Fulfillment of the Conservative government’s 2011 electoral promise to double the annual limit on contributions to Tax-Free Savings Accounts (TFSAs) to $10,000 has raised many questions about who will gain and who will not. In defence of its TFSA limit hike, the government has cited figures showing that nearly 60 per cent of TFSA holders who maximized their cumulative limits in 2013 had individual incomes below $60,000. This view has been mirrored in media and expert claims that the gains from the increased limits will be widely dispersed.
This study carefully examines the available data on TFSAs to gain deeper insights into the true distributional impacts of the 2015 hike to contribution limits. It assesses past patterns of TFSA participation and maximization — not only for persons holding TFSAs, but for the entire population eligible to have TFSAs. The untold story is that fewer than two out of every five eligible Canadians had availed themselves of TFSAs by 2013. In contrast, 62 per cent of eligible persons had not even opened a TFSA. By 2013, only one out of 15 eligible persons — or 6.7 per cent — had maxed out the TFSA limits, and by the start of 2015 it would have been an even smaller proportion.
This broader purview of past TFSA behaviour patterns provides a sharply different understanding of the real effects of raising the TFSA limits. This study finds that the benefits will in fact be concentrated among higher-income and older individuals. Even the large relative gains for seniors are found to be a transitory effect that will decline in future years, as seniors appear to be mainly shifting taxable assets into TFSAs to cut their income taxes and raise their public pension benefits rather than increasing their savings. The sharp decline in the number of people maxing out the TFSA limits across age and income groups provides evidence that the TFSA hike will encourage relatively little new savings and mainly evoke asset shifting and income splitting by wealthier Canadians holding the most taxable assets.
‘Behind the Headlines: Who’s Really Benefiting from Higher TFSA Limits?’ is licensed under CC BY-NC 4.0
