The High Cost of Tax Free Savings Accounts

A recent study by the Broadbent Institute looks at the impact of the Harper Government's Tax Free Savings Accounts on federal tax revenue.  These plans were first introduced in 2009 and initially allowed Canadians to contribute $5000 annually, a level that was increased to $5,500 in 2013 and to $10,000 in the most recent 2015 budget.  Please keep in mind that the figures used in this posting are based on the current $5500 limit.  The impact of the raised limit on government revenue won't be known for some time.

Let's start with a table of statistics:

In 2013, an estimated 12.3 million TFSA accounts existed with an estimated 9.6 million Canadians (2012) availing themselves of the chance to save on taxes.  Total annual contributions in 2012 reached $33.5 billion with an average annual contribution of $3,491 in that year.  Interestingly, total annual TFSA contributions in 2012 exceeded RRSP deductions of $32.4 billion in the same year.   In 2013, the year end fair-market value of the 12.3 million accounts was $108.858 billion, a compound annual growth rate of more than 50 percent since the program began in 2009.   

Obviously, despite what the government states, these plans are not really designed for poorer Canadians, rather, they have allowed medium- and high-income Canadians an opportunity to shelter money from Ottawa's grasp.  In fact, only 20 percent of individuals with incomes below $20,000 participated in TFSAs in 2011 compared to 58 percent for those with individual incomes of over $200,000.  Individuals with these high incomes make up 1.3 percent of all tax filers and 2.5 percent of TFSA account holders.

Obviously, the existence of TFSAs is going to have short- and long-term impacts on tax revenue .    The foregone federal tax revenue on TFSAs has grown from $65 million in 2009, to $165 million in 2010, $160 million in 2011, $295 million in 2012 and $410 million in 2013 and is expected to grow steeply as the years pass and contributions grow.  Unfortunately, the authors note that it will take 40 to 50 years before the full cost of the program is known since it will take many years for younger Canadians to amass significant tax-sheltered assets as shown on this table:

In addition, there will be tax revenue losses to provincial governments, estimated at about 60 percent of federal revenue.  A study by Kevin Milligan suggests that there may be a decline in the size of the total federal tax base by as much as 6.0 percent as shown on this table:

This 6 percent loss of the tax base yields a 10.6 percent loss of federal personal tax revenues which would constitute foregone federal tax revenue of $15.5 billion based on the 2015 - 2016 forecast income tax revenues of $145.8 billion, a situation that will be multiplied based on the newly introduced $10,000 limit.

Obviously, a near-doubling of the current TFSA contribution limits will have a significant impact on those Canadians that are able to take advantage of additional contribution room.  That said, it will have an even greater impact on the federal government's revenues, making it increasingly difficult for future governments to achieve fiscal balance without succumbing to the temptation of raising taxes since meaningful spending cuts seem to be off the table for the most part.