Andy McKay

Apr 18, 2011

Doubling TFSA? Not sure about that

Stephen Harper wants to double the TFSA, from its current $5,000 to $10,000. Like his other promise for income splitting for families with children, this will only come into effect if the budget is balanced (that's a really helpful get out clause for the tories, but let's worry about that later).

What's the point of this doubling of the allowance?

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

National Post

TFSA's allow people to shelter savings away from the tax man and let them grow tax free. This is a good thing for savers, for banks. It helps level the playing field as lower income families who may not have access to sophisticated financial service can get some of the same shelter that higher income families do.

But there comes a point where it focuses on the higher income earners. The average income in Canada is $46,900 ($30,000) for women (Statcan). So that means $10,000 a year in TFSA is somewhere between 30% and 21% of the average income. When you consider the amount of income that's spent on housing and living expenses you get a small amount of money left for savings. Then there's RRSPs to fill up and if you have kids there are RESPs.

That leaves a small amount of money left for TFSAs and more often than not a choice between TFSA or RRSP.

As a result, there are only 4.8 million TFSA accounts. Thats just 18 per cent of eligible Canadians (18 and older), and a smaller share of Canadian households.

Globe and Mail

And then there's the cost, if people do take them up, how much will this cost the Government down the line? One economist thinks a lot:

If we assume the average federal tax rate on capital income is 25 per cent (most capital income is taxed in the higher 22 per cent, 26 per cent and 29 per cent tax brackets), this yields a revenue cost of $6.6-billion, or 7 per cent of federal income tax revenues.

Globe and Mail

But, the area that concerns me is retirement and the continual story that we aren't saving enough for retirement. Not only Canada, but in other economies we can see that people are unable or unwilling to save for retirement. I think if there's talk about retirement planning it should be focused on what I see as the biggest hole: the difficulty of employer assisted pensions in the non-public sector.