since proof can only come after the fact. There are too many variables at play. Both studies make what Malcolm Hamilton, a senior fellow at the C.D. Howe Institute and former chief actuary with HR consultant Mercer, calls “heroic assumptions” about the future. That way the conclusions become more dramatic.
For example, you cannot know what the economy will look like in 2080. Or what will happen to interest rates, or the labour force. Would all this extra saving space be used? Only a small portion of the current TFSA room is being used. The same goes for RRSPs.
The Parliamentary Budget Office says there’s $ 1 trillion of TFSA contribution room available. The CRA says the current value inside them just 12 per cent of that, or $ 118 billion. In other words, 88 cents of every $ 1 of room is unused.
When it comes to RRSPs, after nearly 60 years, some 94 per cent of available room is unused there. That is probably not the answer you would have expected from a study in 1957 speculating on the dangers of RRSPs to the tax system.
“There’s no way to make an accurate estimate of what this might cost,” Hamilton says. “You have to predict the future and people’s behavior which you can’t do.”
Hamilton says neither study persuades him of a dire outcome. The loss to the federal treasury as extrapolated is “relatively inconsequential” when set against the size of the economy in 60 years, he believes.
“These studies tell me what I already know, which is that most of the vehicles that let you profit from tax exemptions favour people with money. That’s not a surprise. But there are a lot of things for people with low incomes too – OAS, GIS, as examples.”
Hamilton, the taxpayer would be happy to have his TFSA doubled. But he doesn’t think it’s necessary or will improve retirement savings rates. He says expanding the limit sets us up for dueling tax shelters, forcing people to make a confusing choice between RRSPs and TFSAs.
The tax system offers advantages for all income groups, based on notions of fairness. Not all groups benefit from all things. All benefit from some things. So picking one piece of a hundred moving parts and looking at it in isolation doesn’t prove one way or the other that’s it’s good or bad.
The only way to do that is make the change, observe what happens and adjust as necessary.
More columns by Adam Mayers
– The 2015 annual TFSA limit is $ 5,500.
– Unused portions can be carried forward.
– You contribute to a TFSA with after-tax money, but the amount inside grows tax free.
– Whatever you take out this year cannot be put back until the next tax year.