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TFSA proponent warns against increasing limit

Peter O'Neil / Vancouver Sun

OTTAWA — Prominent B.C. economist J. Rhys Kesselman is horrified by the Frankenstein’s monster that has evolved from a tax policy idea he advanced in 2001.

Kesselman, in a paper he co-wrote with Finn Poschmann of the C.D. Howe Institute, proposed a form of tax-free savings that was aimed particularly at encouraging low-income Canadians to save for retirement.

That idea ended up in the 2008 Conservative budget and has been wildly popular — especially in B.C. By 2014 more than 10 million Canadians have opened up tax-free savings accounts, which allow Canadians to earn interest and capital gains tax-free on deposited amounts of up to $5,500 annually.

But Kesselman doesn’t agree with some of the components of Ottawa’s program, and describes it as a “ticking time bomb” that will eventually drain billions from federal and provincial treasuries while benefiting the very rich.

And, in his new report being released today tuesday by the left-leaning Broadbent Institute, he said the Conservative vow to increase the maximum annual contribution to $10,000 will “overwhelmingly” be enjoyed by the ultra-wealthy.

“Doubling the TFSA contribution limit would in the long run be of even more-lopsided benefit to the wealthy and of limited or no benefit for the great majority of lower-, mid-, and upper-income earners who already have adequate tax-favoured contribution room,” he writes in Double Trouble: The Case Against Expanding Tax-Free Savings Accounts.

He said the increase would be a “dereliction of fiscal responsibility” that won’t be a huge imposition on the current government’s fiscal plans because of modest initial costs.

“Rather those costs would be borne by successor administrations a generation or two down the road — and by persons enduring the reduced public services or bearing the increased taxes needed to offset the revenue losses from relief enjoyed by the wealthiest.”

Kesselman is going against the grain both in terms of public opinion and in terms of breaking with the co-author of the 2001 report, Finn Poschmann, who supports the government’s plan.

Recent department of finance figures indicate more money is now held in these vehicles than in registered retirement savings plans.

And B.C. leads the way, with 36 per cent of adults setting up TFSA accounts.

Kesselman describes the TFSA promise as the largely-ignored but scarier of the two “twins” of the Conservative fiscal plan promised in the 2011 election campaign.

The other sibling is the Tory tax break that allows a spouse in a higher tax bracket to transfer part of their income to a lower-earning spouse. This “income-splitting” vow, available to couples with children under 18, was criticized by the late Conservative finance minister Jim Flaherty and others as too costly and overly generous to the well-off.

The income-splitting promise will cost the federal treasury an average of a little over $2 billion a year for the next five years, far above the TFSA price tag that went from $65 million in 2009 to $410 million by 2013.

Kesselman said the cost of the TFSA, even if it isn’t doubled, will grow “exponentially” and in 40 to 50 years cost the federal treasury $15.5 billion annually in 2015 dollars, and $9 billion to provincial coffers, including roughly $850 million to B.C.’s.

“Like a little baby who looks cuddly and cute, this proposed initiative (will) grow up to be the hulking teenager who eats everyone out of house and home,” writes Kesselman, who holds the Canada Research Chair in Public Finance at Simon Fraser University.

Kesselman said it’s not possible to calculate the hit on federal finances if the limit goes to $10,000, but said the benefit will go “overwhelmingly” to the ultrarich.

Another Kesselman concern is the government’s vow that income from a TFSA account won’t be considered in connection with eligibility criteria for Old Age Security and the Guaranteed Income Supplement.

The GIS is designed for low-income seniors, while the OAS benefit starts getting clawed back by the taxman after a seniors’ income starts getting into the $70,000-a-year range.

If income tests don’t include TFSA income plenty of wealthy Canadians will get benefits designed to help the less well-off. In 40 to 50 years the additional cost could range from $4 billion to roughly $14 billion annually, in 2015 dollars.