Boosting tax-free savings account may cost billions: budget watchdog

Boosting the maximum tax-free savings account contribution could cost the federal treasury billions in lost revenue, according to the Parliamentary Budget Office.

• Doubling TFSA limit will only help wealthy, study argues
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• TFSA withdrawal rule keeps catching unwitting Canadians
• Getting the most out of a TFSA

During the 2011 election campaign, the Conservatives pledged to double the maximum limit as soon as the budget was balanced. The maximum is currently $5,500 annually (not including any unused contribution room from previous years).

But a new report from Canada's budget watchdog says the fiscal impact of the current plan on tax revenues would be $1.3 billion in 2015 — two-thirds of which would be borne by the federal government, with the remaining third carried by the provinces.

"By 2080, the TFSA fiscal costs project to increase tenfold, reaching 0.57 per cent of GDP," the report concludes.

"This long-term total fiscal impact is roughly proportional to the current federal fiscal impact of the RRSP, now the third largest of the 130 federal tax expenditure."

Doubling the limit would increase long-term costs by "roughly one-third," the report predicts.  

The budget watchdog also says wealthier Canadians are more likely to benefit from the plan.

"Benefits skew to higher income, higher wealth and older households. Low-income households’ benefits range from half to one-fourth the median between 2015 and 2080," it states.

That gap would become wider over time as the contribution limit rises, the report predicts.

"TFSA gains for low- and low-middle income households project to plateau in 2040,while PBO estimates that higher-income households will benefit from continued annual increases TFSA contribution room."

Doubling limits would make plan 'more regressive': report

Doubling the maximum limit would make the tax plan "much more regressive," according to the budget watchdog, with wealthier households likely to benefit by as much as four per cent of after-tax income in 2060 — about 10 times what less well-off households could expect to gain.

Those findings are in line with a new report released by the Broadbent Institute on Tuesday, in which economist Rhys Kesselman found no justification "on either economic or equity grounds" for doubling the contribution limit without "correcting deficiencies of the current scheme."

To do so, he said, "would be a dereliction of fiscal responsibility."

According to Kesselman's analysis, which used data compiled from Canada Revenue Agency and Finance Canada reports, Canadians earning less than $200,000 a year would be unlikely to take advantage of the higher limit.

The report warns that Ottawa could lose up to $15 billion a year in revenues when the program fully matures in 40 to 50 years, with provincial coffers taking a combined hit of $9 billion.

"The great majority of Canadians would enjoy no benefits," Kesselman concluded.

"In fact, they would bear the burdens of an expanded TFSA by enduring the reduced public services or bearing the increased taxes needed to offset the lost revenues."

Approximately 11 million Canadians have opened the savings accounts since their inception in 2009.

In a written statement from his office on Tuesday, Finance Minister Joe Oliver said the "vast majority of accounts" belong to low- and middle-income earners.

"The TFSA gives Canadians greater incentive to save, and provides retirees higher after-tax income."

An accompanying backgrounder states that 75 per cent of all account holders made less than $70,000 a year. It also claims "nearly 700,000 seniors" earning less than $22,000 use the program, and "nearly half" of all account holders make less than $42,000 a year.

Doubling limits 'fails a couple of basic tests': Liberals

Liberal finance critic Scott Brison told CBC News that his party believes the existing tax-free account structure is helping middle-income Canadians save for retirement, but he's not sure if doubling the limit makes sense.

"The question you have to ask is, one, can we afford to double the TFSA in the current fiscal environment, and secondly, with economic growth flat-lined and jobs stagnant — does this do anything for jobs and growth? And does it help middle-income families?"

"Doubling the TFSA fails a couple of basic tests," he noted.

"The fairness test — does it help the people that need the help the most? — and secondly, the affordability test: can we afford to do it right now?"

The Liberals would be open to changes that would broaden the number of Canadians who benefit from it, he added. 

During question period, NDP finance critic Nathan Cullen claimed the government was "focused like a laser on schemes to help the wealthy few."

"Do these troubling new reports give the finance minister any pause, or is he really so hell-bent on finding new ways to give tax breaks to the wealthy and the well-connected?" he wondered.

In response, Minister of State for Finance Kevin Sorenson reminded the House the NDP had voted against the budget that included those measures.

"We know that they would raise taxes for Canadians, we know they would take away the TFSA," he added.

"Canadians understand that they are better off with this Conservative government."