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TFSA Disproportionately Benefits Older, Wealthier Males, Study Finds

Harper's Favourite Tax Break Benefits Old, Rich Males: Study

Tax-Free Savings Accounts were sold by the Conservative government as a way of helping all Canadians to save money, but new research suggests they disproportionately help older white males.

A study published in the latest edition of the Canadian Tax Journal argues the four-year-old tax break will do little to help low-income earners save money, while creating a cumulative effect over time that will help high-income earners.

Another study published at the CTF estimates that TFSAs will reduce the federal government’s tax base.

TFSAs allow Canadians to put aside up to $5,000 per year. While they are not tax-deductible, like RRSPs, they are exempt from taxes on any gains made on the money in the accounts, such as interest.

“Canadians from all income levels and all walks of life can benefit,” the government says of the tax break.

But study authors Maureen Donnelly and Allister Young looked at the effects of Great Britain’s version of the TFSA, known as Individual Savings Accounts (ISAs), on which the Canadian tax break is modelled, and found that the higher one’s income, the likelier that person is to have a tax-free account.

The U.K.’s tax-free accounts have been available since 1999, providing more data on the effects of the tax break than is available in Canada, where they have been in existence since 2008.

While one in three British taxpayers now have a tax-free account, that drops to as low as one in 20 among low-income earners, the study found.

“The introduction of ISAs has done little, if anything, to break down the barriers to saving faced by low-income individuals,” the study says. Not surprisingly, the main reason for not participating in the accounts was a lack of money to put in them.

The study also found that, since the British accounts were introduced, the participation rate among low earners has been declining, while the participation rate for high earners has been growing.

“The typical ISA holder is male, belongs to the highest-income cohort, and is approaching retirement,” the study found.

Meanwhile a study from UBC economics professor Kevin Milligan, also published at the CTF, estimates that the government could have a hard time raising revenue as TFSAs grow older and larger.

Milligan notes that, because TFSAs accumulate over time, eventually Canadians will have a large portion -- if not all -- of their assets sheltered from taxation altogether.

“Because unused contribution amounts accumulate over time, the TFSA will have much larger consequences when it becomes a mature system,” Milligan writes. “For example, while today’s 40-year-old will have only $20,000 of available TFSA contribution room, an individual aged 18 today will begin accumulating contribution room in 2012, potentially affording him $110,000 of room by age 40 (assuming an annual limit of $5,000 for each year). This means that the TFSA will affect coming generations much more than we have observed in its first few years.”

While that may be good news for savers, it may be bad news for the government’s balance sheet, which will see “a noticeable decline in the federal tax base and an even bigger impact on federal revenues,” Milligan writes.

“These simulations suggest that a mature TFSA system results in an appreciably different income tax than exists today,” he concludes.

Prime Minister Stephen Harper ran for re-election in 2011 on a promise to double the limit on TFSAs, to $10,000 per year. However, that is contingent on the federal government returning to balanced budgets, which is not expected to happen for several more years.

The TFSA have been a tremendous success,” Harper said during the election. “This is another major step forward to allow Canadians to keep more of their hard-earned money and to save and invest in their own priorities.”

The Donnelly and Young study echoes arguments other economists have been making about the TFSA for a few years now.

An actuarial report last year estimated that TFSAs are giving wealthier Canadian access to benefits meant for the poor, because money sheltered in TFSAs isn't counted towards your income when calculating eligibility for aid.

Writing in the Globe and Mail last year, Armine Yalnizian of the Canadian Centre for Policy Alternatives argued that TFSAs “will make the rich and powerful more rich and powerful. The rest of us will be left begging for funding for basic services.”

She suggested that, instead of increasing the limit on TFSAs, the total lifetime contribution amount should be capped at $50,000.

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